<PAGE>
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, 1999
--------------------------
[ ] 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
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SOUTHERN INVESTORS SERVICE COMPANY, INC.
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(Name of small business issuer in its charter)
Delaware 74-1223691
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
2727 North Loop West, Suite 200,
Houston, Texas 77008
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(Address of principal executive offices) (Zip Code)
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
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock $1.00 Par Value
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(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
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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. $2.5 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 20, 2000.
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 shares, Common Stock
------------------------------
$1.00 Par Value as of March 24, 2000
- -------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
Information contained in the Company's proxy statement to be used in
connection with the 2000 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., (the Company), was incorporated
under the laws of the State of Delaware in 1972. Prior to 1990, the Company was
engaged in the ownership and development of real estate primarily in the
Houston, Texas area. The operations of the Company were significantly reduced
during 1990, as a result of various debt settlements with lenders and other
creditors. These settlements resulted in the transfer of substantially all of
the Company's holdings to its creditors. During 1998 and prior years, the
Company's operations included the management of residential developments and two
office buildings owned by others. During 1998, the majority of these residential
projects were sold by the owners and therefore the Company no longer is managing
these projects. Effective January 1, 1999, the Company ceased all management
activity and all employees related to this activity were terminated. Since then,
the Company's primary activity has been the operation of a resort property in
west Texas known as Lajitas located in the Big Bend region in Texas (Lajitas).
As a result of the Company's operational losses in recent years, the Company's
management has from time to time considered several options to generate cash at
sufficient levels to meet operating needs and increasing debt obligations.
These options have included efforts to reduce operating expenses (including
interest), attempts to increase revenues of the Company's resort development,
negotiations with various creditors to settle accounts for cash payments at
substantially lower amounts than the amounts due, the settlement of liabilities
through the transfer of assets to creditors in satisfaction of their claims, and
a possible plan under the U.S. Bankruptcy Code or possible liquidation of the
Company.
Although there have been sporadic efforts to sell Lajitas in the past, only a
few potential buyers ever seriously examined the property or conducted any due
diligence. With debt of more than $4,780,000 that had matured and was currently
due, the Company determined in late 1999 that the sale of Lajitas, its sole
remaining operating asset, would facilitate the Company's ability to settle its
existing liabilities most favorably. The Company's decision to sell Lajitas at
this time was also influenced by its perception that a strong marketplace
currently favors sellers of specialty properties. After considering the efficacy
of the Company's past efforts and reviewing sales of other specialty properties,
the Company determined that the best alternative would be to sell the property
through an auction process. As a result, the Company retained the National
Auction Group, Inc., (National Auction) to conduct an auction of Lajitas. The
auction was conducted on February 24, 2000 and the property was sold for
$3,950,000. The closing of the sale is scheduled for March 31, 2000, (the
Closing Date).
In accordance with the terms of the purchase agreement which has been approved
by the Board of Directors of the Company and a majority of the Company's
shareholders (the Purchase Agreement), the buyer will pay to the Company
$3,950,000 (the Purchase Price) by wire transfer of immediately available funds
to a title company at the closing. The buyer will pay National Auction a fee in
the amount of $296,250 (7.5% of the Purchase Price), $162,000 of which will be
paid by National Auction to the Company as reimbursement for advertising
expenses. The Company will pay National Auction a commission equivalent to 6% of
the proceeds it receives from the transaction. The buyer has deposited 10% of
the Purchase Price as earnest money with the title company.
2
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At closing the Company will sell and transfer its right, title and interest in
the business, assets and properties of Lajitas as defined in the Purchase
Agreement. Such transferred assets comprise the assets and real property of the
resort and town of Lajitas, certain receivables and the two adjoining tracts of
land that are covered by the separate Real Estate Purchase and Sale Agreements.
The transferred assets also include all of the outstanding capital stock of
Lajitas Utility Co., Inc., a company which provided water and related utility
services to the resort town. As part of the transaction, the buyer will assume
certain liabilities at the closing. The assumed liabilities include (i) the
obligation to honor guest deposits paid to the Company on or before the Closing
Date; (ii) all trade payables incurred on or before the Closing Date to the
extent they remain unpaid by such date; (iii) certain tax obligations; (iv)
accrued but unused vacation time of the employees of Lajitas; and (v) the
obligation to continue to provide services to guests at the resort on the
Closing Date.
Approximately 55% of the Lajitas real estate is subject to a mortgage in favor
of Walter M. Mischer, who is the Chairman of the Board and Chief Executive
Officer of the Company. The mortgage secures approximately $712,000 of
indebtedness to Mr. Mischer, consisting of $497,000 of principal and
approximately $215,000 of accrued interest at February 25, 2000. It will be
necessary for the Company to use a portion of the proceeds from the sale of
Lajitas to repay this indebtedness in order to remove the mortgage lien from the
property and convey free and clear title to the buyer.
As part of the property being sold pursuant to the Purchase Agreement, the buyer
will purchase only a portion of the employee housing at the resort currently
owned by Mr. Mischer. Mr. Mischer has agreed to sell this housing to the Company
immediately prior to the closing for $275,000, which amount represents the
actual cost incurred by Mr. Mischer in connection with the construction thereof.
