SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
Commission file number: 0-13499-D
WORLD SERVICES, INC.
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(Name of small business issuer in its charter)
South Dakota 46-0355586
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
404 South Lincoln, P.O. Box 786
Aberdeen, South Dakota 57402
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(Address of principal executive offices) Zip Code
Issuer's telephone number: (605) 225-4131
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Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.001 par value
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for at least the past 90 days.
Yes X No .
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Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B 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. [XX]
Issuer's revenues for its most recent fiscal year: $176,900
Aggregate market value of voting stock held by non-affiliates as of
December 31, 1996: $-0-. There is currently no trading market for the
Registrant's securities.
Number of shares of common stock, $.001 par value, outstanding as of
December 31, 1996: 5,229,907
---------------
Documents incorporated by reference: No documents are incorporated by
reference into this annual report on Form 10-KSB.
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WORLD SERVICES, INC.
FORM 10-KSB
PART I
Item 1. Description of Business
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(a) Business Development.
General. World Services, Inc. (the "Registrant") was incorporated under the
laws of the State of South Dakota on December 17, 1979 under the name of Midwest
Management & Marketing Corporation. The name was changed in July 1983 to World
Services, Inc. The Registrant, a diversified financial holding company, was
formed to invest in and manage companies primarily in the real estate, insurance
and banking industries, along with other service industries.
In May 1983, the Registrant adopted a business plan whereby it would become
a one-stop financial service company by either acquiring operating companies or
founding new ones in the following service areas: insurance, real estate, stock
brokerage, commodities, travel and banking. The Registrant is also the owner of
approximately 22% of the outstanding stock of First Savings and Loan
Association, Inc. ("First Savings") and the owner of approximately 16% of the
outstanding stock of Super 8 Motel Developers, Inc. ("Super 8").
The current members of the Board of Directors were appointed in 1989 upon
the resignation of the former members of the Board. Since that time, the
Registrant has been maintained as a valid South Dakota corporation, it has been
collecting receivables and settling debts incurred by the Registrant through the
cessation of its active operations, and has been maintaining the books and
records to allow the Registrant to obtain audited financial statements as
necessary. The Registrant has not engaged in any significant business activity
for more than the past five years.
First Savings -- Summary. First Savings (formerly known as "Midwest Savings
& Loan Association, Inc.") commenced operations in May 1983. In May 1985, First
Savings registered its common stock pursuant to Section 12(g) of the Securities
and Exchange Act of 1934. First Savings is primarily engaged in obtaining
savings deposits from the general public and making loans to enable borrowers to
purchase or refinance residential and other real estate. See "Financial
Statements."
Super 8 -- Summary. In a series of transactions during 1984, the Registrant
acquired shares of World Venture Capital Corporation which subsequently changed
its name to Super 8 Venture Capital, Inc. ("S8VC") which shares, at December 31,
1985, constituted 43.9% of the outstanding common stock of S8VC and had a
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carrying value of $628,327. In May 1986 S8VC was liquidated and its assets
consisting of cash, the Registrant's common stock and common stock of Super 8
Motel Developers, Inc. ("Super 8") were distributed to shareholders. As a result
of the liquidation and subsequent transactions, the Registrant received 796,952
shares or approximately 16% of Super 8's common stock, $16,689 in cash and
125,000 shares of its own common stock. Super 8 Motel Developers Inc. is engaged
in the acquisition and operation of budget motels. See "Narrative Description of
Business" and "Financial Statements."
(b) Business of Issuer.
In the near future, the Registrant intends to maintain its investments in
Super 8. Because of certain requirements of the federal Office of Thrift
Supervision ("OTS"), the Company may be required to dispose of its interest in
First Savings. In addition, the Registrant intends to consider business
combinations and financing opportunities, although there can be no assurance
that the Registrant will be able to complete either.
First Savings and Loan Association, Inc.
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Acquisition of Interest. In a series of cash purchases totalling
approximately $270,021, from February 1981 through March 1983, the Registrant
acquired approximately 22% of the outstanding capital stock of First Savings and
Loan Association, Inc. ("First Savings"), a South Dakota corporation, operating
primarily in the city of Aberdeen. In May 1985 the Registrant purchased an
additional 4,250 shares of First Savings stock for $2,000. The Registrant may be
deemed a promoter of First Savings as such term is defined under the Securities
Exchange Act of 1934. First Savings is engaged in the business of attracting
funds in the form of savings deposits from the general public and originating
loans secured by residential, commercial and other improved real estate, and
operates under the rules of the OTS, the Federal Deposit Insurance Corporation
("FDIC") and the State Banking Commission of South Dakota. All of its accounts
are FDIC insured up to a maximum of $100,000 per account. First Savings' common
stock has been registered pursuant to Section 12(g) of the Securities Exchange
Act of 1934.
Current Activities. First Savings has continued its operations as a savings
and loan association whose principal activities are accepting deposits from
customers and making loans to borrowers. The Registrant has no managerial
control over First Savings, and has no representatives on the First Savings
Board of Directors. During 1991 and 1992, the Registrant sold 3,524 shares of
First Savings Common Stock, which reduced its ownership from 22.4% to
approximately 22%. In 1996, the Registrant received dividend income from First
Savings of approximately $17,000, and in 1995, the Registrant received a
dividend of $34,000. These are the first dividends the Registrant has received
from First Savings in more than the last nine years. Management of the
Registrant believes that the market value of its First Savings shares equals or
exceeds its current cost basis.
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Regulatory Requirements. Under South Dakota law a savings and loan
association is subject to examination by the director of the Division of Banking
and Finance of the Department of Commerce. OTS regulations require a member
savings and loan association to maintain cash, certain time deposits, bankers'
acceptances and specific United States government and state or federal agency
obligations ("liquid assets") in an amount equal to or greater than a specific
percentage of the monthly average of its net withdraw-able savings deposits and
borrowings payable in one year or less ("short term borrowings"). The base
liquidity requirement may be changed from time to time by the OTS to amounts
within a certain specified range. Liquid assets must constitute a certain
percentage of the monthly average of net withdrawable savings plus short term
borrowings. Failure to meet these liquidity requirements may result in monetary
penalties. Based upon the First Savings financial statements included herewith,
the Registrant believes that First Savings is currently in compliance with these
liquidity requirements.
The FDIC requires an annual audit by independent accountants and also
regularly conducts its own examination of insured institutions. It may revalue
assets of an institution, based upon its appraisals, and requires establishment
of specific reserves. The FDIC also requires an annual insurance premium payment
and can also assess additional premiums against each insured institution. First
Savings is required to maintain its net worth in excess of certain specified
minimum levels. If an insured savings and loan association fails to meet the
foregoing reserve or net worth requirements, the FDIC may require such
association to take corrective action. Sanctions for not complying with these
net worth requirements may include a reduction in the rate of interest that may
be paid on savings accounts, limitations on operational expenses, limitations on
the receipt of deposits to those made to existing accounts, or limitations on
lending. The FDIC has the authority to terminate the insurance of accounts
pursuant to procedures established for that purpose. If insurance of accounts is
terminated by the FDIC, the savings and loan association subject to termination
proceedings will continue to be insured by the FDIC for a period of two years
following the date of termination.
In addition, the Federal Home Loan Bank requires savings and loan
associations to maintain reserves against their transaction accounts, primarily
NOW and super NOW accounts and nonpersonal time deposits. The Federal Home Loan
Bank regulations generally require that reserves must be maintained at certain
level against transaction accounts. Savings and loan associations have the
authority to borrow from a Federal Home Loan Bank's "discount window," but the
Federal Home Loan Bank's regulations require a savings and loan to exhaust all
OTS sources before borrowing from a Federal Home Loan Bank.
First Savings is subject to various consumer protection laws such as the
Federal Truth-In-Lending Act, the Equal Credit Opportunity Act, and the
Financial Privacy Acts. Each of these laws and related regulations provide
significant penalties in the event of noncompliance with the statutes. First
Savings structures its lending programs to improve and stabilize its operational
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results and to make its loan portfolio interest-rate-sensitive by offering
short-term or adjustable real estate loans and short-term consumer and
commercial loans. First Savings also invests such funds in mortgage backed
securities and investment and money market securities. First Savings' earnings
are largely dependent on the difference between the income it receives from its
loans and securities investment portfolios and its cost of funds. First Savings'
operations, and the operations of savings and loan associations generally, are
significantly influenced by general economic conditions, by the monetary and
fiscal policies of the federal government and by the regulatory policies of
various federal regulatory authorities. Savings deposits and costs of funds are
influenced by in interest rates on competing investments and general market
rates of interest. Lending activities are affected by the demand for mortgage
financing and for consumer and other types of loans which is in turn affected by
the interest rates at which such financing may be offered and other factors
affecting the supply of housing and the availability of funds.
