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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
--- OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1994
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 (NO FEE REQUIRED)
For the transition period from _________________ to _________________
Commission file number 04863
SOUTHERN INVESTORS SERVICE COMPANY, INC.
(Name of small business issuer in its charter)
Delaware 74-1223691
------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2727 North Loop West, 77008
Suite 200, Houston, Texas (Zip Code)
(Address of principal executive offices)
Issuer's telephone number (713) 869-7800
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock $1.00 Par Value
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No
--- --
Check if no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is contained in this form, and no disclosure will be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this
Form 10-KSB. X
---
State issuer's revenues for its most recent fiscal year. $3.1 Million
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act). $0.00 as
of March 16, 1995
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date. 3,168,929 as of March 16, 1995
DOCUMENTS INCORPORATED BY REFERENCE
Information contained in the Company's proxy statement to be used in
connection with the 1995 annual meeting is incorporated by reference into Part
III.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Southern Investors Service Company, Inc. was incorporated under the laws of
the State of Delaware in 1972. Southern Investors Service Company, Inc. and its
subsidiaries (Company) are engaged in real estate management and development in
Texas.
The Company's real estate development operations have been significantly
reduced as a result of debt settlements reached with lenders and other
creditors, and its ability to generate cash flow from operations has been
severely reduced. During the last five years, the Company has emphasized the
management of its resort development in west Texas and the management of real
estate development and operations for others. Currently, the Company's primary
operations include the management of ten residential developments, two office
buildings and its resort in west Texas. Some of these activities are conducted
through joint ventures in which the Company has equity interests. Unless
otherwise indicated, the term "Company" includes these joint ventures.
The Company's future financial condition depends upon its ability to generate
cash at levels to meet operating needs and debt obligations. Cash flow from
operations has not been adequate to meet the Company's obligations for the past
several years and management projects negative cash flow from operations for
1995. During the last several years, the Company has entered into settlements
with certain of its lenders and other creditors. The Company's real estate
revenues and operations have been affected by the conveyance of a significant
amount of its real estate assets and the assignment of its distribution rights
in certain joint ventures to its lenders during 1990.
During 1994, the Company received $892,000, after the payment of legal fees
and other expenses, as a result of the settlement of the litigation discussed
below. These funds were used to settle various obligations. Management is
currently reviewing possible options to increase cash flow and settle the
Company's existing liabilities with its extremely limited resources. These
options include, but are not limited to, continued efforts to procure management
and consulting contracts for a fee, reduction of operating expenses (including
interest), attempts to increase revenues of the Company's resort development,
continued negotiations with various creditors to settle their accounts for cash
payments at substantially less than the amount due, the settlement of
liabilities through the transfer of assets to creditors in satisfaction of their
claims, and a possible plan of reorganization under Chapter 11 of the U.S.
Bankruptcy Code or liquidation of the Company.
LITIGATION SETTLEMENT
In October 1988, the Company filed a lawsuit against KeepRite, Inc.
(KeepRite), Intercity Gas Company (IGC) and Heil-Quaker, collectively,
(Defendants). The jury returned a verdict on February 14, 1991 in favor of the
Company finding that (i) KeepRite breached its fiduciary duty, resulting in
actual damages of $10,000 and punitive damages of $1,000,000; (ii) Heil-Quaker
tortiously interfered with the contractual relations between the Company and
KeepRite, resulting in damages of $10,000 and punitive damages of $1,500,000;
and (iii) Heil-Quaker knowingly participated in the breach of fiduciary duty by
KeepRite, resulting in $1,500,000 of exemplary damages. In March 1991, in
connection with this litigation, a hearing was held regarding the entry of
judgment and the award of attorneys' fees. The Company sought judgment in the
amount of $4,020,000; the Defendants sought judgment in the amount
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of $675,000 plus $1,500,000 in attorneys' fees and no award to the Company. The
court entered judgment for the Company in the amount of $3,400,000 and denied
Defendants' request for a new trial. Thereafter, the Defendants filed a bond in
that amount to secure the judgment and to appeal it. On October 28, 1991,
Defendants filed their appeal brief. The Company filed its brief in response on
December 23, 1991. The appeal was heard on October 21, 1992.
On September 16, 1993, the Court of Appeals affirmed the judgment pertaining
to KeepRite ($1,010,000) and reversed the judgment of actual, punitive and
exemplary damages against Heil-Quaker ($3,010,000). The reversal of judgment as
to Heil-Quaker potentially reinstated Heil-Quaker's claim against the Company
seeking payment of $675,000. The Company appealed the reversal of the judgment
as to Heil-Quaker.
On April 20, 1994, the Company and the Defendants executed an agreement to
settle this matter. In accordance with this agreement, the Defendants agreed to
pay the Company $1,300,000 (including $100,000 attributable to claims by Jackson
Supply Company, a former subsidiary of the Company). In addition, the Company
and the Defendants individually and collectively released all of their
respective claims, including the Defendants' claim against the Company which had
been recorded by the Company at $318,000. The Company received $892,000 after
the payment of the amount attributable to Jackson Supply Company and the payment
of outstanding legal fees and other expenses totalling $308,000 (of which
$108,000 had been accrued in prior periods). The Company recorded a gain of
$1,318,000 in connection with this settlement.
LIABILITY SETTLEMENTS
During 1994, the Company reached agreements with several of its creditors to
settle outstanding liabilities for less than the full amount due. These
settlements included the payment of $258,000 in settlement of a promissory note
which had an outstanding principal balance of $1,148,000. This promissory note
had been issued by the Company in connection with the 1992 restructure of a
partnership in which the Company owns a 20% interest.
In addition, during 1994, the Company reached an agreement with one of its
lenders to settle a promissory note that matured September 30, 1993 for a cash
payment of $114,000. This note had been issued by the Company as part of a 1990
debt settlement and had a balance of $892,000 including accrued and unpaid
interest.
The Company's other long-term debt consisted of unsecured notes payable which
were due September 30, 1993, in the principal amount of $1,049,000 plus related
interest. These notes are payable to trade creditors of a subsidiary of the
Company that ceased operations during 1989. The Company has made offers to
these creditors to settle existing claims at less than the amounts due and as of
December 31, 1994, the Company had made payments of $78,000 in settlement of
$313,000 in principal amount of these trade creditor notes. Included in these
trade creditor notes was an obligation in the amount of $318,000 payable to the
Defendants in connection with the litigation discussed above. This amount was
released as a result of the settlement and is included in Litigation Settlement
in the accompanying financial statements. As of December 31, 1994, $736,000 in
trade creditor notes and related accrued interest remained in default.
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The Company had an incentive plan for certain key employees (Incentive Plan).
To implement the Incentive Plan, the Company formed limited partnerships to
purchase, hold, develop and dispose of improved and unimproved real estate as
authorized by the Compensation Committee of the Board of Directors. The Company
is the general partner of such limited partnerships, holding an 85% interest.
The limited partners holding the remaining 15% interest are certain current and
former employees, including one who serves as a director of the Company. Under
the terms of the limited partnership agreements, the Company may, at its option,
and is required, at the option of the limited partner, to purchase the
partnership interest of a limited partner who is no longer employed by the
Company or any of its subsidiaries. The agreements contain complex provisions
regarding the purchase price payable, which may be substantial, to a limited
partner upon exercise of such option. As of December 31, 1993, the Company had
accrued $807,000 in connection with its obligations pursuant to the Incentive
Plan. During 1994, the Company made payments of $202,000 in settlement of these
obligations, and recorded an extraordinary gain of $605,000.
The settlements discussed above and other settlements reached during 1994
resulted in extraordinary gains totaling $2,374,000.
During 1993, the Company restructured Debentures with aggregate principal
balances of $2,331,000, Debenture Loans advanced by certain Debenture holders
with aggregate principal balances of $639,000, and accrued and unpaid interest
with respect to these Debentures and Debenture Loans of approximately $470,000
in exchange for unsecured promissory notes of the Company. These notes bear
interest at 6%, compounded annually, and are due October 2, 1995. In addition,
the Company extended various offers to purchase Debentures and Debenture Loans
with aggregate principal balances of $714,500 from funds available in the
sinking fund which had been established with respect to the Debentures.
Payments of $220,000 were made from the sinking fund to purchase Debentures with
principal balances of $556,500 and Debenture Loans with aggregate principal
balances of $35,000. The Company recognized extraordinary gains during 1993 of
approximately $410,000 in connection with these purchases. In an effort to
reach a settlement with respect to the remaining Debentures during 1993, the
Company extended an offer to purchase Debentures with aggregate principal
balances of $123,000. This offer included the payment of $450 from funds
available in the sinking fund and $550 in the form of an unsecured promissory
note issued by the Company for each $1,000 principal amount of Debentures. Such
promissory notes are payable in two annual installments beginning in October
1994, and bear interest at the rate of 6% per annum. Payments of $38,700 were
made from the sinking fund, and promissory notes with aggregate principal
balances of $47,300 were issued by the Company to purchase Debentures with
aggregate principal balances of $86,000. The remaining Debentures with
principal balances of $37,000 were settled during 1994.
Management believes that the debt settlements discussed above have improved
the Company's financial condition and its ability to pursue and realize
investment, development and management opportunities in real estate properties.
However, debt totaling $1,819,000 has matured and is currently due and debt
totaling $4,146,000 matures in 1995. See Note 5 of the Notes to Consolidated
Financial Statements for a discussion of the Company's debt.
The ability of the Company to continue as a going concern is dependent upon
its ability to settle or restructure its remaining debt and other obligations
and generate positive cash flow to cover operating expenses and other cash
requirements. The Company may develop real estate if it is able to obtain
financing for the acquisition and development of real estate and
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subsequently sell the developed residential lots and commercial tracts. There
is no assurance that the Company could arrange to borrow funds or raise capital
from other sources. The Company's financial statements have been prepared in
conformity with generally accepted accounting principles assuming that the
Company will continue as a going concern. The financial statements of the
Company do not include any adjustments relating to the recoverability of asset
carrying amounts that might be necessary should the Company be unable to
continue as a going concern. In the event the Company fails to continue as a
going concern, the value of its assets may be substantially less than the value
that normally would be realized in the ordinary course of business.
REAL ESTATE OPERATIONS
GENERAL
The Company's most significant real estate asset consists of a resort
development in west Texas known as Lajitas on the Rio Grande. Rental and other
revenue from the operation of this facility totaled $2.1 million and $2.0
million for the years ended December 31, 1994 and 1993, respectively. See Item
2, "Description of Property" for more information concerning this investment.
Since 1990, the Company has emphasized the management of real estate
development for others, primarily for real estate projects in which Walter M.