Mr. Mischer agreed to provide such employee housing for Lajitas at a time when
the Company was unable to finance its construction on acceptable terms.
CONTINUED OPERATIONS
- --------------------
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 $4,780,000 as of December 31,
1999. The Company estimates that the net proceeds from the sale of Lajitas will
be approximately $2,660,000. The Company will use these proceeds in an attempt
to settle or restructure existing debt and to realize the carrying amount of its
remaining assets. However, there can be no assurance the Company will be able to
settle or restructure existing debt and realize the carrying amount of its
assets should such proceeds be realized. Should the sale of Lajitas fail to
close, the Company's future financial condition will depend upon its ability to
generate cash at levels to meet operating needs and debt obligations which is
uncertain at this time. Management is currently reviewing possible options to
settle the Company's existing liabilities with its very limited resources. These
options include, but are not limited to, 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 under the U.S.
Bankruptcy Code or possible liquidation of the Company. 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.
3
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LIABILITY SETTLEMENTS
- ---------------------
During 1999, the Company settled a note payable with an outstanding balance of
$175,000 for a cash payment of $59,000 and recorded an extraordinary gain of
$116,000.
During 1998, the Company sold two small tracts of undeveloped real estate which
had been collateral for a note payable to an insurance company. This note was
issued during 1992 as part of a settlement with the insurance company; the terms
of which provided for the release from liability of approximately $273,000 in
claims if the note was paid. The sale of the two tracts of land provided the
funds necessary to repay the note for $9,000 less than the amount due. As a
result, the Company recorded an extraordinary gain of $282,000 during 1998.
GENERAL
- -------
The Company's most significant asset consists of Lajitas. Rental and other
revenue from the operation of this facility totaled $2.3 million and $2.1
million for the years ended December 31, 1999 and 1998, respectively. See
Item 2, "Description of Property."
Since 1990, in addition to the operations of its resort property, the Company
had emphasized the management of real estate development for others. The Company
had entered into contracts to manage, operate and develop residential property,
including the performance of various administrative functions. Such contracts
could be canceled on 30 days notice. During 1998, the majority of these
residential projects were sold by the owner and therefore the Company's
contracts were canceled. Effective January 1, 1999, the Company ceased all
development management activities and all employees related to this activity
were terminated. 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 a 6.7% equity interest in a ten-story building located at 2707
North Loop West, in Houston, Texas. The Company also has a cash flow interest in
2727 North Loop West, in Houston, Texas, where its corporate headquarters are
located.
The Company also had equity interests in three other real estate joint ventures.
During 1998, the assets of two of these ventures were sold and the ventures
therefore terminated. In addition, the assets of the one remaining venture were
sold during February 1999 at approximately book value. As a result of these
transactions, the Company recorded net gains of approximately $161,000 during
1998.
EMPLOYEES
- ---------
The Company employed a total of 70 persons on a full-time basis and a total of
4 persons on a part-time basis as of December 31, 1999.
4
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COMPETITION
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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.
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.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's net investment in Lajitas was $2.2 million or 71% of total
assets as of December 31, 1999. The development consists of approximately 22,000
acres of land located in the southwest portion of Brewster County adjacent to
the western border of Big Bend National Park. A substantial portion of the
22,000 acres is pledged to secure borrowings of the Company. These borrowings
have a principal amount of $497,000. The development includes a hotel,
condominiums, a restaurant, meeting rooms, various shops and other facilities in
various separate one and two-story buildings. The development has ancillary site
improvements consisting of a nine-hole golf course, recreational vehicle park,
swimming pool, tennis courts, landing strip and an airplane hangar.
5
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Rental and other revenues from the operation of these facilities totaled $2.3
million and $2.1 million for the years ended December 31, 1999 and 1998,
respectively. Rental revenue and occupancy statistics for the Company's resort
operations for each of the two years ended December 31, 1999 are summarized as
follows:
Year Ended December 31,
-------------------------
1999 1998
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Hotel rooms:
% Occupancy 38% 34%
Average rate $ 66.98 $ 61.37
Total revenue $ 835,000 $ 712,000
Condominiums:
% Occupancy 24% 22%
Average rate $ 74.80 $ 64.36
Total revenue $ 177,000 $ 137,000
Total rental revenues $1,012,000 $ 849,000
Restaurant, bar and golf course revenues 698,000 653,000
Other revenues 642,000 577,000
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Total revenues $2,352,000 $2,079,000
========== ==========
The development has a basis for federal income tax reporting of approximately
$1.9 million as of December 31, 1999. The improvements are depreciated using the
straight-line method with lives ranging from twelve to forty years. The realty
tax rate for 1999 was $1.91 per $100 assessed value and total taxes were
approximately $71,000 for the year ended December 31, 1999. Due to the location
of the development and lack of public fire protection, the Company considers the
cost of obtaining insurance prohibitive and consequently does not carry property
insurance for this development.