Office of Thrift Supervision ("OTS") Challenge. In September 1996, the
Registrant was contacted by the federal OTS concerning certain changes in the
alleged control of First Savings stock, the ownership of First Savings stock by
certain affiliates of the Registrant, and a threatened action against the
Registrant as a result thereof. OTS notified the Registrant and some of its
directors that they may be in violation of OTS Reg. No. 574.4(b), relating to a
requirement of submitting either a change of control notice or rebuttals of
concerted action or control. The Registrant has cooperated with and will
continue to cooperate with OTS in its investigation and expects to reach a
resolution of this matter.
Competition. First Savings is in competition with other savings and loan
associations, commercial banks, credit unions, and other financial institutions
in Aberdeen, South Dakota and nationally. The financial services industry,
including banking and making loans, has become less regional and more national
since 1988 as a result of improved communications and computer technology.
Financial institutions compete for deposits from customers primarily by offering
higher interest rates. Financial institutions compete for lending activities by
offering lower interests rates and loan expenses, and more favorable
qualification terms. Many of First Savings' competitors have significantly
greater capitalization and market presence than has First Savings. First Savings
has been able to maintain its presence in Aberdeen, South Dakota as a
locally-owned institution providing personalized service with local, timely
decision-making ability.
Super 8 Motel Developers, Inc.
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Acquisition. Super 8 Motel Developers, Inc., a South Dakota corporation
("Super 8"), is engaged in the acquisition and development and management of
budget motels. Super 8 was formerly 40% owned by Super 8 Venture Capital, Inc.
("S8VC"), a South Dakota corporation formed in April 1984 to invest in, develop
and manage motels. In connection with the formation of S8VC, 125,000 shares of
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the Registrant's unregistered common stock were issued in September 1984 in
exchange for 2,500,000 shares of common stock of S8VC which was subsequently
reduced to 2,249,993 shares.
Business of Super 8. The primary objective of Super 8 is to develop and
operate franchise budget motels primarily in Virginia, West Virginia, Maryland,
Delaware and the District of Columbia. Super 8 acquired exclusive franchise
rights in July 1984 from Super 8 Motels, Inc., for $250,000. The agreement
grants Super 8 certain exclusive rights in the above-referenced states to
construct, own, and operate motels using the Super 8 name and to represent Super
8 Motels, Inc. in the sale of franchises within that territory. Significant
terms of the agreement and amendments thereto are as follows:
1. The term of the agreement is through 2004;
2. The initial franchise fee payable by motels which are owned at least
51% by Super 8 is $10,000;
3. Super 8 is to receive one-third of the initial franchise fee,
presently $20,000, of each franchise sold by the Super 8 system in the
territory; and
4. A specified percentage of the annual gross room rentals of each
operating unit is to be tendered to Super 8 Motels, Inc. as a fee for
services rendered and royalties. Super 8 Motels, Inc. will pay 25% of
the fee it receives from each motel unit in the territory as a fee for
services rendered by Super 8. Those payments are to continue from the
date such motel unit in the territory first commences monthly royalty
payments for ten years (for motels opened on or before July 11, 1990)
and for 15 years (for motels opened after July 11, 1990). Subfranchise
fee income to Super 8 under this agreement were $422,600 during the
year ended December 31, 1996, and $433,357 (1995).
Super 8 acquired these franchise rights in July 1984. As of March 1988,
Super 8 had interests in nineteen motels operating and four motels under
construction; as of December 31, 1996, Super 8 had interests in 29 operating
motels. The size of motels vary from 42 to 73 units and are, in most instances,
located adjacent to restaurant facilities.
At December 31, 1996, Super 8 was also a general partner in 9 limited
partnerships, (which are in addition to the 29 motels owned by Super 8 at
December 31, 1996), all of which were formed for the purpose of owning and
operating Super 8 Motels.
In 1996, the Registrant received dividend income from Super 8 of
approximately $160,000. Management of the Registrant believes that the market
value of its investment in Super 8 equals or exceeds its current cost basis.
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Competition. Super 8 is in competition with a large number of lower priced,
"budget" motel chains, such as Motel 6, Days Inn, Econolodge, and Red Roof Inn.
In addition, there are many individually-owned motels which are not part of a
chain, or which are members of a marketing organization such as "Best Western."
Super 8 generally competes with these other motels on pricing, location, and
advertising.
Plan of Operations
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To date, the Registrant has not been engaged in any operations other than
attempting to organize its affairs, settle its obligations, collect receivables
and, more recently, bring the Registrant up to date with required governmental
filings and compliance with other regulatory requirements. The current Board of
Directors has not been authorized by the shareholders to commence any active
business operations, and has not sought any possible business combination.
In the future, the Board will seek direction from the shareholders as to an
appropriate course for the Registrant to follow after the meeting. This course
could include any of several alternatives, briefly identified as follows:
1. Dissolution and Liquidation. Pursuant to this alternative, the Registrant
would seek shareholder approval for the liquidation of the Registrant and
the distribution of net assets to shareholders on a pro rata basis.
2. Continuation of the Registrant as a going concern. Pursuant to this
alternative, the Registrant, through its elected Board of Directors and
management, would seek business opportunities and consider various
possibilities of reorganization with the intention of allowing the
Registrant to engage in active business operations.
3. Sale or distribution of the Registrant's minority interests. In connection
with either or both of the foregoing alternatives, the Registrant may
consider the sale of its minority interests in Super 8 and First Savings.
This may be necessary to avoid the application of the Investment Company
Act, as discussed below. Divestiture of its interest in First Savings may
be necessary to comply with OTS regulation as discussed above.
4. Seeking a waiver from the application of the Investment Company Act or
registering as an Investment Company or BDC.
The Board of Directors has not made any determination as to which, if any
of the foregoing alternatives, it may recommend to the shareholders of the
Registrant. Any such recommendation will be in the form of a proxy statement
meeting the requirements of Schedule 14A of the Securities Exchange Act of 1934,
as amended.
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Possible Liquidation
- --------------------
To the extent the Board of Directors recommends liquidation to the
shareholders, it will do so in accordance with the applicable requirements of
South Dakota corporation law and the requirements of the Securities Exchange Act
of 1934. Because the Registrant has attempted to sell its interest in both First
Savings and Super 8 previously, there can be no assurance that the Registrant
will be able to do so in connection with any liquidation plan. Furthermore,
there can be no assurance whether the Registrant would be offered a fair price
in connection with any attempt to liquidate those interests.
Consequently, it is possible that the Registrant may propose to the
shareholders that it not attempt to sell the Registrant's interest in either
First Savings or Super 8, but rather that the Registrant distribute the First
Savings and Super 8 shares to the Registrant's shareholders in a pro rata
distribution. There are significant regulatory hurdles that must be considered
in connection with either spin off or a sale which the Registrant has not yet
contemplated. Any such transaction will, however, only be done in accordance
with all applicable requirements, including the requirements of the Securities
Exchange Act of 1934, state corporation laws, and state and federal banking
laws.
Business Combinations.
- ----------------------
If the Registrant proposes to implement a business plan to seek,
investigate, and, if warranted, to acquire an interest in a business opportunity
which management believes may provide a return to the Registrant and its
shareholders. The Registrant has no significant capital available to it to
acquire a business opportunity, and there can be no assurance that it will be
able to do so. The Registrant may attempt to do so using its unissued common
stock instead of cash or debt; any such issuance will likely provide significant
dilution to the Registrant's existing shareholders.
The Registrant has not yet identified a business opportunity for
acquisition. It is expected to seek out developing companies to allow the
Registrant to expand into new products or markets, or to develop a new product
or service. Established businesses which may be experiencing financial or
operating difficulties and would be in need of the additional capital and
management expertise the Registrant could provide also will be investigated. In
some instances, a business opportunity may involve the acquisition of or merger
with a corporation which does not need substantial additional cash but which
desires to establish a public trading market for its securities.
The Registrant anticipates that the selection of a business opportunity
will be a complex process and will involve a number of risks, because
potentially available business opportunities may occur in many different
industries and may be in various stages of development. Due in part to depressed
economic conditions in a number of geographic areas, rapid technological
advances being made in some industries and shortages of available capital,
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management believes that there are numerous firms seeking either the limited
additional capital which the Registrant will have or the benefits of a publicly
traded corporation, or both. The perceived benefits of a publicly traded
corporation may include facilitating or improving the terms upon which
additional equity financing may be sought, providing liquidity for estate
planning needs of principle shareholders, creating a means for providing
incentive stock options or similar benefits to key employees, providing
liquidity for all shareholders and other factors.