Mischer, the Chairman of the Board of the Company, has an effective ownership
interest ranging from 50% to 100%. The Company has entered into contracts for
the management, operation and development of residential property, which provide
for various administrative functions. As of December 31, 1994, the Company
managed ten residential developments, which provide for aggregate monthly
payments of approximately $52,500. Such contracts may be canceled on 30 days
notice. See Note 7 of the Notes to Consolidated Financial Statements of the
Company for a discussion of management contracts with related parties.
The Company has developed commercial office buildings and currently has an
equity interest in two office buildings. The Company has a 19.4% equity
interest in a seven-story building located at 2727 North Loop West, Houston,
Texas completed in 1980, where its corporate headquarters are located. The
Stewart & Stevenson Building, which opened during 1983, is a ten-story building
located at 2707 North Loop West, Houston, Texas in which the Company has an
equity interest of 20%. The Company has management contracts covering these two
properties which provide for aggregate monthly fees of approximately $10,000.
Approximately 90% of the aggregate space in these two buildings is leased.
RESIDENTIAL MANAGEMENT AND DEVELOPMENT
In connection with its development and management activities, the Company has
historically formed ventures with one or more parties to develop residential
subdivisions and commercial sites. The reason for creating such ventures is to
obtain additional financing capacity, spread the risk of loss and, in some
instances, obtain rights to land owned by venture partners. The subdivisions,
most of which are located in independent school districts within a 25-mile
radius of downtown Houston, may include residential lots and commercial sites
held for sale to builders and other developers. Acquisitions of multi-acre
tracts are generally made on
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terms that include a cash down payment and the issuance to the selling party or
a bank of an interest-bearing promissory note secured by a mortgage on the
development acreage.
Following the purchase of development acreage, a master plan is devised for
the proposed subdivision setting forth the residential lots and commercial sites
to be developed. The Company contracts for and supervises the construction of
all improvements to the development acreage to prepare the lots for sale to
homebuilders. Unless the acreage is located within a municipality or an
existing utility district, a municipal utility district is formed to supply
water, sanitary sewage and storm drainage service to the planned subdivision.
The Company bears the full cost of construction of underground utilities in
those subdivisions not located in utility districts. The cost of development is
partially defrayed in subdivisions located in utility districts, since the
utility districts usually finance 70% of the cost of engineering and
constructing the water and sanitary lines, storm sewer facilities and other
storm drainage, and 100% of the cost of sewage treatment and water plants. The
Company advances the utility district's share of such costs during construction,
which advance is later reimbursed by the utility district out of designated
proceeds from the sale of an issue of the utility district's municipal tax and
revenue bonds. Reimbursement is dependent upon each utility district's ability
to sell bonds.
Improved lots are sold to builders in parcels of lots for cash or pursuant to
contracts that may provide for an initial down payment on the aggregate lot
purchase price. The balance of the purchase price, including interest thereon,
must be paid within a specified time period. Before builders can commence
construction, the full purchase price of the lots upon which they intend to
build must be paid. Upon such payment, the lots are conveyed to the builder.
The lot sales contracts are generally option contracts and cannot be
specifically enforced by the Company. These lot sales contracts provide for the
forfeiture of any down payment in the event the builder does not timely purchase
the lots.
Commercial sites are sold either for cash, cash and nonrecourse promissory
notes secured by the property, or contracts of sale providing for a cash down
payment and subsequent repayment of the indebtedness over a period of years.
To finance the development of a subdivision, the Company has historically
obtained development loans from banks, which loans are secured by the acreage
under development. Although the development acreage is available to satisfy
such loans, the loans are usually guaranteed in part by the Company and its
joint venture partners. The terms of the development loans are negotiated at
the time the loan is extended. The Company can offer no assurance that it will
be able to continue to obtain such financing in the future. The debts and
obligations of the Company and its joint ventures are discussed more fully in
Notes 3 and 5 of the Notes to Consolidated Financial Statements of the Company.
The Company's equity interests in real estate joint ventures range from 12.5%
to 50%. As of December 31, 1994, the real estate joint ventures accounted for
on the equity method, in which the Company has not assigned its rights to cash
distributions, had total assets of $22.8 million. In addition, as of December
31, 1994, assets of $0.9 million were owned by joint ventures in which the
Company has assigned its rights to cash distributions to lenders. Such assets
are not included in the combined condensed balance sheet and statements of
income of the real estate joint ventures accounted for on the equity method
discussed in Note 3 of the Notes to Consolidated Financial Statements. The
Company has recorded its investment in joint ventures in which it has assigned
its rights to cash distributions at zero and has not recorded
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equity in earnings or losses of these ventures. See Note 3 of the Notes to
Consolidated Financial Statements of the Company for a discussion of the
Company's investments in joint ventures, and Note 7 for a discussion of lot
sales contracts with related parties.
EMPLOYEES
The Company employed a total of 84 persons on a full-time basis and a total of
7 persons on a part-time basis, as of December 31, 1994.
COMPETITION
Real estate management and development are highly competitive businesses. The
Company competes with a number of other experienced managers and developers in
the greater Houston area. Certain of these competitors operate on a nationwide
basis and have substantially greater financial resources than the Company. The
Company's resort development in west Texas does not have any direct competition
due to its location. The only other resort facility in the area offering
accommodations and other amenities is the Big Bend National Park.
REGULATION
The Company's real estate management and development activities are subject to
regulation by municipal, county, state and federal governments. Federal
regulatory agencies, such as the Veterans Administration and the Federal Housing
Administration, provide mortgage guarantees or insurance to lenders only when
the mortgaged properties comply with requirements affecting the design criteria
of the subdivisions. Most of the Company's subdivisions are designed to comply
with the requirements of such federal agencies, although in many instances
mortgage funds are supplied by conventional lenders. The Company may be
required to participate in filing environmental impact statements or similar
documents prior to the commencement of the development of certain subdivisions
that are subject to the provisions of the Environmental Protection Act.
Subdivision developments within the city of Houston or its extraterritorial
jurisdiction are also subject to certain land platting and other standards
administered by the City Planning Commission. In addition, the Texas Water
Commission must issue a permit approving the discharge of treated sewage
effluents and the Harris-Galveston Coastal Subsidence District must issue a
water well permit. Compliance with the regulations promulgated by these
authorities does not have a materially adverse effect on the operations of the
Company.
The successful development of subdivisions in the greater Houston area is
dependent to a significant degree upon the developer's ability to secure the
formation of municipal utility districts for its subdivisions. The organization
of municipal utility districts is subject to approval by either the Legislature
of the State of Texas or the Texas Water Commission. The issuance of bonds by a
municipal utility district is subject to the approval of the projects as
feasible by the Texas Water Commission and the approval of the bonds as legally
issuable by the Attorney General of the State of Texas. Municipal and county
governments also regulate certain municipal utility district activities.
The Company's real estate management and development activities are also
subject to local building code requirements.
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CURRENT BUSINESS CONDITIONS
Current economic conditions affecting the Company and its financial condition
are discussed more fully in Item 6, "Management's Discussion and Analysis or
Plan of Operation" and in Note 1 of the Notes to Consolidated Financial
Statements of the Company.
ENVIRONMENTAL MATTERS
The operations of the Company are subject to various federal, state and local
laws and regulations relating to the environment. Violation of any of these
federal statutes or the regulations or orders issued thereunder, as well as any
relevant state and local laws and regulations, could result in civil or criminal
enforcement actions. In general, the Company's investment in real estate will
continue to be affected by federal, state and local environmental laws and
regulations. Prior to land acquisition or development, the Company currently
has engineers or other qualified experts perform geological fault and
environmental site assessments, wetland determinations and review of hazardous
and toxic waste site history. Development of some properties may be
significantly impacted by wetlands regulations. A controversy currently exists
between the Army Corps of Engineers and the U.S. Fish and Wildlife Department as
to the application of certain wetlands regulations. The U.S. Fish and Wildlife
Department's interpretation of these regulations could mean that significant
portions of properties that were considered not to contain wetlands, now, in
fact, contain significant wetland areas. To qualify for the Federal Housing
Administration's approved status, all subdivisions are subject to inspection for
wetlands by the U.S. Fish and Wildlife Department. In the absence of the Army
Corps of Engineers or U.S. Fish and Wildlife Department's inspection of the
property, it cannot be accurately predicted as to whether or not any particular
property contains wetlands. In addition to other applicable law, the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (CERCLA), provides for cleanup of sites from which there has been a
release or threatened release of hazardous substances and authorizes the
Environmental Protection Agency (EPA) to take any necessary response actions at
such sites, including requiring potentially responsible parties (PRPs) to take
or pay for such actions. PRPs are broadly defined under CERCLA and include past
and present owners and operators of a site. Courts have interpreted CERCLA to
impose strict, joint and several liability upon persons liable for response
costs. The Company is not aware of any potentially material environmental
liability relating to any property in which the Company has an interest;
however, there can be no assurance that no such liability exists, or that future
developments will not result in material costs and liabilities being imposed on
the Company. It is possible that future environmental requirements may be more
stringent than current requirements.
OTHER FACTORS
The real estate management and development businesses are sensitive to changes
in economic conditions, interest rates, availability of mortgage funds for new
residential and commercial construction, employment levels and demand for
housing in a particular area. Adverse changes in these factors have from time
to time resulted in the inability of builders to perform under contracts for the
purchase of lots in certain of the Company's subdivisions. Such contracts are
usually renegotiated or terminated without penalty except for the forfeiture of
the builder's down payment. Scarcity of mortgage funds, high unemployment,
general economic conditions, the level of interest rates and decreased housing
demand could affect the Company adversely.
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The Company's subdivision management and development activities, as well as
its resort in west Texas, are sensitive to weather conditions. Prolonged
periods of inclement weather may impact these operations adversely.
FEDERAL TAX LAW CHANGES
The effects on the Company of the Revenue Reconciliation Act of 1993 and the
Tax Reform Act of 1986 are discussed in Note 4 of the Notes to Consolidated
Financial Statements of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's most significant real estate asset consists of a resort
development in west Texas known as Lajitas on the Rio Grande. The Company's net
investment in this property was $2.9 million or 70% of total assets as of
December 31, 1994. The development consists of approximately 24,000 acres of
land located in the southwest portion of Brewster County adjacent to the western
border of Big Bend National Park. The development includes a hotel,
condominiums, a restaurant, meeting rooms, various shops and other facilities in
47 separate one and two-story buildings containing a total of approximately
118,000 square feet. The development has ancillary site improvements consisting
of a nine-hole golf course, a recreational vehicle park, a swimming pool, tennis
courts, a landing strip and two airplane hangars. A substantial portion of the
24,000 acres is pledged to secure borrowings of the Company.