The Company's principal executive offices are located in northwest Houston and
are shared at no charge with companies affiliated with the Chairman of the Board
and Chief Executive Officer, Walter M. Mischer, Sr. The Company owns or leases
office furniture, furnishings, equipment and vehicles as management deems
necessary for its operations. Information concerning encumbrances on the
property owned by the Company and subleases from a related party is contained in
Notes 5 and 7 of the Notes to Consolidated Financial Statements of the Company.
The Company has planned no significant additions to its properties during 2000.
6
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ITEM 3. LEGAL PROCEEDINGS
The information with respect to legal proceedings is contained in Note 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, 1999.
7
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the over-the-counter market, but is
not quoted on the National Association of Securities Dealers Automated Quotation
(NASDAQ) system. According to National Quotation Bureau, Incorporated, the last
reported price of the Company's common stock was $.0625 on 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
24, 2000 was 506. No dividends have been paid by the Company since its inception
and the Company has no plans to pay dividends in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This report contains "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this section and elsewhere in this
report are forward looking statements and, although the Company believes that
the expectations reflected in such forward looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
The Company's business and financial results are subject to various risks and
uncertainties, including the Company's ability to settle or restructure its
remaining debt and other obligations and to generate positive cash flow to cover
its operating expenses, that may cause actual results to differ materially from
the Company's expectations. The Company does not intend to provide updated
information other than as otherwise required by applicable law. All subsequent
written and oral forward looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their entirety by the
cautionary statements contained in this paragraph and elsewhere in this report.
8
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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.
Year Ended December 31,
------------------------
1999 1998
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Resort revenues $ 2,352 $ 2,079
Real estate revenues, net 202 827
Resort operating expenses (2,598) (2,377)
Other operating expenses ( 102) ( 680)
Interest expense ( 381) ( 367)
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Loss before extraordinary gains ( 527) ( 518)
Extraordinary gains on debt settlements 116 282
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Net Loss ($ 411) ($ 236)
======== =========
Loss per common share:
Loss before extraordinary gains ($ 0.17) ($ 0.16)
Net Loss ($ 0.13) ($ 0.07)
Total assets $3,049 $ 3,098
Total debt $5,584 $ 5,452
Total stockholders' deficit ($5,257) ($ 4,846)
Current Business Conditions, Certain Events and Uncertainties
- -------------------------------------------------------------
The Company has sustained losses from operations for several years and the
Company anticipates that it will incur a loss from operations for 2000. Such
losses depleted the Company's stockholders' equity in 1989. 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 2000. 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 a series of transactions
to significantly reduce its debt obligations through the transfer of a
significant amount of the Company's assets to its lenders and creditors. See
Item 1, "Description of Business" for information concerning the proposed sale
of the Company's last remaining operating assets.
LIABILITY SETTLEMENTS
- ---------------------
During 1999, the Company settled a note payable with an outstanding balance of
$175,000 for a cash payment of $59,000 and recorded an extraordinary gain of
$116,000.
9
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During 1998, the Company sold two small tracts of undeveloped real estate which
had been collateral for a note payable to an insurance company. This note was
issued during 1992 as part of a settlement with the insurance company, the terms
of which provided for the release from liability of approximately $273,000 in
claims if the note was paid. The sale of the two tracts of land provided the
funds necessary to repay the note for $9,000 less than the amount due. As a
result, the Company recorded an extraordinary gain of $282,000 during 1998.
OPERATIONS
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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 $4,780,000 as of December 31,
1999. The Company estimates that the net proceeds from the sale of Lajitas will
be approximately $2,660,000. The Company will use these proceeds in an attempt
to settle or restructure existing debt and to realize the carrying amount of its
limited remaining assets. However, there can be no assurance the Company will be
able to settle or restructure existing debt and realize the carrying amount of
its assets should such proceeds be realized. Should the sale of Lajitas fail to
close, the Company's future financial condition will depend upon its ability to
generate cash at levels to meet operating needs and debt obligations which is
uncertain at this time. Management is currently reviewing possible options to
settle the Company's existing liabilities with its very limited resources. These
options include, but are not limited to, 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 under the U.S.
Bankruptcy Code or possible liquidation of the Company. 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
- ---------------------
The Company reported a $411,000 loss for 1999 compared with a loss of $236,000
in 1998. The Company recorded extraordinary gains on debt settlements of
$116,000 and $282,000 during 1999 and 1998, respectively.
Rentals and other income from the Company's resort in west Texas were $2.3
million and $2.1 million for the years ended December 31, 1999 and 1998,
respectively. The increase in rental and other income was due to increased
rental rates and slightly higher occupancy during 1999. Resort operating
expenses for 1999 increased as compared to 1998. This increase was primarily
due to higher personnel and maintenance expenses. See Item 2, "Description of
Property" included herein for a discussion of the Company's resort development.
Real estate revenues decreased to $202,000 in 1999 from $827,000 in 1998. This
decrease in revenues and corresponding decrease in operating expenses is
primarily the result of the withdrawal from the real estate management business.
During 1998 the Company sold its remaining land held for development or sale for
a net gain of $86,000.