In seeking business opportunities, management's decision will be based upon
the objective of seeking long-term capital appreciation in real value of the
Registrant's investment. Current income will be only a minor factor in such
decisions.
It is anticipated that the Registrant will essentially be limited to one
business venture in the foreseeable future, due to the Registrant's limited
financing. This lack of diversification will not permit the Registrant to offset
potential losses from one business opportunity against profits from another, and
should be considered an adverse factor affecting any decision to purchase the
Registrant's securities.
In some cases, management of the Registrant will have the authority to
effect acquisitions without submitting the proposal to the shareholders for
their consideration. In some instances, however, the proposed participation in a
business opportunity may be submitted to the shareholders for their
consideration, either voluntarily by the Board of Directors to seek the
shareholders' advice and consent, or because of a requirement of state law to do
so.
Sale or Distribution of Minority Interests
- ------------------------------------------
The Registrant may determine to sell all or a portion of the Registrant's
interests in either First Savings, Super 8, or both, in connection with any
business combination that may be pursued by the Registrant. Alternatively, the
Registrant might consider distributing to the Registrant's shareholders, on a
pro rata basis, interests in Super 8, First Savings, or both. In both cases, it
is likely that any such sale or distribution would require shareholder approval
under South Dakota law, as well as possible approval by the South Dakota
Attorney General and Secretary of State.
Registration Under or Waiver of Investment Company Act
- ------------------------------------------------------
In its proxy statement for the meeting of shareholders held September 29,
1988, the Registrant stated that if the proposal to sell the Registrant's assets
was approved and the transactions completed, the Registrant intended to elect
treatment as a business development company ("BDC") under the Investment Company
Act of 1940 (the "1940 Act"). The transactions anticipated by the Registrant
were the sale of the travel and the real estate operations to certain affiliates
(which occurred in March 1989), and the sale of the Registrant's interest in
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First Savings. The Registrant was never able to dispose of its interest in First
Savings on economically reasonable terms. Furthermore, the Registrant never made
an election to be treated as a BDC because the Registrant did not have
sufficient working capital to complete the steps necessary for such an election.
The Registrant currently might be considered an "investment company" as
that term is defined in the 1940 Act. An investment company is generally a
company that is engaged in the business of investing, holding, reinvesting, or
trading of investment securities. Investment securities are defined by the 1940
Act to include all securities except United States government obligations,
certain other securities and cash where the Registrant has less than a 50%
interest in the issuer. Under that definition, both the Super 8 securities and
the First Savings securities would classify as investment securities.
Because these securities have such a significant position in the
Registrant's financial statements, it is possible that the Securities and
Exchange Commission may take the position that the Registrant is an investment
company and should be registered as such under the 1940 Act. The Registrant
believes, however, that if the 1940 Act is applicable at all, the Registrant is
an inadvertent investment company. This status resulted from the sale by the
Registrant of its operating assets in 1988-1989, and the Registrant's inability
to sell its interest in Super 8 or First Savings. The Registrant does not intend
nor does it have authority to engage in the business of investing, holding,
reinvesting, or trading of investment securities.
The Registrant intends to vigorously resist classification as an investment
company, and to take advantage of any exemptions or exceptions from application
of the 1940 Act, which allows an entity a one-time option during any three-year
period to claim an exemption as a "transient" investment company. The necessity
of asserting any such resistance, or making any claim of exemption, could be
time consuming and costly, or even prohibitive, given the Registrant's limited
resources.
Employees and Consultants
- -------------------------
The Registrant currently has no employees. Management anticipates that
employees and/or consultants will be retained as may be necessary to operate the
Registrant following any business combination. See also "Management."
Item 2. Description of Property
-----------------------
The Registrant currently maintains its offices at no charge in the office
of Tarrell Realty, Aberdeen, South Dakota, a company owned by Ronne Tarrell, a
director of the Registrant. The office facilities are provided to the Registrant
pursuant to an oral agreement. Management believes that this arrangement will be
suitable for its needs for the immediate future, until such time as any business
combination has been substantially completed.
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The Registrant owns no real property and no material personal property.
Item 3. Legal Proceedings
-----------------
The Registrant is not a party to any legal proceedings and no such
proceedings are known to be contemplated except for the OTS inquiry described
above.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters were submitted to a vote of shareholders during the fourth
quarter of the fiscal year. The Registrant did hold an meeting of the
shareholders in January 1996, at which meeting the directors of the Registrant
were reelected.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
---------------------------------------------------------
(a) Market Information.
The Registrant's Common Stock is not eligible for listing on the NASDAQ
system, and trading, if any, has been strictly limited to the over-the-counter
market. To the knowledge of the Registrant, there has been no trading in the
Registrant's Common Stock for a significant period of time. The Common Stock has
been quoted from time to time in the "Pink Sheets" maintained by the National
Quotation Bureau, Inc. Management believes that no established trading market
exists for the Registrant's Common Stock.
(b) Holders.
(b)(1) The approximate number of record holders of the Registrant's Common
Stock, $.001 par value, as of December 31, 1996 was approximately 3,600. This
figure does not reflect an indeterminable number of shareholders whose shares
are held in "street name."
(c) Dividends.
The Registrant has not paid a dividend with respect to its Common Stock and
cannot be expected to pay a dividend on its Common Stock in the foreseeable
future.
Item 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
Results of Operations
Years Ended December 31, 1995 and 1996
- --------------------------------------
As stated above, until recently the Registrant has been essentially
inactive since early 1988. Until 1995, the Registrant's activities consisted of
nothing more than maintaining its investments in First Savings and Super 8. The
Registrant's only earnings have been from dividends received from its
investments in 1988, 1993, 1994, 1995 and 1996 and a nominal amount of interest
earned on deposits.
Expenditures increased during 1996 as the Registrant incurred general and
administrative expenses in connection with expenses necessary to continue the
effectuation of the Registrant's Plan of Operations and preparation of responses
to the OTS as a result of its investigation. See Item 1(b) - Plan of Operations.
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Except for dividends which may be paid to the Registrant by either First
Savings or Super 8 (neither of which can be assured), and interest from any
funds on deposit, the Registrant anticipates no other income. The Registrant
anticipates increased expenses during he current 1997 fiscal year as it plans to
hold a formal shareholders meeting and solicit proxies in connection with
possible divestiture of assets.
Liquidity and Capital Resources
December 31, 1995 and 1996
- --------------------------
At the time the Registrant ceased active business operations in 1989, it
was essentially out of money and has been unable to raise any substantial
amounts of money since that time. The Registrant disposed of its interests in
its travel agency, real estate operations and insurance operations in an effort
to minimize its general and administrative expenses and to raise cash. The
Registrant did not receive dividends from Super 8 during the 1995 fiscal year,
but received approximately $160,000 in dividends from Super 8 in 1996. The
Registrant received dividends of approximately $34,000 from First Savings in
fiscal 1995 and $17,000 in fiscal 1996.
At December 31, 1995 and 1996, the Registrant had net working capital of
$199,000 and $335,000 respectively, as a result of cash dividends received by
the Registrant from Super 8 and First Savings. Prior to 1994, the Registrant had
significant working capital deficits.
The Registrant's most significant assets are its investments in First
Savings and Super 8, which are carried on the equity method of accounting and at
cost, respectively. Management believes that the fair market value of these
investments is equal to or in excess of their respective book values. However,
as a result of the extent of the Registrant's percentage ownership in First
Savings and Super 8 and its inability to significantly influence these entities,
the ultimate realization of these investments may be subject to conditions
outside the control of the Registrant. Furthermore the Registrant received
dividends of approximately $34,000 and $17,000 from First Savings during 1995
and 1996, respectively, and dividends of approximately $160,000 from Super 8 in
1996, which have provided the Registrant with a means of bringing its
obligations current and to formulate and effectuate its plan of operations.
During the years ended December 31, 1995 and December 31, 1996, the
Registrant had limited cash flows from investing and financing activities. In
1996 the Registrant purchased a certificate of deposit in the amount of $60,000
from Dakota Bank, Aberdeen, South Dakota, using the dividend proceeds it
received from Super 8 and First Savings.
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Item 7. Financial Statements
--------------------
The Registrant's audited financial statements, described as follows, are
appended to the signature page of this report.
World Services, Inc.
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Independent Auditor's Report.......................................
Balance Sheet - December 31, 1996..................................
Statements of Operations - For the Years
Ended December 31, 1996 and 1995...................................