Rental and other revenues from the operation of these facilities totalled $2.1
million and $2.0 million for the years ended December 31, 1994 and 1993,
respectively. Rental revenue and occupancy statistics for the Company's resort
operations for each of the two years ended December 31, 1994 are summarized as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1994 1993
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<S> <C> <C>
Hotel rooms:
% Occupancy 44% 42%
Average rate $ 58.78 $ 60.08
Total revenue $ 830,000 $ 748,000
Condominiums:
% Occupancy 28% 23%
Average rate $ 98.13 $ 105.04
Total revenue $ 227,000 $ 202,000
Total rental revenues $1,057,000 $ 950,000
Restaurant, bar and golf course revenues 700,000 647,000
Other revenues 348,000 418,000
---------- ----------
Total revenues $2,105,000 $2,015,000
========== ==========
</TABLE>
The development has a basis for federal income tax reporting of approximately
$1.8 million as of December 31, 1994. The improvements are depreciated using
the straight-line method with lives ranging from 12 to 40 years. The realty tax
rate for 1994 was $1.60 per $100
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assessed value, and total taxes were approximately $74,000 for the year ended
December 31, 1994. Due to the location of the development and lack of public
fire protection, the cost of obtaining property insurance is considered
prohibitive; consequently, property insurance is not carried by the Company for
this development.
The Company's principal executive offices are located in northwest Houston and
are leased for an aggregate annual rental of $250,000 under a lease expiring in
June 1995. As of December 31, 1994, the Company was delinquent on $308,000 of
rental payments accrued under this lease, for amounts prior to September 30,
1992 and is currently attempting to settle this obligation. The Company has a
19.4% interest in the joint venture that owns the building and currently leases
approximately 20,000 square feet in the building. Of the 20,000 square feet
leased, the Company has subleased approximately 8,700 square feet to companies
affiliated with Mr. Mischer for an aggregate annual rental of approximately
$129,000. The Company owns or leases such additional office furniture,
furnishings, equipment and vehicles as management deems necessary for its
operations. Such building and properties owned or leased by the Company are
subject to long-term mortgages and debt. Information concerning encumbrances on
the property owned by the Company and subleases to a related party is contained
in Notes 3, 5 and 6 of the Notes to Consolidated Financial Statements of the
Company.
See "Real Estate Operations" in Item 1 for information with respect to
additional properties owned or managed by the Company.
The Company has planned no significant additions to its properties during
1995.
ITEM 3. LEGAL PROCEEDINGS
The information with respect to legal proceedings is contained in Notes 1 and
6 of the Notes to Consolidated Financial Statements of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 1994.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded in the over-the-counter market, but is
not quoted on the NASDAQ system. The following table sets forth the high and
low bid prices of the common stock for each of the quarters in 1994 and 1993.
<TABLE>
<CAPTION>
1994 PRICE 1993 PRICE
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BID BID
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HIGH LOW HIGH LOW
---- ---------- ---- ----
<S> <C> <C> <C> <C>
First - - 3/16 1/16
Second - - 1/8 1/16
Third - - - -
Fourth - - - -
</TABLE>
The prices quoted represent prices between dealers without retail markup,
markdown or commission and do not necessarily reflect actual transactions.
According to National Quotation Bureau, Incorporated, the last reported price of
the Company's common stock was June 18, 1993. There were no prices quoted after
that date.
The approximate number of holders of record of the Company's stock as of March
16, 1995 was 518. No dividends have been paid by the Company since its
inception, and the Company has no plans to pay dividends in the foreseeable
future.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following is a summary of certain financial information regarding the
Company. All amounts are stated in thousands of dollars, except per share
amounts. This summary should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1994 1993
--------- ---------
<S> <C> <C>
Resort revenues $ 2,105 $ 2,015
Real estate revenues, net 985 1,330
Resort operating expenses ( 2,292) ( 2,331)
Other operating expenses ( 1,031) ( 1,158)
Interest expense ( 468) ( 484)
Litigation settlement 1,318 ---
--------- --------
Income (Loss) before extraordinary gain 617 ( 628)
Extraordinary gain on debt settlements 2,374 449
--------- --------
Net income (loss) $ 2,991 ($ 179)
========= ========
Income (loss) per common share:
Before extraordinary gain $ 0.19 ($ 0.20)
Net income (loss) $ 0.94 ($ 0.06)
Total assets $ 4,135 $ 4,267
Total debt $ 6,310 $ 8,881
Total stockholders' deficit ($ 4,959) ($7,950)
</TABLE>
CURRENT BUSINESS CONDITIONS, CERTAIN EVENTS AND UNCERTAINTIES
The Company has sustained losses from operations for the past several years
and anticipates that it will incur a loss from operations for 1995. Such losses
have depleted the Company's stockholders' equity. Cash flow from operations has
not been sufficient to meet liquidity needs during the past several years, and
the Company anticipates negative cash flow from operations during 1995. The
Company's operations are concentrated in Texas, which from 1986 to 1988 was
adversely affected by the downturn in the energy and real estate markets.
Reduced revenues during this period resulted in a deterioration of the Company's
financial condition and its ability to meet its obligations. As a result, since
1989 the Company has entered into various transactions to significantly reduce
its debt obligations through the transfer of significant amounts of the
Company's assets to its lenders and creditors or payments to creditors at less
than the full amount due.
LITIGATION SETTLEMENT
In October 1988, the Company filed a lawsuit against KeepRite, Inc.
(KeepRite), Intercity Gas Company (IGC) and Heil-Quaker, collectively,
(Defendants). The jury returned a verdict on February 14, 1991 in favor of the
Company finding that (i) KeepRite breached its fiduciary duty, resulting in
actual damages of $10,000 and punitive damages of $1,000,000; (ii) Heil-Quaker
tortiously interfered with the contractual relations between the Company and
KeepRite, resulting in damages of $10,000 and punitive damages of $1,500,000;
and (iii) Heil-Quaker knowingly participated in the breach of fiduciary duty by
KeepRite, resulting in
12
<PAGE>
$1,500,000 of exemplary damages. In March 1991, in connection with this
litigation, a hearing was held regarding the entry of judgment and the award of
attorneys' fees. The Company sought judgment in the amount of $4,020,000; the
Defendants sought judgment in the amount of $675,000 plus $1,500,000 in
attorneys' fees and no award to the Company. The court entered judgment for the
Company in the amount of $3,400,000 and denied Defendants' request for a new
trial. Thereafter, the Defendants filed a bond in that amount to secure the
judgment and to appeal it. On October 28, 1991, Defendants filed their appeal
brief. The Company filed its brief in response on December 23, 1991. The
appeal was heard on October 21, 1992.
On September 16, 1993, the Court of Appeals affirmed the judgment pertaining
to KeepRite ($1,010,000) and reversed the judgment of actual, punitive and
exemplary damages against Heil-Quaker ($3,010,000). The reversal of judgment as
to Heil-Quaker potentially reinstated Heil-Quaker's claim against the Company
seeking payment of $675,000. The Company appealed the reversal of the judgment
as to Heil-Quaker.
On April 20, 1994, the Company and the Defendants executed an agreement to
settle this matter. In accordance with this agreement, the Defendants agreed to
pay the Company $1,300,000 (including $100,000 attributable to claims by Jackson
Supply Company, a former subsidiary of the Company). In addition, the Company
and the Defendants individually and collectively released all of their
respective claims, including the Defendants' claim against the Company which had
been recorded by the Company at $318,000. The Company received $892,000 after
the payment of the amount attributable to Jackson Supply Company and the payment
of outstanding legal fees and other expenses totalling $308,000 (of which
$108,000 had been accrued in prior periods). The Company recorded a gain of
$1,318,000 in connection with this settlement.
LIABILITY SETTLEMENTS
During 1994, the Company reached agreements with several of its creditors to
settle outstanding liabilities for less than the full amount due. These
settlements included the payment of $258,000 in settlement of a promissory note
which had an outstanding principal balance of $1,148,000. This promissory note
had been issued by the Company in connection with the 1992 restructure of a
partnership in which the Company owns a 20% interest.
In addition, during 1994, the Company reached an agreement with one of its
lenders to settle a promissory note that matured September 30, 1993 for a cash
payment of $114,000. This note had been issued by the Company as part of a 1990
debt settlement and had a balance of $892,000 including accrued and unpaid
interest.
The Company's other long-term debt consisted of unsecured notes payable that
were due September 30, 1993, in the principal amount of $1,049,000 plus related
interest. These notes are payable to trade creditors of a subsidiary of the
Company that ceased operations during 1989. The Company has made offers to
these creditors to settle existing claims at less than the amounts due and as of
December 31, 1994, the Company had made payments of $78,000 in settlement of
$313,000 in principal amount of these trade creditor notes. Included in these
trade creditor notes was an obligation in the amount of $318,000 payable to the
Defendants in connection with the litigation discussed above. This amount was
released as a result of the settlement and is included in Litigation Settlement
in the accompanying financial statements. As
13
<PAGE>
of December 31, 1994, $512,000 in trade creditor notes and related accrued
interest remained in default.
The Company had an incentive plan for certain key employees (Incentive Plan).
To implement the Incentive Plan, the Company formed limited partnerships to
purchase, hold, develop and dispose of improved and unimproved real estate as
authorized by the Compensation Committee of the Board of Directors. The Company
is the general partner of such limited partnerships, holding an 85% interest.
The limited partners holding the remaining 15% interest are certain current and
former employees, including one who serves as a director of the Company. Under
the terms of the limited partnership agreements, the Company may, at its option,
and is required, at the option of the limited partner, to purchase the
partnership interest of a limited partner who is no longer employed by the
Company or any of its subsidiaries. The agreements contain complex provisions
regarding the purchase price payable, which may be substantial, to a limited
partner upon exercise of such option. As of December 31, 1993, the Company had
accrued $807,000 in connection with its obligations pursuant to the Incentive
Plan. During 1994, the Company made payments of $202,000 in settlement of these
obligations, and recorded an extraordinary gain of $605,000.
The settlements discussed above and other settlements reached during 1994
resulted in extraordinary gains totaling $2,374,000.
During 1993, the Company restructured Debentures with aggregate principal
balances of $2,331,000, Debenture Loans advanced by certain Debenture holders
with aggregate principal balances of $639,000, and accrued and unpaid interest
with respect to these Debentures and Debenture Loans of approximately $470,000
in exchange for unsecured promissory notes of the Company. These notes bear
interest at 6%, compounded annually, and are due October 2, 1995. In addition,
the Company extended various offers to purchase Debentures and Debenture Loans
with aggregate principal balances of $714,500 from funds available in the
sinking fund which had been established with respect to the Debentures.