10
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LIQUIDITY AND CAPITAL RESOURCES
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As of December 31, 1999, the Company was delinquent on notes payable and other
long-term debt of approximately $4,780,000 and interest payments of $2,179,000.
As of December 31, 1999, the Company had recorded accounts payable and accrued
expenses and other liabilities of $2.7 million. The Company estimates that the
net proceeds from the sale of Lajitas will be approximately $2,660,000. The
Company will use these proceeds in an attempt to settle or restructure existing
debt. Should the sale of Lajitas fail to close, management is currently
reviewing possible options to settle the Company's existing liabilities with its
very limited resources. These options include, but are not limited to, 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 under the U.S. Bankruptcy Code or possible liquidation of the
Company. The Company's debts and obligations are discussed in Notes 1, 5, 6, and
7 of Notes to Consolidated Financial Statements of the Company.
In assessing the Company's liquidity, the impact of income taxes has been
considered. The Company does not expect its cash flow to be affected by income
taxes in the foreseeable future because of its net operating loss carryforward.
The Company's federal income taxes are disclosed in Note 4 of the Notes to
Consolidated Financial Statements of the Company.
The impact of inflation on the Company over the past several years has been
minimal.
No major additions to property, plant and equipment are anticipated.
The Year 2000 Issue
- -------------------
The transition to the year 2000 date change was made without significant
problems or interruption of business activity. The Company had implemented
programs to assess the impact of the year 2000 date change on software and
related technologies. Testing and modifications of the Company's critical
information systems were completed prior to December 31, 1999. The Company did
not incur any significant costs relating to the year 2000 issues.
11
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ITEM 7. FINANCIAL STATEMENTS
The following financial statement data required pursuant to this item are
included herein:
Report of Independent Public Accountants
Consolidated Balance Sheet -
December 31, 1999
Consolidated Statements of Loss for
each of the Two Years Ended
December 31, 1999 and 1998
Consolidated Statements of Changes in Stock-
holders' Deficit for each of the Two Years
Ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows for
each of the Two Years Ended
December 31, 1999 and 1998
Notes to Consolidated Financial Statements
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
12
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PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information required by Item 9 is contained in the Company's proxy
statement to be used in connection with its 2000 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Director,"
which information is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is contained in the Company's proxy
statement to be used in connection with its 2000 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 is contained in the Company's proxy
statement to be used in connection with its 2000 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Director,"
which information is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is contained in the Company's proxy
statement to be used in connection with its 2000 annual meeting of stockholders
under the captions "Principal Security Holders" and "Nominees for Director,"
which information is incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits Required by Item 601 of Regulation S-B
*Filed Herein or
Incorporated by Reference
Exhibit from Exhibit
------- --------------------------
(3) (a) Certificate of Incorporation as 3(a) 1989 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
13
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(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 *
(27) Financial Data Schedule *
(B) Reports on Form 8-K
The Company filed no reports on Form 8-K during the quarter ended
December 31, 1999.
14
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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, 1999, and the related consolidated statements of
loss, changes in stockholders' deficit and cash flows for each of the two years
in the period ended December 31, 1999. 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 auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
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, 1999, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
The Company's cash flow from operations has not been adequate to meet the
Company's obligations for the past several years. Management projects negative
cash flow from operations for 2000 and the Company has a deficit in
stockholders' equity. As described in Note 1 to the Consolidated Financial
Statements, even though the Company has restructured certain indebtedness in the
last several years, it continues to be delinquent on $4,780,000 of debt. The
Company has entered into a contract to sell its resort development. If this sale
closes as scheduled, the Company will have sold substantially all of its assets,
but will have approximately $2,660,000 in net proceeds available to settle or
restructure existing debt and realize the carrying amount of its remaining
assets. However, there can be no assurance the Company will be able to settle or
restructure existing debt and realize the carrying amount of its assets should
such proceeds be realized. Should the sale of the resort development fail to
close, the Company's future financial condition will depend upon its ability to
generate cash at levels to meet operating needs and other debt obligations which
is uncertain at this time. 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. 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 any of the options management is currently reviewing. 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.
Houston, Texas
March 17, 2000 Arthur Andersen LLP
15
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SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
(Thousands of Dollars)
ASSETS
- -------
REAL ESTATE ASSETS:
Resort development held for sale, net $ 2,163
Equity in real estate joint ventures, net 361
---------
Total real estate assets 2,524
CASH 69
ACCOUNTS RECEIVABLE 279
OTHER ASSETS 177
---------
Total assets $ 3,049
=========
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
LIABILITIES:
Notes payable, including $4,780 matured $ 5,584
Accounts payable and accrued expenses 2,722
--------
Total liabilities 8,306
--------
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 (11,443)
Less treasury stock, 112,402 shares, at cost (126)
--------
Total stockholders' deficit (5,257)
--------
Total liabilities and stockholders' deficit $ 3,049
========
The accompanying notes are an integral part of this statement.