Statement of Changes in Stockholder's Equity (Deficit) -
For the Period from January 1, 1995 through December 31, 1996......
Statements of Cash Flow - For the Years
Ended December 31, 1996 and 1995...................................
Notes to Financial Statements......................................
First Savings and Loan Association, Inc.
- ----------------------------------------
Independent Auditor's Report.......................................
Balance Sheets - September 30, 1996, and 1995 .....................
Statements of Income - For the Years
Ended September 30, 1996, 1995 and 1994............................
Statement of Stockholder's Equity -
For the Years Ended September 30, 1996, 1995 and 1994..............
Statements of Cash Flows - For the Years
Ended September 30, 1996, 1995 and 1994............................
Notes to Financial Statements......................................
Super 8 Motel Developers, Inc.
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INDEPENDENT AUDITORS' REPORT.......................................
15
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FINANCIAL STATEMENTS:................................................
Consolidated Balance Sheets..........................................
Consolidated Statements of Operations for the
Years Ended December 31, 1996 and 1995...............................
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996 and 1995.......................
Consolidated Statements of Cash Flows................................
Notes to Consolidated Financial Statements...........................
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Since inception, the Registrant has not filed a Form 8-K reporting a change
of accountants, nor has there been any material disagreement with its
accountants on any matter regarding accounting or financial disclosure.
16
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act
- --------------------------------------------------------------------------------
(a) Identification of Directors and Executive Officers.
The officers and directors of the Registrant are listed below. The
directors of the Registrant are elected to hold office until the next annual
meeting of shareholders and until their respective successors have been elected
and qualified. Officers of the Registrant are elected by the Board of Directors
and hold office until their successors are elected and qualified.
The current officers and directors of the Registrant are:
Name Age Position
- ---- --- --------
Ronne Tarrell 55 President, Director
Delores Bower 53 Vice President, Director
David Jorgenson 61 Secretary, Treasurer, Director
Delbert Harty 57 Director
Terry Heinz 39 Director
A brief summary of the business experience of each person who is currently
an officer or director of the Registrant, and such person's service with the
Registrant is as follows:
Ronne Tarrell has been president since 1993 and a director of the
Registrant since 1990. He is a licensed realtor in the State of South Dakota and
has owned and operated Tarrell Realty in Aberdeen, South Dakota, for more than
the past five years. Mr. Tarrell is not a director of any other corporation
which has a class of securities registered under the Securities Exchange Act of
1934.
Delores Bower has been Vice President and a Director of the Registrant
since 1990. She has been financial director of Midwest Paint, a privately held
company in Aberdeen, South Dakota, for more than the past five years. Mrs. Bower
is not a director of any other corporation which has a class of securities
registered under the Securities Exchange Act of 1934.
David Jorgenson has been Secretary and Treasurer since 1993, and a director
of the Registrant since 1990. Mr. Jorgenson is manager of a small business in
Aberdeen, South Dakota. For the five prior years, Mr. Jorgenson was a state
video lottery inspector for the State of South Dakota Lottery Commission. In
17
<PAGE>
addition, Mr. Jorgenson manages his own investments. Mr. Jorgenson is not a
director of any other corporation which has a class of securities registered
under the Securities Exchange Act of 1934.
Delbert Harty has been a director of the Registrant since 1993. He has been
retired for more than the last five years, and currently manages his personal
investments. Prior to retirement he was employed as a machinist. Mr. Harty is
not a director of any other corporation which has a class of securities
registered under the Securities Exchange Act of 1934.
Terry Heinz has been a director of the Registrant since 1993. Since October
1993, Mr. Heinz has been an account executive at Tel Serv, Inc., a direct
marketing firm in Aberdeen, South Dakota. From April 1984 until October 1993 he
was a sales representative for Dial-Net, a marketing firm in Sioux Falls, South
Dakota. Mr. Heinz is not a director of any other corporation which has a class
of securities registered under the Securities Exchange Act of 1934.
(b) Significant Employees.
The Registrant has no salaried employees at the present time.
(c) Family Relationships.
There are no family relationships among any of the Registrant's officers
and/or directors.
(d) Involvement in Certain Legal Proceedings.
During the past five years, no current director, executive officer,
promoter or control person of the Registrant has:
(1) Filed or has had filed against him a petition under the federal
bankruptcy laws or any state insolvency law, nor has a receiver, fiscal agent or
similar officer been appointed by a court for the business or property of such
person, or any partnership in which he was a general partner, or any corporation
or business association of which he was an executive officer at or within two
years before such filings;
(2) Been convicted in a criminal proceeding or is a named subject of a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
18
<PAGE>
(3) Been the subject of any order, judgment, or decree, not
subsequently reversed, suspended or vacated, of any court of competent
jurisdiction, permanently or temporarily enjoining such person from, or
otherwise limiting, the following activities:
(i) Acting as a futures commission merchant, introducing broker,
commodity trading advisor, commodity pool operator, floor broker, leverage
transaction merchant, any other person regulated by the Commodity Futures
Trading Commission, or an associated person of any of the foregoing, or as an
investment adviser, underwriter, broker or dealer in securities, or as an
affiliated person, director, or employee of any investment company, bank,
savings and loan association or insurance company, or engaging in or continuing
any conduct or practice in connection with such activity;
(ii) Engaging in any type of business practice; or
(iii) Engaging in any activity in connection with the purchase or
sale of any security or commodity or in connection with any violation of federal
or state securities laws or federal commodities laws;
(4) Been the subject of any order, judgment or decree, not
subsequently reversed, suspended or vacated, of any federal or state authority
barring, suspending or otherwise limiting for more than 60 days the right of
such person to engage in any activity described in paragraph (3)(i) above, or to
be associated with persons engaged in any such activity; or
(5) Been found by a court of competent jurisdiction in a civil action
or by the Securities and Exchange Commission (the "Commission") to have violated
any federal or state securities law, and the judgment in such civil action or
finding by the Commission has not been subsequently reversed, suspended, or
vacated.
(6) Been found by a court of competent jurisdiction in a civil action
or by the Commodity Futures Trading Commission to have violated any federal
commodities law, and the judgment in such civil action or finding by the
Commodity Futures Trading Commission has not been subsequently reversed,
suspended or vacated.
Item 10. Executive Compensation
----------------------
(a)(1) & (2) Cash Compensation.
Officers and Director received $150 per directors meeting attended during
1996. Prior to 1996, no cash compensation was paid.
19
<PAGE>
(b)(1) Compensation Under Plans.
The Registrant has no stock option plan, stock bonus plan, other
compensatory plan or arrangement, or employee benefit plan for employees,
consultants, officers, or directors.
(c) Other Compensation.
No compensation was paid or distributed to any officer or director of the
Registrant for services rendered to the Registrant during the 1996 fiscal year.
(d) Compensation of Directors.
In 1996, the Registrant paid its directors $150 per directors meeting
attended for their services. In addition, officers and directors may receive
reimbursement for out-of-pocket expenses incurred by them in connection with the
business of the Registrant.
The Registrant has no other arrangements pursuant to which any director of
the Registrant was compensated during the 1996 fiscal year for services as a
director.
(e) Termination of Employment and Change in Control.
The Registrant has no compensation plan or arrangement with respect to any
executive officer which plan or arrangement results or will result from the
resignation, retirement or any other termination of such individual's employment
with the Registrant. The Registrant has no plan or arrangement with respect to
any such persons which will result from a change in control of the Registrant or
a change in the individual's responsibilities following a change in control.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners.
The following table sets forth information as of December 31, 1996, as to
the beneficial ownership of shares of the Registrant's only outstanding class of
securities, its Common Stock, by each person who, to the knowledge of the
Registrant at that date, was a beneficial owner of 5% or more of the outstanding
shares of Common Stock. The table does not include information regarding shares
of Common Stock held in the names of certain depositories/clearing agencies as
nominee for various brokers and individuals. No such broker or individual is
believed to hold greater than 5% of the Registrant's Common Stock.
20
<PAGE>
Name and Address Amount of
of Beneficial Beneficial Percent of
Owner Owner Class
----------------- ----------- ----------
Murray Woulfe 379,834 shares(1) 7.4%
HCR 70 Box 2206
Lake George, MN 56458
- ----------
(1) Ownership is direct. 115,000 of these shares are held in escrow pursuant to
an agreement with the Director of Securities of South Dakota until, if
even, the Registrant achieves net earnings per share of $0.06 for any three
year period, two of which must be consecutive. Mr. Woulfe has agreed to
place an additional 150,000 shares into this escrow.
21
<PAGE>
(b) Security Ownership of Management.