Payments of $220,000 were made from the sinking fund to purchase Debentures with
principal balances of $556,500 and Debenture Loans with aggregate principal
balances of $35,000. The Company recognized extraordinary gains during 1993 of
approximately $410,000 in connection with these purchases. In an effort to
reach a settlement with respect to the remaining Debentures during 1993, the
Company extended an offer to purchase Debentures with aggregate principal
balances of $123,000. This offer included the payment of $450 from funds
available in the sinking fund and $550 in the form of an unsecured promissory
note issued by the Company for each $1,000 principal amount of Debentures. Such
promissory notes are payable in two annual installments beginning in October
1994, and bear interest at the rate of 6% per annum. Payments of $38,700 were
made from the sinking fund, and promissory notes with aggregate principal
balances of $47,300 were issued by the Company to purchase Debentures with
aggregate principal balances of $86,000. The remaining Debentures with
principal balances of $37,000 were settled during 1994.
As more fully described in Note 5 of the Notes to Consolidated Financial
Statements, the Company continues to be delinquent on certain debt with an
outstanding principal balance of approximately $1.8 million, and debt with
aggregate outstanding balances of approximately $4.1 million matures in 1995.
The Company has also guaranteed certain debt of one of its former subsidiaries,
which had an outstanding balance of $1.0 million at December 31, 1994. The
Company must settle or restructure existing debt and generate positive cash flow
to cover operating expenses and other cash requirements to continue as a going
concern and to realize
14
<PAGE>
the carrying amount of its assets. Management is currently reviewing possible
options to settle the Company's existing liabilities with its limited resources.
These options include, but are not limited to, continued efforts to procure
management and consulting contracts for a fee, to increase revenues of its
resort development, to reduce operating expenses (including interest expense),
to negotiate with various creditors to settle their accounts for cash payments
at substantially less than the amount due, to settle liabilities through the
transfer of assets to creditors in satisfaction of their claims, and a possible
plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code or
liquidation of the Company. The Company may develop real estate if it is able
to obtain financing for the acquisition and development of real estate and
subsequently sell the developed residential lots and commercial tracts. There
can be no assurance that the Company could arrange to borrow funds from other
sources. The consolidated financial statements do not include any adjustments
relating to the recoverability of asset carrying amounts or the amount and
classification of liabilities that might be necessary if the Company is unable
to continue as a going concern.
RESULTS OF OPERATIONS
Income before extraordinary gain was $.6 million in 1994 compared with a loss
before extraordinary gain of $.6 million in 1993. Included in income before
extraordinary gains for 1994 is income of $1,318,000 from the settlement of
litigation that the Company had been involved in for several years. See Note 1
of the Notes to the Consolidated Financial Statements for a discussion of this
litigation. The Company recorded extraordinary gains on debt settlements of
$2.4 million and $.4 million during 1994 and 1993, respectively. Net income was
$2,991,000 or $.94 per share for 1994 compared to a net loss of $179,000 or $.06
per share for 1993.
Rentals and other income from the Company's resort in west Texas were $2.1
million and $2.0 million for the years ended December 31, 1994 and 1993,
respectively. See Item 2, "Description of Property" included herein for a
discussion of the Company's resort development.
Real estate revenues decreased to $985,000 in 1994 from $1,330,000 in 1993.
This decrease was due primarily to a decrease of $379,000 in the Company's
equity in earnings of joint ventures. This decrease was due to reduced
residential lot sales by one of the ventures in which the Company has an equity
interest. Real estate revenues include the following amounts:
<TABLE>
<CAPTION>
(Thousands of Dollars) Year Ended December 31,
--------------------------------- -------------------------
1994 1993
-------------------------
<S> <C> <C>
Sales of real estate $ 23 $ 34
Cost of real estate sales (23) ---
Equity in income of real
estate joint ventures 143 522
Management fees 753 713
Interest and other income 89 61
------------------------------------------------------------
Total real estate revenues, net $ 985 $1,330
============================================================
</TABLE>
15
<PAGE>
The Company's real estate revenues and operations were affected by the
conveyance of a significant amount of its real estate assets and the assignment
of its distribution rights in certain real estate projects to lenders in March
1990. Debt settlements subsequent to 1990 have also impacted real estate
operations. The Company reflected its investment in joint ventures in which it
has assigned its rights to cash distributions at zero and has not recorded
equity in earnings or losses of these ventures. See Note 3 of the Notes to
Consolidated Financial Statements of the Company for a discussion of these joint
ventures. Since 1990, the Company has emphasized the management of its resort
in west Texas and the management of real estate development and operations for
others. The Company may develop real estate in the future if opportunities and
capital become available.
Other operating expenses decreased to $1.0 million during 1994 from $1.2
million during 1993. This decrease was due primarily to a decrease in salaries,
rents and professional fees during 1994.
A significant portion of the Company's real estate management operations is
located in Houston, Texas. Despite the slow recovery from the national economic
recession, the Houston economy remained relatively stable during 1994. The
total job base in Houston has grown slightly since 1993; however, the mix within
the job base has changed with increases in government and services jobs. As the
Houston economy has become more diversified and less dependent upon the oil
industry, its growth has correlated more closely with the growth of the national
economy. As the national and Houston economies recovered, real job growth and
the effects of lower interest rates helped to stimulate the housing industry.
According to the American/Metro Study Corporation, single-family detached
housing starts in Houston were 13,732 in 1994 and 13,795 in 1993 and sales of
new homes in the Houston area were 14,029 in 1994 and 13,132 in 1993. The
recent increase in interest rates has resulted in a slower demand for new homes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations has not been sufficient to meet the Company's
obligations for the past several years, and management anticipates that cash
flow from operations will not be sufficient to meet its liquidity needs in 1995.
During 1994, the Company received $892,000 from the settlement of certain
litigation. These funds were used to settle many of the Company's obligations
at less than the full amounts due. The financial condition of the Company
indicates that, unless operating results and cash flow improve, the Company will
be required to borrow funds or continue to sell assets. There can be no
assurance that the Company could arrange to borrow funds from other sources or
sell sufficient assets to meet its cash needs or restructure its existing debt.
As of December 31, 1994, the Company was delinquent on notes payable and other
long-term debt of approximately $1,818,000 and interest payments of $623,000.
At present, the Company has received notice from one of its lenders that a note
with an outstanding principal balance of $300,000 is in default and that this
indebtedness will be accelerated. The Company is currently negotiating
settlement of this debt. During 1995, approximately $4.1 million of principal
payments on real estate notes, mortgages payable and other long-term debt will
become due. In addition, as of December 31, 1994, the Company had recorded
accounts payable and accrued expenses of $2.4 million. Management is currently
reviewing possible options to settle the Company's existing liabilities with its
limited resources. These options include, but are not
16
<PAGE>
limited to, continued efforts to procure management and consulting contracts for
a fee, reduction of operating expenses (including interest), attempts to
increase revenues of the Company's resort development, continued negotiations
with various creditors to settle their accounts for cash payments at
substantially less than the amount due, the settlement of liabilities through
the transfer of assets to creditors in satisfaction of their claims, and a
possible plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code or
liquidation of the Company. The Company's debts and obligations are discussed
in Notes 1, 3, 5, 6, and 7 of the Notes to Consolidated Financial Statements of
the Company.
With the exception of the improvements located at the Company's resort
development in west Texas, substantially all of the Company's real estate assets
are pledged to secure debt. Management believes that in a stable market the
values of the properties would exceed the balances of the loans which they
secure. If the Company were to sell or dispose of its real estate assets as a
result of the maturity or acceleration of the underlying debt or for reasons
other than those arising in the normal course of business, it is anticipated
that sales prices would be significantly less than the current carrying amount
of the assets, and such sales or dispositions would not generate sufficient
funds to retire the related debt.
In assessing the Company's liquidity, the impact of the Revenue Reconciliation
Act of 1993 has been considered. Although the impact of the tax law changes is
difficult to determine, the Company does not expect these changes to
significantly affect its cash flow in the foreseeable future because of its net
operating loss carryforward. In February 1992, the Financial Accounting
Standards Board issued Statement No. 109, "Accounting for Income Taxes." The
statement requires the use of the liability method of accounting for deferred
income taxes and replaced Statement No. 96. The Company adopted the new
standard during the first quarter of 1993. The adoption had no material impact
on its financial position or results of operations.
The impact of inflation on the Company over the past several years has been
minimal.
No major additions to the Company's resort in west Texas or real estate
investments are anticipated.
ITEM 7. FINANCIAL STATEMENTS
The financial statement data required pursuant to this item are included
elsewhere herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information required by Item 9 will be contained in the Company's proxy
statement to be used in connection with its 1995 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Directors,"
which information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 will be contained in the Company's proxy
statement to be used in connection with its 1995 annual meeting of stockholders
under the caption "Executive Compensation", which information is incorporated
herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 will be contained in the Company's proxy
statement to be used in connection with its 1995 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Directors,"
which information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 will be contained in the Company's proxy
statement to be used in connection with its 1995 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Directors,"
which information is incorporated herein by reference.
18
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) (1) Exhibits Required by Item 601 of Regulation S-B:
* Filed Herewith or
Incorporated by Reference
from Exhibit
________________________
(3) (a) Certificate of Incorporation as 3(a) 1981 Form 10-K
amended through June 6, 1989
(b) articles of Amendment to 3(b) 1989 Form 10-K
Certificate of Incorporation
dated June 7, 1989
(c) articles of Amendment to 3(c) 1993 Form 10-KSB
Certificate of Incorporation
dated May 21, 1993
(d) Bylaws as Amended through 3(b) June 30, 1989
date hereof Form 10-Q
(21) Subsidiaries of the Registrant Exhibit 21
(2) Financial Statements:
Report of Independent Public Accountants
Consolidated Balance Sheet -
December 31, 1994
Consolidated Statements of Income (Loss) for
each of the Two Years Ended
December 31, 1994 and 1993
Consolidated Statements of Changes in Stock-
holders' Deficit for each of the Two Years
Ended December 31, 1994 and 1993
Consolidated Statements of Cash Flows for
each of the Two Years Ended
December 31, 1994 and 1993
Notes to Consolidated Financial Statements
(B) Reports on Form 8-K:
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1994.
19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Southern Investors Service Company, Inc.:
We have audited the accompanying consolidated balance sheet of Southern
Investors Service Company, Inc. (a Delaware Corporation) and subsidiaries (the
Company) as of December 31, 1994, and the related consolidated statements of
income (loss), changes in stockholders' deficit and cash flows for each of the
two years in the period ended December 31, 1994. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southern Investors Service
Company, Inc. and subsidiaries as of December 31, 1994, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1994, in conformity with generally accepted accounting principles.