16
<PAGE>
SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(Thousands of Dollars,
Except Per Share Amounts)
Year Ended December 31,
------------------------
1999 1998
---- ----
RESORT REVENUES $2,352 $2,079
REAL ESTATE REVENUES, NET 202 827
--------- ---------
2,554 2,906
--------- ---------
RESORT OPERATING EXPENSES 2,598 2,377
OTHER OPERATING EXPENSES 102 680
--------- ---------
2,700 3,057
--------- ---------
LOSS FROM OPERATIONS (146) (151)
INTEREST EXPENSE (381) ( 367)
--------- ---------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY GAINS (527) ( 518)
INCOME TAXES --- ---
--------- ---------
LOSS BEFORE EXTRAORDINARY
GAINS (527) (518)
EXTRAORDINARY GAINS ON DEBT SETTLEMENTS
(Net of tax provision and operating loss
carryforward realization of $39 and $96
in 1999 and 1998) 116 282
--------- ---------
NET LOSS ($ 411) ($ 236)
========= =========
LOSS PER COMMON SHARE:
Loss before extraordinary gains ($ 0.17) ($ 0.16)
========= =========
Net Loss ($ 0.13) ($ 0.07)
========= =========
AVERAGE NUMBER OF SHARES OUTSTANDING 3,168,929 3,168,929
========= ==========
The accompanying notes are an integral part of these statements.
17
<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, 1997 3,281,331 $3,281 $3,031 ($10,796) ($126)
Net loss -- -- -- (236) --
--------- ------ ------ -------- -----
BALANCE, December 31, 1998 3,281,331 3,281 3,031 (11,032) (126)
Net loss -- -- -- (411) --
--------- ------ ------ -------- -----
BALANCE, December 31, 1999 3,281,331 $3,281 $3,031 ($11,443) ($126)
========= ====== ====== ======== =====
</TABLE>
The accompanying notes are an integral part of these statements.
18
<PAGE>
SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss ($411) ($236)
Adjustments to reconcile net loss
to net cash used in operating activities:
Extraordinary gains on debt settlements (116) (282)
Equity in undistributed income of real estate joint
ventures ( 5) ( 67)
Distribution from real estate joint ventures, net 151 193
Gain from sale of real estate and joint venture interests (12) (180)
Cost of real estate sold --- ( 91)
Depreciation and amortization 190 190
Change in assets and liabilities:
Investments in resort development held for sale, net (161) ( 80)
Increase in accounts receivable and other assets ( 98) ( 36)
Increase in accounts payable, accrued expenses
and other 261 260
------ ------
Net cash used in operating activities (201) (329)
Cash flows from investing activities:
Proceeds from sale of investments 12 271
------ ------
Net cash provided by investing activities 12 271
Cash flows from financing activities:
Borrowings on notes payable 321 154
Payments on notes payable (104) (209)
------ ------
Net cash provided by (used in) financing activities 217 (55)
Net increase (decrease) in cash 28 (113)
Beginning cash 41 154
------ ------
Ending cash $ 69 $ 41
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
19
<PAGE>
SOUTHERN INVESTORS SERVICE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) CURRENT BUSINESS CONDITIONS
Southern Investors Service Company, Inc., was incorporated under the laws of
the State of Delaware in 1972. Prior to 1990, the Company was engaged in the
ownership and development of real estate primarily in the Houston, Texas area.
The operations of the Company were significantly reduced during 1990, as a
result of various debt settlements with lenders and other creditors. These
settlements resulted in the transfer of substantially all of the Company's
holdings to its creditors. During 1998 and prior years, the Company's operations
included the management of residential developments and two office buildings
owned by others. During 1998, the majority of these residential projects were
sold by the owners and therefore the Company no longer is managing these
projects. Effective January 1, 1999, the Company ceased all management activity
and all employees related to this activity were terminated. Since then, the
Company's primary activity has been the operation of a resort property in west
Texas known as Lajitas located in the Big Bend region in Texas (Lajitas).
As a result of the Company's operational losses in recent years, the Company's
management has from time to time considered several options to generate cash at
sufficient levels to meet operating needs and increasing debt obligations. These
options have included efforts to reduce operating expenses (including interest),
attempts to increase revenues of the Company's resort development, negotiations
with various creditors to settle accounts for cash payments at substantially
lower amounts than the amounts due, the settlement of liabilities through the
transfer of assets to creditors in satisfaction of their claims, and a possible
plan under the U.S. Bankruptcy Code or possible liquidation of the Company.
Although there have been sporadic efforts to sell Lajitas in the past, only a
few potential buyers ever seriously examined the property or conducted any due
diligence. With debt of more than $4,780,000 that had matured and was currently
due, the Company determined in late 1999 that the sale of Lajitas, its sole
remaining operating asset, would facilitate the Company's ability to settle its
existing liabilities most favorably. The Company's decision to sell Lajitas at
this time was also influenced by its perception that a strong marketplace
currently favors sellers of specialty properties. After considering the efficacy
of the Company's past efforts and reviewing sales of other specialty properties,
the Company determined that the best alternative would be to sell the property
through an auction process. As a result, the Company retained the National
Auction Group, Inc., (National Auction) to conduct an auction of Lajitas. The
auction was conducted on February 24, 2000 and the property was sold for
$3,950,000. The closing of the sale is scheduled for March 31, 2000 (the Closing
Date).