The following table sets forth information as of December 31, 1996, as to
the beneficial ownership of shares of the Registrant's only outstanding class of
securities, its Common Stock, by each person who is a director and/or executive
officer of the Registrant, and by all officers and directors of the Registrant
as a group.
Name and Address Amount of
of Beneficial Beneficial Percent of
Owner Owner (2) Class
---------------- ----------- ----------
Ronne Tarrell (1)(3) 6,667 shares *
Delores Bower (1)(4) 163,505 shares 3.1%
David Jorgenson (1) 2,900 shares *
Delbert Harty (1)(3) 14,834 shares *
Terry Heinz (1) 800 shares *
Officers and 188,706 shares 3.5%
directors as a
group (five
persons)
- ----------
* Less than one percent.
(1) Ownership is direct.
(2) There are no warrants outstanding by which any officer, director, or other
person has the right to purchase shares of the Registrant's Common Stock.
(3) These shares are held in escrow pursuant to an agreement with the Director
of Securities of South Dakota until, if even, the Registrant achieves net
earnings per share of $0.06 for any three year period, two of which must be
consecutive.
(4) 15,005 of these shares are held in escrow pursuant to an agreement with the
Director of Securities of South Dakota until, if even, the Registrant
achieves net earnings per share of $0.06 for any three year period, two of
which must be consecutive.
22
<PAGE>
(c) Changes in Control.
There was a change in control of the Registrant in 1990, by which the
current members of the Board of Directors was appointed and the former members
resigned. There has been no change of control since that time.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
(a)(b)(c) Transactions with Management and Others.
All funds held by the Registrant are deposited with First Savings and Loan
Association, Inc., except for those funds related to the $60,000 Dakota Bank
certificate of deposit. The current balance on deposit with First Savings is
greater than $100,000. Any funds over $100,000 will not receive the benefit of
FDIC insurance.
(d) Transactions with Promoters.
Not applicable.
23
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits required to be filed are listed below and, except where
incorporated by reference, immediately follow the Financial Statements.
Number Description
3.1 Articles of Incorporation, as amended(1)
3.2 Bylaws(1)
10.1 Agreements relating to sale of assets:
10.2 Purchase Agreement dated March 31, 1989 between World Services,
Inc. and Rezatto II, Inc.(1)
10.3 Addendum Agreement dated December 29, 1989 between World
Services, Inc. and Rezatto II, Inc.(1)
22.1 Subsidiaries of the Registrant:
(a) First Savings and Loan Association, Inc., a South Dakota
corporation
(b) Super 8 Motel Developers, Inc., a South Dakota corporation
(b) During the last quarter of the period covered by this report the
Registrant filed no reports on Form 8-K.
- ------------
(1) Incorporated by reference from the same numbered exhibit filed with the
Registrant's Report on Form 10-KSB for the fiscal years ended December 13,
1988, 1990, 1991, 1992, 1993 and 1994.
24
<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.
March 27, 1997
WORLD SERVICES, INC.
By /S/ RONNE TARRELL
-------------------------------
Ronne Tarrell, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/S/ RONNE TARRELL
March 27, 1997 ---------------------------------------
Ronne Tarrell, President, Principal
Executive Officer, and Director
/S/ DAVID JORGENSON
March 27, 1997 ---------------------------------------
David Jorgenson, Secretary, Treasurer,
Principal Accounting Officer, Principal
Financial Officer, and Director
/S/ DELORES BOWER
March 27, 1997 ---------------------------------------
Delores Bower, Director
/S/ DELBERT HARTY
March 27, 1997 ---------------------------------------
Delbert Harty, Director
/S/ TERRY HEINZ
March 27, 1997 ---------------------------------------
Terry Heinz, Director
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditor's Report......................................... F-2
Balance Sheet - December 31, 1996.................................... F-3
Statements of Operations - For the Years Ended
December 31, 1996 and 1995......................................... F-4
Statement of Changes in Stockholders' Equity -
For the Period from January 1,
1995 through December 31, 1996..................................... F-5
Statements of Cash Flows - For the Years Ended
December 31, 1996 and 1995......................................... F-6
Notes to Financial Statements........................................ F-7
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Stockholders and Board of Directors
World Services, Inc.
Aberdeen, South Dakota
We have audited the accompanying balance sheet of World Services, Inc., as of
December 31, 1996, and the related statements of operations, changes in
stockholders' equity, and cash flows for the years ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's manage-
ment. Our responsibility is to express an opinion on these financial statements
based on our audits. We did not audit the financial statements of First Savings
and Loan Association, Inc (FSL), the investment in which, as discussed in Note 2
to the financial statements, is accounted for by the equity method of
accounting. The Company's investment in FSL was $335,000 as of September 30,
1996, and the Company's equity in its net income was $45,000 and $40,000 for the
years ended December 31, 1996 and 1995, respectively. The Company received a
dividend of $17,000 and $34,000 from FSL in 1996 and 1995. The financial
statements of FSL were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for FSL is
based solely on the report of the other auditors.
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 and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of World Services, Inc. as of December 31, 1996, and the
results of its operations and its cash flows for the years ended December 31,
1996 and 1995, in conformity with generally accepted accounting principles.
HEIN + ASSOCIATES LLP
Denver, Colorado
February 17, 1997
F-2
<PAGE>
WORLD SERVICES, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 28,000
Certificate of deposit 290,000
Other 17,000
-----------
Total current assets 335,000
INVESTMENTS AND OTHER ASSETS:
Investment in First Savings & Loan 335,000
Investment in Super 8 Motel Developers 568,000
Other 4,000
-----------
TOTAL ASSETS $ 1,242,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES -
Accounts payable and accrued expenses $ -
STOCKHOLDERS' EQUITY:
Common stock, par value $.001 per share;
50,000,000 shares authorized,
5,359,000 shares issued 5,000
Additional paid-in capital 6,545,000
Treasury stock at cost, 129,000 shares (3,000)
Accumulated deficit (5,305,000)
-----------
Total stockholders' equity 1,242,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,242,000
===========
See accompanying notes to these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
WORLD SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
YEARS ENDED
DECEMBER 31,
-----------------------------
1996 1995
--------- ----------
<S> <C> <C>
REVENUES:
Interest income $ 15,000 $ 7,000
Dividend income 160,000 -
--------- ---------
175,000 7,000
--------- ---------
EXPENSES:
Legal and accounting 34,000 43,000
Other general and administrative expenses 22,000 7,000
--------- ---------
56,000 50,000
--------- ---------
INCOME (LOSS) BEFORE EQUITY IN EARNINGS (LOSS) OF
AFFILIATED COMPANIES 119,000 (43,000)
EQUITY IN EARNINGS OF AFFILIATED COMPANIES (NOTE 2) 45,000 40,000
--------- ---------
NET INCOME (LOSS) $ 164,000 $ (3,000)
========= =========
INCOME (LOSS) PER SHARE OF COMMON STOCK $ .03 $ *
========= =========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 5,358,000 5,358,000
========= =========
- ------------------------
*Less than $.01 per share.
See accompanying notes to these financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WORLD SERVICES, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM JANUARY 1, 1995 THROUGH DECEMBER 31, 1996
COMMON STOCK Additional
----------------------- Paid-in Treasury Accumulated
Shares Amount Capital Stock Deficit Total
------ ------ ---------- -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
BALANCE, January 1, 1995 5,359,000 $5,000 $6,545,000 $(3,000) $(5,466,000) $1,081,000
Net income - - - - (3,000) (3,000)
--------- ------ ---------- ------- ----------- ----------
BALANCE, December 31, 1995 5,359,000 5,000 6,545,000 (3,000) (5,469,000) 1,078,000
Net income - - - - 164,000 164,000
--------- ----- --------- ------ ---------- ----------
BALANCE, December 31, 1996 5,359,000 $5,000 $6,545,000 $(3,000) $(5,305,000) $1,242,000
========= ====== ========== ======= =========== ==========
See accompanying notes to these financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
WORLD SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
YEARS ENDED
DECEMBER 31,
--------------------------
1996 1995
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 164,000 $ (3,000)
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Equity in earnings of affiliate (45,000) (40,000)
Increase in other assets (17,000) --
(Decrease) increase in accounts payable and accrued expenses (10,000) 10,000
--------- ---------
Net cash used in operating activities 92,000 (33,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Dividends from First Savings and Loan 17,000 34,000
Purchase of certificate of deposit (90,000) --
--------- ---------
Net cash (used in) provided by investing activities (73,000) 34,000
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 19,000 1,000
CASH AND CASH EQUIVALENTS, at beginning of period 9,000 8,000
--------- ---------
CASH AND CASH EQUIVALENTS, at end of period $ 28,000 $ 9,000
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash payments for:
Income taxes $ -- $ --
========= ==========
Interest $ -- $ --
========= ==========
See accompanying notes to these financial statements
F-6
</TABLE>
<PAGE>
WORLD SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
--------------------------------------------------------------------
Nature of Operations - World Services, Inc. (the Company) was incorporated
in December 1979 as Midwest Management & Marketing Corporation and was
renamed World Services, Inc. in July 1983. The Company was formed to invest
in and manage companies primarily involved in the insurance, real estate,
and financial institution industries, along with other service industries.