The Company has sustained significant operating losses in the last several
years, has continued to sustain operating losses since the end of its latest
year, and has a deficit in stockholders' equity. In addition, the Company's
cash flow from operations has not been sufficient to meet the Company's
obligations and may not be sufficient to meet future obligations. Although the
Company has restructured certain indebtedness in the last several years, it
continues to be delinquent on a significant amount of debt as described in Note
5 to the Consolidated Financial Statements. These factors raise substantial
doubt about the Company's ability to continue as a going concern and to realize
the carrying amount of its assets. Management is currently reviewing options in
regard to these matters as described in Note 1 to the Consolidated Financial
Statements. There can be no assurance that actual events will occur in
accordance with the assumptions considered in the options Management is
currently reviewing. As discussed in Note 6 to the Consolidated Financial
Statements, the Company is involved in litigation and other contingencies, the
outcomes of which are uncertain at this time. However, if the Company, in light
of its present circumstances, were required to make substantial cash
expenditures in connection with such litigation and contingencies, such
expenditures
20
<PAGE>
may materially and adversely affect the Company's consolidated financial
position and ability to continue as a going concern. The accompanying
Consolidated Financial Statements have been prepared assuming the Company will
continue as a going concern and the Consolidated Financial Statements do not
include any adjustments, which could be significant, that might result from the
outcome of the uncertainties described above.
ARTHUR ANDERSEN LLP
Houston, Texas
March 15, 1995
21
<PAGE>
SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1994
(Thousands of Dollars)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
REAL ESTATE ASSETS:
Resort development, net $ 2,900
Real estate held for resale or development 325
Equity in real estate joint ventures, net 517
--------
Total real estate assets 3,742
CASH 93
ACCOUNTS RECEIVABLE 190
OTHER ASSETS 110
--------
Total assets $ 4,135
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
LIABILITIES:
Notes payable $ 5,574
Other long-term debt 736
Accounts payable and accrued expenses 2,441
Other liabilities 343
--------
Total liabilities 9,094
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' DEFICIT:
Preferred stock, $1 par, 1,000,000
shares authorized, none issued --
Common stock, $1 par, 10,000,000 shares authorized,
3,281,331 shares issued 3,281
Additional paid-in capital 3,031
Retained deficit (11,145)
Treasury stock, 112,402 shares, at cost (126)
--------
Total stockholders' deficit (4,959)
--------
Total liabilities and stockholders'deficit $ 4,135
========
</TABLE>
The accompanying notes are an integral part of this statement.
22
<PAGE>
SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(Thousands of Dollars,
Except Per Share Amounts)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1994 1993
----------- -----------
<S> <C> <C>
RESORT REVENUES $ 2,105 $ 2,015
REAL ESTATE REVENUES, NET 985 1,330
---------- ----------
3,090 3,345
---------- ----------
RESORT OPERATING EXPENSES 2,292 2,331
OTHER OPERATING EXPENSES 1,031 1,158
---------- ----------
3,323 3,489
---------- ----------
LOSS FROM OPERATIONS (233) (144)
INTEREST EXPENSE (468) (484)
LITIGATION SETTLEMENT 1,318 ---
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY GAIN 617 (628)
INCOME TAXES (Net of tax operating loss
carryforward
realization of $210 in 1994) --- ---
---------- ----------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 617 (628)
EXTRAORDINARY GAIN ON DEBT SETTLEMENTS
(Net of tax provision and operating loss
carryforward
realization of $807 in 1994) 2,374 449
---------- ----------
NET INCOME (LOSS) $ 2,991 ($179)
========== ==========
INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary gain $0.19 ($0.20)
========== ==========
Net income (loss) $0.94 ($0.06)
========== ==========
AVERAGE NUMBER OF SHARES OUTSTANDING 3,168,929 3,168,929
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE>
SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(Thousands of Dollars)
<TABLE>
<CAPTION>
Common Stock
------------------ Additional
Paid-In Retained Treasury
Shares Amount Capital Deficit Stock
--------- ------- ---------- --------- -------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1992 3,281,331 $3,281 $3,031 ($13,957) ($126)
Net loss -- -- -- (179) --
--------- ------ ------ -------- -----
BALANCE, December 31, 1993 3,281,331 3,281 3,031 (14,136) (126)
Net income -- -- -- 2,991 --
--------- ------ ------ -------- -----
BALANCE, December 31, 1994 3,281,331 $3,281 $3,031 ($11,145) ($126)
========= ====== ====== ======== =====
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
SOUTHERN INVESTORS SERVICE COMPANY, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993
------- -------
<S> <C> <C>
Cash flows from operating activities:
Income (loss) before extraordinary gain $ 617 ($628)
Adjustments to reconcile income (loss) before
extraordinary gain to net cash provided
by operating activities:
Equity in undistributed income of real
estate joint ventures (143) (522)
Distributions from real estate joint
ventures, net --- 395
Cost of real estate sales, net of deferred
gross profit 23 (42)
Depreciation and amortization 255 309
Change in assets and liabilities:
Investments in real estate (123) ---
Collections of notes receivable --- 48
(Increase) decrease in accounts receivable and
other assets (39) 204
Increase (decrease) in accounts payable, accrued
expenses and other (171) 518
----- ------
Net cash from operating activities 419 282
Cash flows from financing activities:
Payments on notes payable and other debt (575) (298)
Borrowings on notes payable and other debt --- 90
----- ------
Net cash used by financing activites (575) (208)
----- ------
Net (decrease) increase in cash (156) 74
Beginning cash 249 175
----- ------
Ending cash $ 93 $ 249
===== ======
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) CURRENT BUSINESS CONDITIONS
BACKGROUND
The operations of Southern Investors Service Company, Inc. and its
subsidiaries (Company) are concentrated in Texas, which from 1986 to 1988 was
adversely affected by the downturn in the energy and real estate markets.
During 1990, the Company reached its first agreement with certain of its
creditors to resolve defaults under various loans and to settle the outstanding
debt and remaining deficiencies. The settlement provided for the conveyance to
the creditors of title to certain collateral securing the loans and the
assignment of distribution rights of certain real estate projects. Total debt
satisfied was $85.4 million for the conveyance and assignments of a significant
portion of the Company's assets. As a result of this debt restructuring and
various others as discussed below, the Company's cash flow from operations has
not been sufficient to meet the Company's obligations for the past several
years. The Company has sustained net operating losses during the past several
years and anticipates that it will incur a net operating loss for 1995. Such
losses have depleted the Company's stockholders' equity. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company's ability to continue as a going concern is dependent upon its
ability to settle or restructure existing debt and generate positive cash flow
to cover operating expenses and other cash requirements.
Management believes that the debt settlements discussed below have improved
the Company's financial condition and its ability to pursue and realize
investment, development and management opportunities in real estate properties.
However, debt totaling $1,818,000 has matured and is currently due and debt
totaling $4,146,000 matures in 1995. The ability of the Company to continue as
a going concern is dependent upon its ability to settle or restructure its
remaining debt and other obligations and generate positive cash flow to cover
operating expenses and other cash requirements. Management is currently
reviewing possible options to increase cash flow and settle the Company's
existing liabilities with its limited resources. These options include, but are
not limited to, continued efforts to procure management and consulting contracts
for a fee, reduction of operating expenses (including interest), attempts to
increase revenues of the Company's resort development, continued negotiations
with various creditors to settle their accounts for cash payments at
substantially less than the amount due, the settlement of liabilities through
the transfer of assets to creditors in satisfaction of their claims, and a
possible plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code or
liquidation of the Company. The Company may develop real estate if it is able
to obtain financing for the acquisition and development of real estate and
subsequently sell the developed residential lots and commercial tracts. There
is no assurance that the Company could arrange to borrow funds or raise capital
from other sources. While management believes that its options are reasonable,
there is no assurance that actual events will occur in accordance with the
assumptions considered in the options Management is currently reviewing.
Accordingly, management's assumptions may need to be revised as actual events
occur which differ from such assumptions. The consolidated financial statements
do not include any adjustments, which could be significant, relating to the
recoverability of asset carrying amounts or the amount of liabilities that might
be necessary if the Company is unable to continue as a going concern.
26
<PAGE>
LITIGATION SETTLEMENT
In October 1988, the Company filed a lawsuit against KeepRite, Inc.
(KeepRite), Intercity Gas Company (IGC) and Heil-Quaker, collectively,
(Defendants). The jury returned a verdict on February 14, 1991 in favor of the
Company finding that (i) KeepRite breached its fiduciary duty, resulting in
actual damages of $10,000 and punitive damages of $1,000,000; (ii) Heil-Quaker
tortiously interfered with the contractual relations between the Company and
KeepRite, resulting in damages of $10,000 and punitive damages of $1,500,000;
and (iii) Heil-Quaker knowingly participated in the breach of fiduciary duty by
KeepRite, resulting in $1,500,000 of exemplary damages. In March 1991, in
connection with this litigation, a hearing was held regarding the entry of
judgment and the award of attorneys' fees. The Company sought judgment in the
amount of $4,020,000; the Defendants sought judgment in the amount of $675,000
plus $1,500,000 in attorneys' fees and no award to the Company. The court
entered judgment for the Company in the amount of $3,400,000 and denied
Defendants' request for a new trial. Thereafter, the Defendants filed a bond in
that amount to secure the judgment and to appeal it. On October 28, 1991,
Defendants filed their appeal brief. The Company filed its brief in response on
December 23, 1991. The appeal was heard on October 21, 1992.
On September 16, 1993, the Court of Appeals affirmed the judgment
pertaining to KeepRite ($1,010,000) and reversed the judgment of actual,
punitive and exemplary damages against Heil-Quaker ($3,010,000). The reversal
of judgment as to Heil-Quaker potentially reinstated Heil-Quaker's claim against
the Company seeking payment of $675,000. The Company appealed the reversal of
the judgment as to Heil-Quaker.
On April 20, 1994, the Company and the Defendants executed an agreement to
settle this matter. In accordance with this agreement, the Defendants agreed to
pay the Company $1,300,000 (including $100,000 attributable to claims by Jackson
Supply Company, a former subsidiary of the Company). In addition, the Company
and the Defendants individually and collectively released all of their
respective claims, including the Defendants claim against the Company which had
been recorded by the Company at $318,000. The Company received $892,000 after
the payment of the amount attributable to Jackson Supply Company and the payment
of outstanding legal fees and other expenses totalling $308,000 (of which
$108,000 had been accrued in prior periods). The Company recorded a gain of
$1,318,000 in connection with this settlement.
LIABILITY SETTLEMENTS
During 1994, the Company reached agreements with several of its creditors
to settle outstanding liabilities for less than the full amount due. These
settlements included the payment of $258,000 in settlement of a promissory note
which had an outstanding principal balance of $1,148,000 as of December 31,
1994. This promissory note had been issued by the Company in connection with
the 1992 restructure of a partnership in which the Company owns a 20% interest.
In addition, during 1994, the Company reached an agreement with one of its
lenders to settle a promissory note that matured September 30, 1993 for a cash
payment of $114,000. This note had been issued by the Company as part of a 1990
debt settlement and had a balance of $892,000 including accrued and unpaid
interest.