In accordance with the terms of the purchase agreement which has been approved
by the Board of Directors of the Company and a majority of the Company's
shareholders (the Purchase Agreement), the buyer will pay to the Company
$3,950,000 (the Purchase Price) by wire transfer of immediately available funds
to a title company at the closing. The buyer will pay National Auction a fee in
the amount of $296,250 (7.5% of the Purchase Price), $162,000 of which will be
paid by National Auction to the Company as reimbursement for advertising
expenses. The Company will pay National Auction a commission equivalent to 6% of
the proceeds it receives from the transaction. The buyer has deposited 10% of
the Purchase Price as earnest money with the title company.
20
<PAGE>
At closing the Company will sell and transfer its right, title and interest in
the business, assets and properties of Lajitas as defined in the Purchase
Agreement. Such transferred assets comprise the assets and real property of the
resort and town of Lajitas, certain receivables and the two adjoining tracts of
land that are covered by separate Real Estate Purchase and Sale Agreements. The
transferred assets also include all of the outstanding capital stock of Lajitas
Utility Co., Inc., a company which provided water and related utility services
to the resort town. As part of the transaction, the buyer will assume certain
liabilities at the closing. The assumed liabilities include (i) the obligation
to honor guest deposits paid to the Company on or before the Closing Date; (ii)
all trade payables incurred on or before the Closing Date to the extent they
remain unpaid by such date; (iii) certain tax obligations; (iv) accrued but
unused vacation time of the employees of Lajitas; and (v) the obligation to
continue to provide services to guests at the resort on the Closing Date.
Approximately 55% of the Lajitas real estate is subject to a mortgage in favor
of Walter M. Mischer, who is the Chairman of the Board and Chief Executive
Officer of the Company. The mortgage secures approximately $712,000 of
indebtedness to Mr. Mischer, consisting of $497,000 of principal and
approximately $215,000 of accrued interest at February 25, 2000. It will be
necessary for the Company to use a portion of the proceeds from the sale of
Lajitas to repay this indebtedness in order to remove the mortgage lien from the
property and convey free and clear title to the buyer.
As part of the property being sold pursuant to the Purchase Agreement, the buyer
will purchase a portion of the employee housing at the resort currently owned by
Mr. Mischer. Mr. Mischer has agreed to sell this housing to the Company
immediately prior to the closing for $275,000, which amount represents the
actual cost incurred by Mr. Mischer in connection with the construction thereof.
Mr. Mischer agreed to provide such employee housing for Lajitas at a time when
the Company was unable to finance its construction on acceptable terms.
Should the sale of Lajitas fail to close, the Company's future financial
condition will depend upon its ability to generate cash at levels to meet
operating needs and debt obligations which is uncertain at this time.
Management is currently reviewing possible options to settle the Company's
existing liabilities with its very limited resources. These options include,
but are not limited to, 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 under the U.S. Bankruptcy Code
or possible liquidation of the Company. 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.
At December 31, 1999, the resort development and adjoining tracts of land are
considered held for sale and are carried on the books at the amortized cost
which is the lesser of cost or fair value less costs to sell.
LIABILITY SETTLEMENTS
During 1999, the Company settled a note payable with an outstanding balance of
$175,000 for a cash payment of $59,000 and recorded an extraordinary gain of
$116,000.
21
<PAGE>
During 1998, the Company sold two small tracts of undeveloped real estate which
had been collateral for a note payable to an insurance company. This note was
issued during 1992 as part of a settlement with the insurance company, the terms
of which provided for the release from liability of approximately $273,000 in
claims if the note was paid. The sale of the two tracts of land provided the
funds necessary to repay the note for $9,000 less than the amount due. As a
result, the Company recorded an extraordinary gain of $282,000 during 1998.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its majority-owned subsidiaries. Income and expenses are recorded on the
accrual basis of accounting, and all significant intercompany accounts and
transactions have been eliminated. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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.
INCOME TAXES
Income taxes are provided on the liability method whereby deferred tax assets
are recognized for deductible temporary differences, and operating loss and tax
credit carryforwards, and deferred tax liabilities are recognized for taxable
temporary differences. Temporary differences are the differences between the
reported amounts of assets and liabilities and their tax bases. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for the
effects of changes in tax laws and rates on the date of enactment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and accounts receivable approximate fair value
due to relatively short maturities. It was not practicable to estimate the fair
value of debt and related accrued interest as significant amounts of debt have
matured or will mature during 2000. The Company is in the process of
negotiating with lenders to settle debt for cash payments or transfer of other
assets at substantially less than amounts due.
22
<PAGE>
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.
Real estate held for resale or development is stated at the lower of cost or net
realizable value. The estimated net realizable value of real estate is based
upon the anticipated sales price in the normal course of business less estimated
costs of completion and direct costs of disposal. 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.
Costs are allocated to tracts based upon the relative sales value of the tracts.