The Company divested itself of all operating subsidiaries by 1989 and
currently holds two investments.
The Company's investment in First Savings & Loan Association, Inc. (FSL)
(see Note 2) is stated at the Company's equity in net assets, which has
been increased or decreased for dividends paid to the Company and for the
Company's share of equity in undistributed earnings of the investee based
upon its respective fiscal year-end of September 30. The Company's
investment in Super 8 Motel Developers, Inc. (S8MD) is carried at cost.
Earnings Per Share - The computations of earnings (loss) per share are
based on the weighted average of common shares outstanding during each
fiscal period.
Cash Equivalents - For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with an original
maturity of three months or less to be cash equivalents.
Use of Estimates - The preparation of the Company's financial statements in
conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
The Company makes significant assumptions concerning the fair market value
of its investment in S8MD. Due to inherent uncertainties in the estimation
process, it is at least reasonably possible that assumptions made in
assessing the fair market value of S8MD could be revised, and such
revisions could be material.
Income Taxes - The Company accounts for income taxes under the liability
method, which requires recognition of deferred tax assets and liabilities
for the expected future tax consequences of events that have been included
in the financial statements. Under this method, deferred tax assets and
liabilities are determined based on the difference between the financial
statements and tax bases of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse.
Impairment of Long-Lived Assets - Effective January 1, 1996, the Company
adopted Financial Accounting Standards No. 121 (FAS 121). In the event that
facts and circumstances indicate that the cost of assets or other assets
may be impaired, an evaluation of recoverability would be performed. If an
evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset's carrying amount
to determine if a write-down to market value or discounted cash flow value
is required. Adoption of FAS 121 had no effect on the financial statements
for the year ended December 31, 1996.
F-7
<PAGE>
WORLD SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
2. INVESTMENTS IN COMPANIES:
-------------------------
The Company currently owns approximately 22% of FSL (formerly Midwest
Savings and Loan). The investment is accounted for under the equity method
of accounting. The Company received $17,000 and $34,000 in dividends during
1996 and 1995, respectively.
The Company also owns approximately 16% of the outstanding common stock of
Super 8 Motel Developers, Inc. (S8MD). The investment is accounted for
under the cost method, which management believes is equal to or in excess
of market value. S8MD is a privately held company, for which the Company
does not exercise significant influence. The Company recorded approximately
$160,000 in dividend income from S8MD during 1996.
The financial statements of FSL and S8MD were audited by other auditors.
Summarized statements of financial information for FSL and S8MD, are as
follows:
SUMMARIZED FINANCIAL INFORMATION FOR FSL
----------------------------------------
(Amounts in 000's)
FOR THE YEARS ENDED
SEPTEMBER 30,
-----------------------
1996 1995
-------- --------
Total assets $ 14,328 $ 14,248
======== ========
Total liabilities $ 12,677 $ 12,741
======== ========
Stockholders' equity $ 1,651 $ 1,507
======== ========
Net income $ 206 $ 182
======== ========
F-8
<PAGE>
WORLD SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SUMMARIZED FINANCIAL INFORMATION FOR S8MD
-----------------------------------------
(Amounts in 000's)
FOR THE YEARS ENDED
DECEMBER 31
-----------------------
1996 1995
-------- --------
Total assets $ 30,608 $ 29,610
======== ========
Total liabilities $ 26,241 $ 25,182
======== ========
Total stockholders' equity $ 4,367 $ 4,428
======== ========
Revenues $ 15,511 $ 14,305
======== ========
Expenses $ 14,596 $ 13,188
======== ========
Net income $ 915 $ 1,117
======== ========
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
------------------------------------
The estimated fair values for financial instruments under Financial
Accounting Standards No. 107, Disclosures about Fair value of Financial
Instruments, are determined at discrete points in time based on relevant
market information. These estimates involve uncertainties and cannot be
determined with precision. The estimated fair value of the Company's
certificates of deposit, approximate their carrying value because of the
short maturity of these instruments. The Company's investment in First
Savings and Loan is accounted for under the equity method. However, the
Company believes the carrying value approximates the fair market value
based on the Company's internal valuation. The fair value of the Company's
investment in S8MD is determined on the basis of comparisons with similar
companies whose shares are publicly traded. After taking into effect a lack
of marketability of the S8MD shares and the Company's lack of control over
S8MD, management believes that the fair value of the S8MD shares
approximates its carrying value.
4. CONCENTRATION OF CREDIT RISK:
----------------------------
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance sheet)
that arise from financial instruments exist for groups of customers or
counterparties when they have similar economic characteristics that would
cause their ability to meet contractual obligations to be similarly
effected by changes in economic or other conditions described below. In
accordance with Financial Accounting Standards No. 105, Disclosure of
Information about Financial Instruments with Off-Balance-Sheet Risk and
F-9
<PAGE>
WORLD SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Financial Instruments with Concentrations of Credit Risk, the credit risk
amounts shown do not take into account the value of any collateral or
security.
5. INCOME TAXES:
-------------
The Company's actual effective income tax rate differs from the U.S.
Federal corporate income tax rate of 34% as follows:
December 31,
------------------------
1996 1995
------- --------
Statutory Rate 34% (34)%
Dividend treatment for tax (23) (79)
Reduction in valuation allowance (11) 113
---- ----
Effective tax rate -0-% -0-%
==== ====
Long-term deferred tax assets (liabilities) are comprised of the following:
December 31,
------------------------
1996 1995
---------- ----------
Net operating loss carryforward and $1,087,000 $1,095,000
investment tax credit carryforwards
FSL basis difference (41,000) (31,000)
---------- ----------
1,046,000 1,064,000
Less valuation allowance (1,046,000) (1,064,000)
---------- ----------
$ - $ -
========== ==========
As of December 31, 1996, the Company has net operating loss carryforwards
for income tax purposes of $3,100,000 which expire in the years 1997 to
2011. The net operating loss carryforwards may be limited with respect to
their availability due to prior ownership changes and the consolidated
return regulations. In addition, there are investment tax credit
carryforwards of $28,000. The change in the deferred tax valuation
allowance from 1995 to 1996 was a decrease of 18,000.
F-10
<PAGE>
WORLD SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
6. STOCKHOLDERS' EQUITY:
---------------------
In May 1980, the 32 promoters of the Company entered into an escrow
agreement restricting the sale of their shares (total of 730,020 shares)
until the Company generates earnings per share of $.06 (based on
approximately 1.9 million outstanding shares) for three years, two of which
must be consecutive. An additional 100,000 shares issued in May 1983, to an
officer and director, are also restricted under the escrow agreement. The
Division of Securities in 1986 released 113,834 shares that were issued to
a founder and were sold on a bankruptcy auction. The remaining 716,186
shares are to be held in escrow until the above conditions are met.
Additionally, management of the Company has had conversations with a prior
officer and director and believes that 150,000 shares issued to the
officer/ director in 1986 are part of the escrow agreement and therefore,
will be placed into escrow during 1997.
F-11
<PAGE>
FIRST SAVINGS & LOAN ASSOCIATION
OF SOUTH DAKOTA, INC.
ABERDEEN, SOUTH DAKOTA
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1996 AND 1995
(With Independent Auditor's Report)
<PAGE>
C O N T E N T S
---------------
Page
----
INDEPENDENT AUDITOR'S REPORT.......................................... 1
FINANCIAL STATEMENTS:
Balance Sheets...................................................... 2
Statements of Income................................................ 3
Statements of Stockholders' Equity.................................. 5
Statements of Cash Flows............................................ 6
Notes to Financial Statements....................................... 8
<PAGE>
1
==========================================
Eide Helmeke PLLP
Certified Public Accountants & Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
First Savings & Loan Association of
South Dakota, Inc.
Aberdeen, South Dakota
We have audited the accompanying balance sheets of First Savings & Loan
Association of South Dakota, Inc. as of September 30, 1996 and 1995, and the
related statements of income, stockholders' equity, and cash flows for each of
the three years in the period ended September 30, 1996. These financial
statements are the responsibility of the Association'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 First Savings & Loan
Association of South Dakota, Inc. as of September 30, 1996 and 1995, and the
results of its operations and its cash flows for each of the three years in the
period ended September 30, 1996 in conformity with generally accepted accounting
principles.