27
<PAGE>
The Company's other long-term debt consisted of unsecured notes payable
that were due September 30, 1993, in the principal amount of $1,049,000 plus
related interest. These notes are payable to trade creditors of a subsidiary of
the Company that ceased operations during 1989. The Company has made offers to
these creditors to settle existing claims at less than the amounts due and as of
December 31, 1994, the Company has made payments of $78,000 in settlement of
$313,000 in principal amount of these trade creditor notes. Included in these
trade creditor notes was an obligation in the amount of $318,000 payable to the
Defendants in connection with the litigation discussed above. This amount was
released as a result of the settlement and is included in Litigation Settlement
in the accompanying financial statements. As of December 31, 1994, $736,000 in
trade creditor notes and related accrued interest remained past due.
The Company had an incentive plan for certain key employees (Incentive
Plan). To implement the Incentive Plan, the Company formed limited partnerships
to purchase, hold, develop and dispose of improved and unimproved real estate as
authorized by the Compensation Committee of the Board of Directors. The Company
is the general partner of such limited partnerships, holding an 85% interest.
The limited partners holding the remaining 15% interest are certain current and
former employees, including one who serves as a director of the Company. Under
the terms of the limited partnership agreements, the Company may, at its option,
and is required, at the option of the limited partner, to purchase the
partnership interest of a limited partner who is no longer employed by the
Company or any of its subsidiaries. The agreements contain complex provisions
regarding the purchase price payable, which may be substantial, to a limited
partner upon exercise of such option. As of December 31, 1993, the Company had
accrued $807,000 in connection with its obligations pursuant to the Incentive
Plan. During 1994, the Company made payments of $202,000 in settlement of these
obligations, and recorded an extraordinary gain of $605,000.
The settlements discussed above and other settlements reached during 1994
resulted in extraordinary gains totaling $2,374,000.
During 1993, the Company restructured Debentures with aggregate principal
balances of $2,331,000, Debenture Loans advanced by certain Debenture holders
with aggregate principal balances of $639,000, and accrued and unpaid interest
with respect to these Debentures and Debenture Loans of approximately $470,000
in exchange for unsecured promissory notes of the Company. These notes bear
interest at 6% compounded annually and are due October 2, 1995. In addition,
the Company extended various offers to purchase Debentures and Debenture Loans
with aggregate principal balances of $714,500 from funds available in the
sinking fund which had been established with respect to the Debentures.
Payments of $220,000 were made from the sinking fund to purchase Debentures with
principal balances of $556,500 and Debenture Loans with aggregate principal
balances of $35,000. The Company recognized extraordinary gains during 1993 of
approximately $410,000 in connection with these purchases. In an effort to
reach a settlement with respect to the remaining Debentures during 1993, the
Company extended an offer to purchase Debentures with aggregate principal
balances of $123,000. This offer included the payment of $450 from funds
available in the sinking fund and $550 in the form of an unsecured promissory
note issued by the Company for each $1,000 principal amount of Debentures. Such
promissory notes are payable in two annual installments beginning in October,
1994, and bear interest at the rate of 6% per annum. Payments of $38,700 were
made from the sinking fund and promissory notes with aggregate principal
balances of $47,300 were
28
<PAGE>
issued by the Company to purchase Debentures with aggregate principal balances
of $86,000. The remaining Debentures with principal balances of $37,000 were
settled during 1994.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its majority-owned subsidiaries and joint ventures. Income and expenses are
recorded on the accrual basis of accounting, and all significant intercompany
accounts and transactions have been eliminated.
The Company records its investment in real estate joint ventures in which
its ownership equals or exceeds 20% but is 50% or less and which the Company
does not control on the equity method. Those ventures in which the Company's
ownership is less than 20% are carried at cost unless the Company exercises
significant influence. The Company recorded its investment in joint ventures in
which it has assigned its rights to cash distributions at zero and has not
recorded earnings or losses of these ventures. As of December 31, 1994, the
ventures in which the Company has assigned its rights to cash distributions had
total assets of $0.9 million.
REAL ESTATE OPERATIONS
Profits from sales of real estate are recognized only upon delivery of a
deed, transfer of all attributes of ownership, receipt from the purchaser of an
adequate cash down payment, and the absence of obligations to perform
significant activities after the sale. If the required cash down payments have
not been received, sales and related costs are recorded but the gross profits
are deferred and recognized on the installment method of accounting until
sufficient cash payments have been received. Deferred gross profit of $343,000
as of December 31, 1994 is included in other liabilities in the accompanying
Consolidated Balance Sheet.
Residential lots and real estate held for resale or development are stated
at the lower of cost or estimated net realizable value. If the Company
estimates that the cost upon completion will exceed the net realizable value,
the Company provides a reserve for such excess costs. Cost includes the land
acquisition cost, general improvements and interest, property taxes and other
carrying costs capitalized during development. Interest is capitalized on the
average amount of accumulated expenditures for property being developed using an
effective rate based on related debt. Interest and property tax capitalization
continues until the assets are ready for sale or until development of the
property is suspended. No amounts were capitalized for the two years ended
December 31, 1994. Costs are allocated to tracts based upon the relative sales
value of the tracts.
The estimated net realizable value of residential lots and real estate held
for resale or development is based upon the anticipated sales price less
estimated costs of completion (including interest and property taxes incurred
during the development period) and direct costs of disposal. Interest and
property taxes which are not capitalizable are not included in the determination
of net realizable value. The estimated net realizable value is contingent upon
the Company's ability to carry out its plans for each property. The estimated
net realizable value of income producing properties and investments in real
estate joint ventures with income
29
<PAGE>
producing properties is based upon anticipated cash flows from operations of the
properties, exclusive of interest, under a going concern assumption.
The majority of the Company's real estate remaining after the debt
settlements discussed above is located in Texas which, as discussed in Note 1,
has been adversely affected by economic conditions generally related to the
downturn in the energy business and the slow recovery from a national recession.
Accounting practice does not require such assets to be recorded at fair market
value, which may be lower than the estimated net realizable value. Management
will continue to monitor and consider the impact of changes in economic
conditions to determine the effect on the net realizable value. The effect of
any significant changes will be reported in income in the period such effect can
be reasonably estimated. If the Company were to sell or dispose of its real
estate assets as a result of the maturity or acceleration of the underlying debt
or because the Company is not able to continue as a going concern, it is
anticipated that sales or dispositions would not generate sufficient funds to
retire the related debt and would be significantly less than the current
carrying amount of assets.
DEPRECIATION
Resort development properties are depreciated on the straight-line basis
over their estimated useful lives net of estimated salvage value. At December
31, 1994, accumulated depreciation totaled approximately $3,700,000.
Upon sale or retirement of depreciable assets, the cost and the related
accumulated depreciation are removed from the accounts and the resulting profit
or loss is reflected in income. The costs of ordinary maintenance and repairs
are expensed, whereas renewals and major replacements are capitalized and
expensed to future operations through depreciation charges.
INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share is computed by dividing income (loss) by the
weighted average number of shares outstanding giving effect to treasury stock.
PREFERRED STOCK
The Company has authorized 1 million shares of $1 par value preferred
stock. No such stock has been issued. The preferred stock may be issued in one
or more series, with the shares in each such series having such voting powers
and such designations, preferences and relative participating, optional
redemption, conversion, exchange and other special rights and restrictions as
may be fixed by a resolution of the Company's Board of Directors.
30
<PAGE>
(3) REAL ESTATE OPERATIONS
Real estate revenues include the following amounts:
<TABLE>
<CAPTION>
(Thousands of Dollars) Year Ended December 31,
-----------------------------------------------------------
1994 1993
----------------------------------------------------------
<S> <C> <C>
$ 23 $ 34
Sales of real estate
Cost of real estate sales (23) --
Equity in income of real
estate joint ventures 143 522
Management fees 753 713
Interest and other income 89 61
---------------------------------------------------------
Total real estate revenues, net $ 985 $1,330
=========================================================
</TABLE>
31
<PAGE>
The combined condensed balance sheet and statements of income of the real
estate joint ventures accounted for on the equity method in which the Company
has not assigned its rights to cash distributions are set forth below:
<TABLE>
<CAPTION>
Balance Sheet December 31,
-----------------------------------------------------------------
(Thousands of Dollars) 1994
---------------------------------------------- ------------------
<S> <C>
ASSETS:
Cash $ 392
Receivables 564
Developed residential lots 1,522
Real estate held for resale or development 1,575
Income producing properties, net 16,981
Other assets 1,808
-----------------------------------------------------------
$22,842
===========================================================
LIABILITIES & VENTURERS' EQUITY:
Accounts payable and accrued liabilities $ 2,580
Notes payable 14,544
Venturers' equity:
Company and its subsidiaries 517
Other ventures 5,201
-----------------------------------------------------------
$22,842
===========================================================
</TABLE>
<TABLE>
<CAPTION>
Statements of Income Year Ended December 31,
-------------------------------------------------------------------
(Thousands of Dollars) 1994 1993
-----------------------------------------------------------------
<S> <C> <C>
REVENUES:
Sales of real estate $ 1,706 $4,017
Cost of sales 866 1,804
-----------------------------------------------------------------
840 2,213
Rental and other income 3,831 3,942
-----------------------------------------------------------------
4,671 6,155
EXPENSES:
Operating expenses 3,014 3,195
Interest expense 533 502
-----------------------------------------------------------------
Net income $ 1,124 $2,458
=================================================================
Equity of the Company and its subsidiaries
in income $ 143 $ 522
=================================================================
</TABLE>
On March 27, 1990 the Company restructured and settled certain debt of the
real estate joint ventures. The Company's real estate revenues and operations
were affected by the conveyance of a significant amount of its real estate
assets and the assignment of its distribution rights in certain real estate
projects to the lenders. The Company recorded its investment in joint ventures
in which it has assigned its rights to cash distributions at zero and has not
recorded earnings or losses of these ventures. As of December 31, 1994, the
ventures in which the Company has assigned its rights to cash distributions had
total assets of $0.9 million.
Substantially all real estate properties and receivables of the joint
ventures are pledged as collateral to secure notes payable. Notes payable bear
interest at rates ranging from the LIBOR rate plus 3% to 9 5/8%. Scheduled
principal payments of joint venture notes payable for the years 1995 through
1998 are $5,640,000, $96,000, $96,000 and $8,712,000, respectively. Additional
amounts may become due in order to obtain the release of real estate which is
sold.
32
<PAGE>
No federal income tax provision is included in the combined condensed
statements of income for the joint ventures since each venturer will report in
its tax return its share of each joint venture's income and expense.
(4) FEDERAL INCOME TAXES
In February 1992, the Financial Accounting Standards Board issued Statement
No. 109, "Accounting for Income Taxes." The statement requires the use of the
liability method of accounting for deferred income taxes and replaced Statement
No. 96. The Company adopted the new standard during the first quarter of 1993.