Management continues to monitor the impact of changes in economic conditions to
determine the effect on the carrying value of its real estate assets in
accordance with SFAS No. 121. 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
may be significantly less than the current carrying amount of assets.
DEPRECIATION
Resort development properties are carried at amortized cost and are
depreciated on the straight-line basis over their estimated useful lives net of
estimated salvage value. At December 31, 1999, accumulated depreciation totaled
approximately $4,635,000.
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.
LOSS PER COMMON SHARE
Loss per common share was computed in accordance with Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" (SFAS 128) issued by the
Financial Accounting Standards Board during 1997.
23
<PAGE>
PREFERRED STOCK
The Company has authorized 1 million shares of $1.00 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.
(3) REAL ESTATE OPERATIONS
As of December 31, 1998, the Company had an investment in one real estate
joint venture accounted for on the equity method. The venture had total assets
of $275,000 and the Company's equity in such venture totaled $147,000. The
assets of this venture were sold during February 1999 at approximately book
value and the Company received a cash distribution of approximately its carrying
amount. In addition to this venture, the Company has investments in two other
ventures accounted for on the cost method. These ventures had a book value of
$361,000 as of December 31, 1999.
(4) FEDERAL INCOME TAXES
The estimated tax effect of temporary differences and tax attributes
representing deferred tax liabilities and assets is summarized as follows:
December 31,
- --------------------------------------------------------------------------------
(Thousands of Dollars) 1999
- --------------------------------------------------------------------------------
Tax benefits due to:
Tax loss carryforwards $ 8,491
Accrued expenses and other liabilities 45
Other (16)
--------
Gross deferred tax asset 8,520
Deferred tax liability due to:
Accelerated depreciation (56)
Basis difference in real estate assets (1,260)
--------
Net deferred tax asset 7,204
Less-Valuation allowance (7,204)
--------
$ ---
========
The Company estimates that as of December 31, 1999, its loss carryforward for
federal income tax reporting purposes, was approximately $24.6 million, of which
approximately $2.4 million was a capital loss carryforward. The capital loss
carryforward will expire by 2002. The operating loss carryforward will begin to
expire in 2003. The tax benefit of the operating loss carryforward has been
recognized as a reduction of the deferred taxes provided on temporary
differences which are expected to reverse during the carryforward period. The
valuation allowance as of December 31, 1999 totaled $7,204,000, an increase of
approximately $238,000 from December 31, 1998.
24
<PAGE>
No taxes were paid during 1999 or 1998.
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
operating loss carryforward following a significant change of ownership. Under
most circumstances, the limitations on the use of the operating loss
carryforward 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,
1999. The Taxpayer Relief Act of 1997, extended the net operating loss
carryforward period from 15 to 20 years.
(5) NOTES PAYABLE AND OTHER DEBT
NOTES PAYABLE
The Company's notes payable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
- -------------------------------------------------------------------------------------------
(Thousands of Dollars) 1999
- -------------------------------------------------------------------------------------------
<S> <C>
Matured notes, bearing interest at rates ranging
from 6% to 10% 1,340
Matured notes issued to various debenture holders,
bearing interest at 6% (See Note 7) 3,440
Note payable to Walter M. Mischer secured by
real estate, and bearing interest
at the prime rate plus 1% (See Note 7) 497
Notes payable to Walter M. Mischer (See Note 7) 307
-----
5,584
=====
</TABLE>
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 debentures and debenture loans of approximately $470,000
in exchange for unsecured promissory notes of the Company. These notes with an
aggregate principal balance of $3,440,000 bear interest at 6% compounded
annually and were due October 2, 1996.
As of December 31, 1999, the Company was delinquent on principal and interest
payments of $4,780,000 and $2,179,000, respectively, on its notes payable. The
Company is currently negotiating settlement of these debts.
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
25
<PAGE>
payments on total notes payable and other debt during the years 2000 through
2004 are $659,000, $144,000, $0, $0, and $0, respectively, not including the
delinquent principal amounts discussed above. Additional amounts may become due
to obtain the release of real estate which is sold.
As of December 31, 1999, the Company had not received any notices of default or
acceleration from any of its lenders.
Interest paid on the consolidated indebtedness during the years ended December
31, 1999 and 1998 was $15,000 and $19,000, respectively.
(6) COMMITMENTS AND CONTINGENCIES
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 insurance
is considered prohibitive; consequently, property insurance is not carried by
the Company for this development.
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 might have a material adverse effect on the Company's consolidated
financial position and might affect the Company's ability to continue as a going
concern.
(7) RELATED PARTY TRANSACTIONS
In connection with various debt settlements during the past several years, Mr.