EIDE HELMEKE PLLP
October 15, 1996
Aberdeen, South Dakota
<PAGE>
2
FIRST SAVINGS & LOAN ASSOCIATION OF SOUTH DAKOTA, INC.
BALANCE SHEETS
SEPTEMBER 30, 1996 AND 1995
(000's omitted)
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
ASSETS
ASSETS:
Cash and due from banks $ 865 $ 1,987
Interest bearing deposits with banks 1,094 1,089
Investment securities (Note 3) 65 82
Loans held for sale 809 255
Loans receivable, net (Note 2) 11,096 10,462
Office properties and equipment, net (Note 6) 182 193
Interest receivable 115 116
Federal Home Loan Bank Stock, at cost 51 51
Deferred income tax benefit 33 -
Other assets 18 13
- --------------------------------------------------------------------------------
Total assets $14,328 $14,248
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Deposits (Note 7) $12,413 $12,475
Interest payable 143 132
Advance payments by borrowers for taxes and insurance 19 19
Income taxes payable 4 102
Special assessment payable 73 -
Other liabilities 25 13
- --------------------------------------------------------------------------------
Total liabilities 12,677 12,741
================================================================================
STOCKHOLDERS' EQUITY:
Capital stock ($ 1 par value, 1,000,000 shares
authorized, 774,277 shares issued and outstanding) 774 744
Additional paid-in capital 376 376
Retained earnings:
Restricted 39 21
Unrestricted 462 336
- --------------------------------------------------------------------------------
Total stockholders' equity 1,651 1,507
- --------------------------------------------------------------------------------
Total liabilities and stockholders' equity $14,328 $14,248
================================================================================
See Notes to Financial Statements.
<PAGE>
3
FIRST SAVINGS & LOAN ASSOCIATION OF SOUTH DAKOTA, INC.
STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
(OOO's omitted, except for per share amounts)
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans $1,074 $ 953 $ 810
Dividends on FHLB stock 3 5 3
Other interest income 90 94 80
- --------------------------------------------------------------------------------
Total interest income 1,167 1,052 893
INTEREST EXPENSE ON DEPOSITS 526 479 377
- --------------------------------------------------------------------------------
NET INTEREST INCOME 641 573 516
PROVISION FOR LOAN LOSSES 30 50 71
- --------------------------------------------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 671 623 587
- --------------------------------------------------------------------------------
NON-INTEREST INCOME:
Gain from sale of loans 145 102 174
SBA loan servicing fees 21 15 14
Overdraft charges 23 18 26
Other fees, charges and
miscellaneous income 51 36 41
- --------------------------------------------------------------------------------
Total non-interest income 240 171 255
- --------------------------------------------------------------------------------
NON-INTEREST EXPENSES:
Salaries and employee benefits 292 251 275
Net occupancy expense of premises 106 101 102
Computer maintenance and updates 28 19 12
Office supplies and postage 37 31 33
Advertising 15 11 12
Assessment and examination fees 106 31 29
Professional fees 29 28 38
Other operating expenses 42 35 41
- --------------------------------------------------------------------------------
Total non-interest expenses 655 507 542
- --------------------------------------------------------------------------------
(continued on next page)
<PAGE>
4
STATEMENTS OF INCOME - page 2
(000's omitted, except for per share amounts)
- --------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 256 287 300
INCOME TAXES (Note 11):
Current (83) (105) (14)
Deferred 33 - (76)
- --------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE
EFFECT ADJUSTMENT 206 182 210
CUMULATIVE EFFECT ON PRIOR YEARS
OF ACCOUNTING CHANGE - - 76
- --------------------------------------------------------------------------------
NET INCOME $ 206 $ 182 $ 286
================================================================================
INCOME PER SHARE:
Before cumulative
effect adjustment $0.27 $0.24 $0.27
Cumulative effect adjustment - - 0.10
- --------------------------------------------------------------------------------
$0.27 $0.24 $0.37
================================================================================
WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING 774 774 774
================================================================================
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
5
FIRST SAVINGS & LOAN ASSOCIATION OF SOUTH DAKOTA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
(OOO's omitted)
- ----------------------------------------------------------------------------------------------------
Additional Restricted Unrestricted Total
Capital Paid-In Retained Retained Stockholders'
Stock Capital Earnings Earnings Equity
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, October 1, 1993 $ 774 $ 376 $ - $ (18) $ 1,132
Net income - - - 286 286
- -----------------------------------------------------------------------------------------------------
Balance, September 30, 1994 774 376 - 268 1,418
Dividends paid - - - (93) (93)
Transfer - - 21 (21) -
Net income - - - 182 182
- -----------------------------------------------------------------------------------------------------
Balance, September 30, 1995 774 376 21 336 1,507
Dividends paid - - - (62) (62)
Transfer - - 18 (18) -
Net income - - - 206 206
- -----------------------------------------------------------------------------------------------------
Balance, September 30, 1996 $ 774 $ 376 $ 39 $ 462 $ 1,651
=====================================================================================================
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
6
FIRST SAVINGS & LOAN ASSOCIATION OF SOUTH DAKOTA, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
(OOO's omitted)
- --------------------------------------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES:
Net income $ 206 $ 182 $ 286
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for loan losses (30) (50) (71)
Amortization of deferred loan fees (3) (1) (1)
Interest added to time
deposits in other banks - (2) (6)
Depreciation 38 34 35
Deferred income taxes (33) - -
Loss on sale of fixed assets 2 - 2
(Gain) loss on sale of foreclosed real estate - 1 (6)
Gain on sale of loans held for sale (145) (102) (174)
Changes in assets and liabilities:
Loans held for sale (409) 51 (376)
Interest receivable 1 (16) (9)
Prepaid income taxes - 22 (22)
Other assets (5) 4 (3)
Accounts payable - - (2)
Interest payable 11 48 (18)
Income taxes payable (98) 102 (3)
Special assessment payable 73 - -
Other liabilities 12 6 (7)
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities (380) 279 (375)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from redemption of (payments for)
time deposits in other banks (5) 3 (100)
Proceeds from the sale of foreclosed real estate - 1 16
Net (increase) decrease in loans (601) (727) 66
Purchase of fixed assets (29) (10) (110)
Principal repayment from investment securities 17 4 11
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (618) (729) (117)
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITES:
Dividends paid (62) (93) -
Net increase (decrease) in deposit accounts (62) 1,290 63
Payments on capitalized lease obligation - - (20)
- ---------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (124) 1,197 43
- ---------------------------------------------------------------------------------------------------
(continued on next page)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
7
STATEMENTS OF CASH FLOWS - page 2
(OOO's omitted)
- -------------------------------------------------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,122) 747 (449)
CASH AND CASH EQUIVALENTS BEGINNING OF YEAR 1,987 1,240 1,689
CASH AND CASH EQUIVALENTS END OF YEAR $ 865 $ 1,987 $ 1,240
===========================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid during the year for:
Interest $ 515 $ 431 $ 395
===========================================================================================
Income taxes (refund) $ 181 $ (19) $ 36
===========================================================================================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING ACTIVITIES:
Transfers from loans to real
estate acquired through foreclosure $ - $ - $ -
===========================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
8
FIRST SAVINGS & LOAN ASSOCIATION OF SOUTH DAKOTA, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Nature of operations - The Association provides a variety of financial services
to individuals and corporate customers located primarily in northeast South
Dakota. The Association's primary source of revenue is single-family residential
loans to middle-income individuals.
Investment securities - The Association has adopted FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." Pursuant to
adopting FASB 115, the Association has classified all of its securities holdings
in the following category:
SECURITIES HELD TO MATURITY - Securities classified as held to maturity
are those debt securities the Association has both the intent and
ability to hold to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions. These
securities are carried at cost adjusted for amortization of premium and
accretion of discount, which are recognized using the interest method
over the period to maturity.
Loans receivable - Loans receivable are stated at unpaid principal balances,
less the allowances for loan losses, and net deferred loan origination fees.
Loans held for sale are carried at the lower of aggregate cost or estimated
market value.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions and other risks inherent in the portfolio. Allowances
for impaired loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense, and reduced by charge-offs, net of
recoveries.
Uncollectible interest on loans that are over 90 days past due is charged off.
Such interest if ultimately collected, will be reported as income when
collected.
Loan origination fees - Loan fees are accounted for in accordance with FASB No.