The adoption did not have a material impact on the financial position or results
of operations.
The estimated tax effect of temporary differences and tax attributes
representing deferred tax liabilities and assets is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
(Thousands of Dollars) 1994
---------------------------------------------------------
<S> <C>
Tax benefits due to:
Tax operating loss carryforwards $ 8,853
Accrued expenses and other liabilities 161
Other 43
-------
Gross deferred tax asset 9,057
Deferred tax liability due to:
Accelerated depreciation ( 344)
Basis difference in real estate assets (1,208)
-------
Net deferred tax asset 7,505
Less-Valuation allowance (7,505)
-------
$ ---
=======
</TABLE>
The Company estimates that as of December 31, 1994, its net operating loss
carryover for federal income tax reporting purposes, after giving consideration
to the tax effect of the debt settlements as discussed in Note 1, is
approximately $26.0 million. The net operating loss will begin to expire in
2002. The tax benefit of the net operating loss carryover has been recognized
as a reduction of the deferred taxes provided on temporary differences which are
expected to reverse during the carryover period. The valuation allowance as of
December 31, 1993 totalled $9,869,000. The decrease in the valuation allowance
was due to realization and adjustments of the net operating loss carryover
during 1994.
During 1994, the Company paid 1993 alternative minimum taxes of $13,500.
No taxes were paid during 1993.
In October 1986, the Tax Reform Act of 1986 (the Act) was passed. The Act
substantially changed the rules regarding the availability of a corporation's
net operating loss carryover following a significant change of ownership. Under
most circumstances, the limitations on the use of the net operating loss
carryover are imposed if the equity ownership of a corporation's 5% stockholders
increases by more than 50% over the lowest percentage of equity ownership of
such stockholders during the three year period prior to the date of the
ownership change. No change of ownership had occurred through December 31, 1994.
The
33
<PAGE>
Revenue Reconciliation Act of 1993 did not have a material impact on the
Company's financial position or results of operation.
(5) NOTES PAYABLE AND OTHER LONG-TERM DEBT
NOTES PAYABLE
The Company's notes payable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
(Thousands of Dollars) 1994
------------------------------------------------------------ -------
<S> <C>
Matured notes, partially secured by real
estate, bearing interest at rates ranging
from 6% to 9% $1,082
Notes issued to various debenture holders,
due in 1995, bearing interest at 6% 3,463
Notes payable secured by the Company's
interest in a real estate joint venture, due in
1995, bearing interest at the prime rate 300
Note payable to Walter M. Mischer secured by
real estate, due during 1995, and bearing
interest at the prime rate plus 1% 338
Note payable issued in partial settlement of
insurance premium claims secured by real
estate, due in 1996, bearing interest at 9% 309
Other 82
------
$ 5,574
=======
</TABLE>
As of December 31, 1994, the Company was delinquent on principal and
interest payments of $1,082,000 and $623,000, respectively, on its notes
payable. At present, the Company has received notice from one of its lenders
that a matured note with an outstanding principal balance of $300,000 is in
default and that this indebtedness will be accelerated. The Company is
currently negotiating settlement of this debt.
During 1989, due to the financial condition of the Company, certain holders
(consenting holders) representing $2,532,000, or approximately 84% of the
outstanding principal amount of the Debentures, agreed to extend loans to the
Company in an amount equal to 100% of all future payments of principal and 72%
of all future interest payments they were due to receive from and after December
1, 1989 (Debenture Loans). The maturity date of such Debenture Loans was
September 30, 1993. In addition, during 1991 and 1992, certain of the
consenting holders extended Debenture Loans to the Company equal to the
remaining 28% of the interest payments they were due to receive. These
Debenture Loans also matured September 30, 1993.
34
<PAGE>
In connection with the extension of these loans by the consenting holders,
effective November 30, 1989, as provided by the Indenture with respect to the
Debentures, the Third Supplemental Indenture was approved. The Third
Supplemental Indenture provided that the Company would not be required from and
after November 30, 1989, to make any sinking fund payments in respect of
Debentures held by consenting holders. The Company continued to make the
required sinking fund payments with respect to debentures held by non-consenting
holders.
The Company requested that certain consenting holders holding $2,331,000
(approximately 77.4%) of the outstanding principal amount of the Debentures
waive their rights to the portion of the sinking fund attributable to deposits
by the Company prior to November 30, 1989 (waiving holders). Such waiving
holders agreed to the Company's proposal contingent upon (i) the Company
offering to purchase the Debentures held by the non-waiving holders for their
pro-rata share of the approximately $280,000 available in the sinking fund after
estimated expenses, (ii) acceptance of such offer by non-waiving holders with
respect to at least $612,000 in principal amount of Debentures (90.01% of the
principal amount of Debentures held by non-waiving holders) and (iii) the
agreement of the consenting holders who are non-waiving holders (the non-waiving
consenting holders) and who accept the offer to cancel the promissory notes
evidencing their Debenture Loans to the Company described above (which Debenture
Loans relating to interest payments to non-waiving consenting holders aggregated
approximately $35,000, excluding accrued interest on the loans) and to
termination of their loan agreement with the Company. The Company reserved the
right to waive these conditions provided that the waiving holders consent to
such waiver.
On January 28, 1993, the Company extended an offer to the non-waiving
holders to purchase their holdings from the funds available in the sinking fund
for (i) $450 for each $1,000 principal amount of Debentures with respect to
Debentures held by non-consenting holders and (ii) $300 for each $1,000
principal amount of Debentures with respect to Debentures held by consenting
holders. Such offer expired on February 26, 1993, at which date $380,500 in
principal amount of Debentures had been tendered.
On March 5, 1993, the Company renewed its offer until March 31, 1993, and
on May 18, 1993, the Company again renewed the offer until June 18, 1993.
Payments of $220,000 were made by the trustee to purchase Debentures and
Debenture Loans in the principal amount of $556,500. The Company recognized an
extraordinary gain of approximately $410,000 in connection with these purchases
during 1993.
On October 12, 1993, the Company offered to purchase the remaining
Debentures which represented an aggregate principal amount of $123,000. This
offer to purchase included the payment of $450 from funds available in the
sinking fund and $550 in the form of an unsecured promissory note issued by the
Company for each $1,000 principal amount of Debentures. Such promissory notes
are payable in two annual installments and bear interest at the rate of 6% per
annum. Payments of $38,700 were made from the sinking fund, and promissory
notes with aggregate principal balances of $47,300 were issued by the Company to
purchase Debentures with aggregate principal balances of $86,000. The remaining
$37,000 in principal amount of Debentures was settled during 1994 from funds
available in the sinking fund.
In addition, during 1993 the Company restructured Debentures with an
aggregate principal balance of $2,331,000, Debenture Loans advanced by certain
debenture holders with aggregate principal balances of $639,000 and accrued and
unpaid interest with respect to these
35
<PAGE>
Debentures and Debenture Loans of approximately $470,000 in exchange for
unsecured promissory notes of the Company. These notes bear interest at 6%
compounded annually and are due October 2, 1995.
OTHER LONG-TERM DEBT
At December 31, 1994, other long-term debt of $736,000 consisted of
unsecured notes payable and related accrued interest payable to trade creditors
of a subsidiary of the Company that ceased operations in 1989, which were due
September 30, 1993. See Note 1 for a discussion of the settlement of certain of
these notes.
With the exception of the improvements and a portion of the land located at
the Company's resort in west Texas, substantially all of the Company's real
estate assets are pledged as collateral. Minimum annual principal payments on
total notes, mortgages payable and other long-term debt during the years 1995
through 1996 are $4,146,000, and $346,000 respectively, not including the
delinquent principal amounts discussed above. Additional amounts may become due
to obtain the release of real estate that is sold.
To date, the Company has not received any notices of default or
acceleration from any of its lenders other than the notices discussed above.
Interest paid on the consolidated indebtedness during the years ended
December 31, 1994 and 1993 was $53,000 and $72,000, respectively.
(6) COMMITMENTS AND CONTINGENCIES
The Company has guaranteed a revolving line of credit of a former
subsidiary. This loan had an outstanding balance of $1.0 million at December
31, 1994.
Due to the location of the Company's investment in the west Texas resort
development and lack of public fire protection, the cost of obtaining property
insurance is considered prohibitive; consequently, property insurance is not
carried by the Company for this development.
The Company has also guaranteed performance under certain construction
contracts of Ross Constructors, Inc., a subsidiary of McGregor Construction
Company, which the Company sold in 1983, and is currently involved in a dispute
in which the owner of an office building has alleged that Ross Constructors,
Inc. failed to construct the building in accordance with the terms of the
construction contract. This case was settled with the owner of the building for
$175,000 during 1991, with the settlement paid by Highlands Insurance Company
(Highlands), as surety for payment under the performance bond. During 1992,
Highlands filed suit against the Company for the $175,000 plus attorneys' fees
based upon a written blanket indemnity agreement executed by the Company in
favor of Highlands. The Company accrued a $175,000 liability related to its
indemnity to Highlands during 1991.
A suit was filed May 17, 1993, against the Company and thirteen others in
the 165th District Court of Harris County, Texas by Angela and Daniel
Thibodeaux, et al seeking unspecified damages for injuries that allegedly
occurred during 1991, as the result of a fall by Angela Thibodeaux and her son
at the Point Royal Apartments. The suit claims that the
36
<PAGE>
Company and the other defendants were negligent in failing to adequately inspect
and repair the property. The Company was a general partner in a partnership
that owned the Point Royal Apartments. The Company denies any wrongdoing and
intends to vigorously defend against these allegations.
The Company is also named a defendant in lawsuits and other claims arising
in the ordinary course of the Company's business. If the Company, in the light
of its present circumstances, were required to make substantial cash
expenditures in connection with current and future lawsuits and other claims,
such expenditures could have a material adverse effect on the Company's
consolidated financial position and could affect the Company's ability to
continue as a going concern.
The Company leases office space from a joint venture of which it owns
19.4%. The annual rentals under this lease for 1994 were $250,000. The minimum
annual rentals under this lease are $125,000 for 1995. As of December 31, 1994,
the Company was delinquent on $308,000 of rental payments under this lease, for
amounts due prior to September 30, 1992. This amount has been accrued. The
Company has subleased a portion of the office space to companies affiliated with
Mr. Mischer for an aggregate annual rental of approximately $129,000.
(7) RELATED PARTY TRANSACTIONS
The Company had an incentive plan for certain key employees (Incentive
Plan). To implement the Incentive Plan, the Company formed limited partnerships
to purchase, hold, develop and dispose of improved and unimproved real estate as
authorized by the Compensation Committee of the Board of Directors. The Company
is the general partner of such limited partnerships, holding an 85% interest.