Mischer had loaned or advanced the Company various amounts. In 1993, these loans
and advances were consolidated into a single note in the principal amount of
$339,000. This note bears interest at the prime rate plus 1% and will mature in
February, 2000. This note is secured by approximately 12,000 acres of land
located adjacent to the Company's resort in west Texas. During 1999, an
additional note, with the same terms as the 1993 note, was executed by the
Company in the principal amount of $162,000. The Company borrowed $158,000 on
this second note. The aggregate amount outstanding secured by the Lajitas resort
as of December 31, 1999, was $497,000. In addition, during 1996, the Company
executed two additional notes to Mr. Mischer. One note in the original principal
amount of $26,000 was unsecured and was payable in monthly payments of $640 per
month and bore interest at the rate of 9%. This note was paid March 1998. The
second note is secured by receivables, is payable monthly as collections on the
related receivables are received, bears interest at the rate of 9%, with a final
maturity of July 2001. During 1998, the Company borrowed an additional $154,000
and made payments of $65,000 in connection with this note. During 1999 the
Company made payments of $46,000 in connection with this note. As of December
31, 1999, the outstanding principal balance was $145,000. During 1999, the
Company executed an additional promissory note in the principal amount of
$200,000 payable to Mr. Mischer. This note is secured by the Company's ownership
interest in a real estate partnership, bears interest at 8% and is due March 31,
2000. During 1999, the Company borrowed $162,000 on this note, the proceeds of
which were used to fund the auction expenses in connection with the proposed
sale of Lajitas.
26
<PAGE>
During 1998, the Company sold its 12.5% joint venture interest in Heritage Park
to an entity affiliated with Mr. Mischer. The Company received cash
distributions of $288,000 and recognized income of $96,000 during 1998, relating
to its 12.5% equity interest in Heritage Park including $94,000 from the gain on
the sale.
On December 15, 1989, Mr. Mischer and Walter M. 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 discussed above,
debentures held by them and accrued and unpaid interest. These notes bear
interest at 6% compounded annually and were due October 2, 1996.
Mr. Mischer and Mr. Mischer, Jr. participate in real estate projects in the
Houston area which may compete with the Company's projects.
Prior to 1999, the Company managed real estate projects in which Mr. Mischer or
members of his family had effective ownership interests ranging from 13% to
100%. During 1998, revenue recognized from managing such projects totaled
approximately $442,000. The management contracts were cancelable upon thirty
days notice. During March 1998, five of these projects which paid an aggregate
monthly management fees of $30,000 were sold and as a result the management
contracts were canceled by the new owners. As of December 31, 1998, the Company
had accounts receivable from these and other projects of $87,000. These
receivables were collected in full in 1999. All management activities ceased
effective January 1, 1999.
During 1992 and 1987, Mr. Mischer purchased certain notes receivable held by 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 have been repurchased
through December 31, 1999.
Due to the Company's financial condition, it was unable to construct additional
employee housing at the Company's resort in west Texas. As a result, Mr.
Mischer built and owns additional employee housing that is leased by the Company
on a month to month basis for $2,100 per month. In connection with the proposed
sale of Lajitas the Company will purchase this employee housing at Mr. Mischer's
cost of approximately $275,000.
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 which could have been obtained from unaffiliated third parties.
27
<PAGE>
(8) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses included the following:
December 31,
- ----------------------------------------------------------------------
(Thousands of Dollars) 1999
- ----------------------------------------------------------------------
Trade accounts payable $ 106
Accrued interest payable 2,389
Accrued taxes payable 71
Other accrued liabilities 156
------
$2,722
======
28
<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: WALTER M. MISCHER
WALTER M. MISCHER
__________________________
Walter M. Mischer
Chairman of the Board
Chief Executive Officer
Date: March 29, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934 this
report has been signed by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
WALTER M. MISCHER Date: March 29, 2000
- ------------------------------------------
Walter M. Mischer
Chairman of the Board and
Chief Executive Officer
Director
WALTER M. MISCHER, JR. Date: March 29, 2000
- ------------------------------------------
Walter M. Mischer, Jr.
President and Director
Chief Operating Officer
ERIC SCHUMANN Date: March 29, 2000
- ------------------------------------------
Eric Schumann
Senior Vice President - Finance
Principal Financial and Accounting Officer
JOHN D. WEIL Date: March 29, 2000
- ------------------------------------------
John D. Weil
Director
29
<PAGE>
INDEX TO EXHIBITS
BY PAGE IN SEQUENTIAL NUMBER COPY
Document or Exhibit Page No.
- --------------------------------------------------------------------------------
Exhibit 21 Subsidiaries of the Registrant...................................31
Exhibit 27 Financial Data Schedule..........................................32
<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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Consolidated
Financial Statements as of December 31, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 69
<SECURITIES> 0
<RECEIVABLES> 279
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 6,798
<DEPRECIATION> 4,635
<TOTAL-ASSETS> 3,049
<CURRENT-LIABILITIES> 0
<BONDS> 5,584
0
0
<COMMON> 3,281
<OTHER-SE> (8,538)
<TOTAL-LIABILITY-AND-EQUITY> 3,049
<SALES> 0
<TOTAL-REVENUES> 2,554
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 2,700
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 381
<INCOME-PRETAX> (527)
<INCOME-TAX> 0
<INCOME-CONTINUING> (527)
<DISCONTINUED> 0
<EXTRAORDINARY> 116
<CHANGES> 0
<NET-INCOME> (411)
<EPS-BASIC> (.13)
<EPS-DILUTED> (.13)
</TABLE>