The limited partners holding the remaining 15% interest are certain current and
former employees, including one who serves as a director of the Company. Under
the terms of the limited partnership agreements, the Company may, at its option,
and will, at the option of the limited partner, purchase the partnership
interest of a limited partner who is no longer employed by the Company or any of
its subsidiaries. The agreements contain complex provisions regarding the
purchase price payable, which may be substantial, to a limited partner upon
exercise of such option. In 1987, one such limited partner who is no longer
employed by the Company, made a formal demand upon the Company, pursuant to the
terms of the Incentive Plan, that the Company purchase her partnership interest.
On December 28, 1992, the Company purchased her 2.5% interest in the 1982
Partnership, thereby increasing its ownership from 85.0% to 87.5%. As
consideration for her 2.5% interest the Company issued an $8,000 note payable to
the limited partner due in eight quarterly installments of principal and
interest at 6% per annum of $1,068 commencing March 28, 1993 until maturity at
December 28, 1994. The Company also deeded a house in Houston to the limited
partner as consideration for her interest. The house was purchased from Walter
M. Mischer for $65,000. The Company issued a $65,000 note payable to Mr.
Mischer which was due together with interest at the prime rate on June 28, 1993.
The Company had accrued a $965,000 liability, and made distributions of $85,000
to the limited partners during 1991 and $73,000 to the partner discussed above
during 1992 related to the Incentive Plan. During 1994, the Company made
payments of $202,000 in settlement of these obligations and recorded an
extraordinary gain of $605,000.
37
<PAGE>
During 1990, the Company settled its obligations with one of its joint
venture lenders. Walter M. Mischer had previously guaranteed the joint
venture's loan and the Company had indemnified Mr. Mischer against any loss with
respect to his guarantee. Mr. Mischer paid $35,000 cash and issued a note
payable to the lender for $83,700, bearing interest at 12% and maturing on June
28, 1993 to settle his guarantee. The Company recorded a note payable to Mr.
Mischer, which had a balance of $116,000 as of December 31, 1992, and with
interest at 12% was due June 28, 1993. During 1993, Mr. Mischer advanced the
Company $90,000. This advance, together with the $65,000 and $116,000 notes
discussed above, and accrued and unpaid interest, were consolidated into a
single note in the principal amount of $338,000. This note bears interest at
the prime rate plus 1% and is due May 18, 1995. This note is secured by
approximately 14,720 acres of land located adjacent to the Company's resort in
west Texas.
During 1990, the Company entered into a series of transactions relating to
its 75% joint venture interest in Heritage Park Venture II (Heritage Park) and
its net profits interest in the Fairwood subdivision. Prior to these
transactions, the Company had effectively conveyed to others substantially all
of its beneficial interest in Heritage Park. The Company arranged the sale to
Hallmark Residential Group, Inc.(Hallmark), a Company in which Mr. Mischer then
owned 56% of the common stock, of an unencumbered 62.5% interest in Heritage
Park for $2,285,000 in cash and $186,000 payable from future cash flow from
Heritage Park. To consummate the sale of an unencumbered 62.5% interest in the
venture, the Company negotiated recission of its purchase of Hallmark common
stock and subordinated debentures and reacquisition of the rights to proceeds
from Heritage Park that had been conveyed to its lenders. The Company paid
$2,285,000 of the proceeds received from the sale of the 62.5% interest in
Heritage Park to reacquire its beneficial interest in Heritage Park that it had
conveyed to its lenders and to settle $1,267,000 of its indebtedness with the
lenders. The Company retained all rights to the $186,000 portion of sale
proceeds payable from future cash flow from Heritage Park, a 12.5% joint venture
interest in Heritage Park and a net profits interest in Fairwood and recognized
a $685,000 gain on this series of transactions. The Company received cash
distributions of $0 and $110,000 and recognized income of $99,000 and $130,000
during 1994 and 1993, respectively, relating to its remaining 12.5% equity
interest in Heritage Park.
On December 15, 1989, Mr. Mischer and Mr. Mischer, Jr. agreed to make
Debenture Loans to the Company equal to all future principal payments and 72% of
future interest payments received on the Debentures held by them. In 1991, Mr.
Mischer and Mr. Mischer, Jr. agreed to make Debenture Loans to the Company equal
to 100% of the interest payments received on the Debentures on June 1 and
December 1, 1991. Such Debenture Loans made to the Company bear interest at the
same rate as the applicable 7% or 8.5% Debenture and were due on September 30,
1993. See Note 5 describing the terms of the Debenture modification. In
addition, Mr. Mischer and Mr. Mischer, Jr. made Debenture Loans of $133,000
which amount is equal to 72% of interest payments received during 1989 on the
Debentures held by them. Such Debenture Loans made to the Company during 1989
bear interest at 6% and 7% per annum and were due on September 30, 1993. During
1993, in connection with the restructure of the Company's Debentures, the
Company issued $3,440,000 in unsecured promissory notes to certain directors,
stockholders and affiliates including notes to Mr. Mischer, Mr. Mischer, Jr.,
John D. Weil and John W. Storms, Trustee, in the aggregate principal amount of
$2,995,000 to consolidate amounts due for the Debenture Loans, Debentures held
by them and accrued and unpaid interest. These notes bear interest at 6%,
compounded annually, and are due October 2, 1995.
38
<PAGE>
Mr. Mischer and Mr. Mischer, Jr. participate in real estate projects in the
Houston area that may compete with the Company's projects.
As a result of a series of transactions occurring during 1989 and 1990, the
Company's effective investment in Jackson Supply Company (Jackson), an
established distributor of air conditioning equipment located in Jackson,
Mississippi, was reduced to 10%. In connection with these transactions, Walter
M. Mischer and the president of Jackson have effective investments in Jackson of
75% and 15%, respectively. Since the Company has an effective investment of
less than 20% of the voting stock of Jackson, it has accounted for its
investment in Jackson on the cost method subsequent to December 31, 1990. The
Company has guaranteed Jackson's revolving line of credit with a bank. At
December 31, 1994, the revolving line of credit had an outstanding principal
balance of $1.0 million.
In January 1990, the Company entered into an agreement with a limited
partnership, in which Mr. Mischer holds an effective interest of 50%, to manage
the development and sales of a residential property for a monthly fee of
$10,000. In addition, the Company manages real estate projects in which Mr.
Mischer has effective ownership interests ranging from 81% to 100% for an
aggregate monthly management fee of $41,500. The Company also has management
contracts on the two office buildings in which it has an ownership interest
which provide for an aggregate monthly management fee of $10,000. The
management contracts are cancelable upon 30 days notice. As of December 31,
1994, the Company had accounts receivable from these projects of $50,000.
Various companies or joint ventures in which Mr. Mischer has effective
ownership interests ranging from 50% to 100% acquired options to purchase lots
from the Company or from a joint venture in which the Company is a venturer.
The joint venture purchased a total of 104 lots and 113 lots from the joint
venture for an aggregate amount of $1,751,000 and $1,822,000 during 1994 and
1993, respectively. These companies and joint ventures had outstanding option
contracts totaling $2,559,000 covering 150 lots with the Company or its
affiliated joint venture at December 31, 1994.
Due to the Company's lack of adequate resources and its need for additional
employee housing units at its resort in west Texas, a company owned by Mr.
Mischer contracted with the Company for the construction of additional employee
housing. During 1994 the Company billed and collected $204,000 representing the
entire cost of these units from Mr. Mischer. These units are owned by Mr.
Mischer and leased to employees of the Company.
During 1992 and 1987 Mr. Mischer purchased certain notes receivable held by
a subsidiary of the Company at face amount of $83,000 and $546,000,
respectively. The Company is required at Mr. Mischer's election to repurchase,
at par, any note with a payment more than 90 days delinquent. None of these
notes had been repurchased through December 31, 1994.
In the opinion of the management of the Company, all of the transactions
described above were effected on terms at least as favorable to the Company as
those that could have been obtained from unaffiliated third parties.
39
<PAGE>
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses included the following:
<TABLE>
<CAPTION>
December 31,
(Thousands of Dollars) 1994
-------------------------------------------------------
<S> <C>
Trade accounts payable $ 434
Accrued interest payable 911
Accrued taxes payable 238
Accrued legal and insurance settlements 448
Other accrued liabilities 410
-----
$2,441
======
</TABLE>
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SOUTHERN INVESTORS SERVICE COMPANY, INC.
by: /S/ WALTER M. MISCHER
-------------------------------------------
Walter M. Mischer
Chairman of the Board
Chief Executive Officer
Date: March 30, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934 the
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
/S/ WALTER M. MISCHER Date: March 30, 1995
---------------------------------
Walter M. Mischer
Chairman of the Board-
Chief Executive Officer
Director
/S/ WALTER M. MISCHER, JR. Date: March 30, 1995
---------------------------------
Walter M. Mischer, Jr.
President and Director
Principal Executive Officer
/S/ ERIC SCHUMANN Date: March 30, 1995
---------------------------------
Eric Schumann
Senior Vice President - Finance
Principal Financial and
Accounting Officer
/S/ TOM F. STEELE Date: March 30, 1995
---------------------------------
Tom F. Steele
Director
/S/ JOHN D. WEIL Date: March 30, 1995
---------------------------------
John D. Weil
Director
41
<PAGE>
INDEX TO EXHIBITS
BY PAGE IN SEQUENTIAL NUMBER COPY
Document or Exhibit Page No.
---------------------------------------------------------------
Exhibit 21 Subsidiaries of the Registrant....... 43
42
<PAGE>
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
Percentage of
Owned by Registrant Voting Securities
------------------- -----------------
Mischer Enterprises, Inc. (Texas) 100%
City Pavers, Inc. d/b/a
Mischer Paving & Utility Company,
in the State of Texas (Delaware) 100%
Lajitas Utility Co., Inc. (Texas) 100%
The subsidiaries listed above are included in the Company's consolidated
financial statements.
43
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>This schedule contains summary financial information extracted from
Consolidated Financial Statements for the year ended December 31, 1994 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 93
<SECURITIES> 0
<RECEIVABLES> 190
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 7,442
<DEPRECIATION> 3,700
<TOTAL-ASSETS> 4,135
<CURRENT-LIABILITIES> 0
<BONDS> 6,310
<COMMON> 3,281
0
0
<OTHER-SE> (8,240)
<TOTAL-LIABILITY-AND-EQUITY> 4,135
<SALES> 0
<TOTAL-REVENUES> 3,090
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,323
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 468
<INCOME-PRETAX> 617
<INCOME-TAX> 0
<INCOME-CONTINUING> 617
<DISCONTINUED> 0
<EXTRAORDINARY> 2,374
<CHANGES> 0
<NET-INCOME> 2,991
<EPS-PRIMARY> .94
<EPS-DILUTED> .94
</TABLE>