91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Loan fees and certain
direct loan origination costs are deferred, and amortized as a yield adjustment
to interest income using the interest method over the contracted life of the
loans, adjusted for prepayments based on the Association's historical prepayment
experience.
Office properties and equipment - Property and equipment is stated at cost less
accumulated depreciation and amortization. Depreciation is computed over the
useful lives of the assets using straight-line and accelerated methods.
Estimated useful lives are as follows:
Leasehold improvements 5-40 years
Furniture and equipment 5-15 years
(continued on next page)
<PAGE>
9
NOTES TO FINANCIAL STATEMENTS - page 2
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
- ---------------------------------------------------
Cash equivalents - Cash equivalents consist of cash and funds due from banks.
For purposes of the statements of cash flows, the Association considers all
highly liquid debt instruments with original maturities when purchased of three
months or less to be cash equivalents. The cash effects of the change in time
deposits in other banks, loans, deposits, and customer certificates of deposit
are shown as net amounts on the statement of cash flows.
Income per share - The income per share were computed by dividing net income by
weighted average common shares (774,277) outstanding.
Restricted retained earnings - Restricted retained earnings represents amounts
required to be restricted pursuant to the payment of dividends in accordance
with Office of Thrift Supervision (OTS) mandate. The amount restricted is equal
to 10% of the Association's net income and becomes restricted upon the
Association's declaration of dividends related to such net income.
Income taxes - Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the allowance for loan
losses, accumulated depreciation, and the basis of accounting for financial and
income tax reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered and settled.
Use of estimates - 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 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. Material estimates that are particularly susceptible to significant
change in the near term relate to the determination of the allowance for loan
losses.
Reclassification - Certain prior year amounts have been reclassified to conform
to the 1996 presentation.
NOTE 2 - LOANS RECEIVABLE (000's omitted)
- -----------------------------------------
Loans receivable at September 30, 1996 and 1995 consisted of the following:
1996 1995
---- ----
Loans secured by first mortgages on real estate:
Secured by 1 to 4 family residences $ 3,542 $ 3,796
Secured by other properties 2,089 1,563
Construction 555 282
------ -------
6,186 5,641
Less deferred loan origination fees 2 5
------ -------
Total first mortgages 6,184 5,636
------ -------
(continued on next page)
<PAGE>
10
NOTES TO FINANCIAL STATEMENTS - page 3
- --------------------------------------------------------------------------------
NOTE 2 - LOANS RECEIVABLE (000's omitted) - continued
- -----------------------------------------
1996 1995
---- ----
Other loans:
Consumer loans 2,147 2,407
Loans on deposits 372 502
Commercial 2,491 2,019
Overdrafts on deposit accounts 21 16
------- -------
Total other loans 5,031 4,944
------- -------
Total loans 11,215 10,580
Less: allowance for loan losses 119 118
------- -------
$ 11,096 $ 10,462
======= =======
Activity in the allowance for loan losses is summarized as follows for the years
ended September 30:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Allowance for loan losses, October 1 $ 118 $ 125 $ 139
Reductions (addition to income) (30) ( 50) ( 71)
Charge offs and recoveries, net 31 43 57
---- ---- ----
Allowance for loan losses, September 30 $ 119 $ 118 $ 125
==== ==== ====
</TABLE>
At September 30, 1996 and 1995, the Association had $1,053,664 and $180,241,
respectively, of loans in process and no installment loans which include
unearned interest.
The Association sold the SBA guaranteed portion of certain loans and was
servicing those loans for others as follows:
1996 1995
---- ----
September 30 $ 1,498,117 $ 1,383,278
========= =========
At September 30, 1996 and 1995, the Association had loans amounting to $4,678
and $46,478 that were specifically classified as impaired. The allowance for
loan losses related to impaired loans amount to approximately $4,678 and $11,600
as of September 30, 1996 and 1995.
(continued on next page)
<PAGE>
11
NOTES TO FINANCIAL STATEMENTS - page 4
- --------------------------------------------------------------------------------
NOTE 3 - INVESTMENT SECURITIES
- ------------------------------
Securities held to maturity consist of the following:
<TABLE>
<CAPTION>
September 30, 1996 September 30, 1995
-------------------------------------------- ---------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
---- ----- ------ ----- ---- ----- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
State and local
governments $ 65 $ - $ - $ 65 $ 82 $ - $ - $ 82
=== === === === == === === ===
</TABLE>
The amortized cost and estimated market value of debt securities being held to
maturity at September 30, 1996, by contractual maturity, are shown below:
Estimated
Amortized Market
Cost Value
Due after 10 years $ 65 $ 65
=== ===
NOTE 4 - FINANCIAL INSTRUMENTS (000's omitted)
- ----------------------------------------------
Financial Instruments with Off-Balance Sheet Risk
The Association is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include outstanding loan commitments.
The Association has outstanding mortgage loan commitments of $335,272 and
$550,947 at September 30, 1996 and 1995, respectively. The Association has
approved these loans and intends to advance the loan proceeds to the borrower
upon the closing of the loan. There is no loss to the Association if either
party fails to perform on these commitments. All of these loans are fixed rate
loans that will be resold.
Significant Group Concentrations of Credit Risk
The Association maintains a cash balance with a financial institution that
represents a concentration of credit risk because the deposit exceeds the amount
insured by the Federal Deposit Insurance Corporation ($100,000). The
Association's uninsured cash balances totaled $521,362 and $1,401,086 at
September 30, 1996 and 1995, respectively.
The Association has deposits with the Federal Home Loan Bank that represent a
concentration of credit risk because the deposits are not insured or
collateralized by the Federal Home Loan Bank. Such deposits totaled $177,389 and
$363,760 at September 30, 1996 and 1995, respectively.
(continued on next page)
<PAGE>
12
NOTES TO FINANCIAL STATEMENTS - page 5
- --------------------------------------------------------------------------------
NOTE 4 - FINANCIAL INSTRUMENTS (000's omitted) - continued
- ----------------------------------------------
Most of the Association's loan activity is with customers located in the
northeast part of the state. Generally, the loans are secured by assets or
stock. The loans are expected to be repaid from cash flow or proceeds from the
sale of selected assets of the borrowers. Credit losses arising from lending
transactions with highly leveraged entities compare favorable with the
Association's credit loss experience on its loan portfolio as a whole.
Fair Values of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (Statement 107), requires the disclosure of
estimated fair values of all asset, liability and off-balance sheet financial
instruments.
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instruments. Because no
market exists for a significant portion of the Association's financial
instruments, fair value estimates are based on judgments regarding future
expected loss experience, current economic conditions, risk characteristics and
other factors. These estimates are subjective in nature and involve
uncertainties and matters of significant judgment and, therefore, cannot be
determined with precision. Changes in assumptions could significantly affect the
estimates.
The estimated fair values of the Association's financial instruments as of
September 30, 1996 are as follows:
Carrying Fair
Value Value
-------- -----
Financial assets:
Cash and due from banks $ 865 $ 865
Interest-bearing time deposits with
banks, investment securities and
Federal Home loan Bank stock 1,210 1,210
Loans, net 11,905 11,905
Interest receivable 115 115
------- -------
Total financial assets $ 14,095 $ 14,095
======= =======
Financial liabilities:
Nonmaturity deposits $ 4,826 $ 4,826
Deposits with stated maturities 7,587 7,607
Interest payable 143 143
------- -------
Total financial liabilities $ 12,556 $ 12,576
======= =======
(continued on next page)
<PAGE>
13
NOTES TO FINANCIAL STATEMENTS - page 6
- --------------------------------------------------------------------------------
NOTE 4 - FINANCIAL INSTRUMENTS (000's omitted) - continued
- ----------------------------------------------
The following methods and assumptions are used by the Association in estimating
fair values of financial instruments:
Cash and due from banks - The carrying value of cash and due from banks
approximates fair value due to the relatively short period of time between the
origination of the instruments and their expected realization.
Interest-bearing time deposits with banks, investment securities and Federal
Home Loan Bank stock - Fair values of interest-bearing time deposits with banks,
investment securities and Federal Home Loan Bank stock are estimated using
quoted market prices, when available. If quoted market prices are not available,
fair value is estimated using quoted market prices for similar assets.
Loans - Fair values for loans are estimated based on contractual cash flows,
discounted using an appropriate rate. Discount rates and cash flow assumptions
are based upon the type and the associated risk characteristics.
Interest receivable and payable - The carrying value of interest receivable and
payable approximates fair value due to the relatively short period of time
between origination and expected realization.
Deposits - The fair value of deposits with stated maturities is the present
value of the contractual cash flows, including principal and interest, and
servicing costs, discounted using the rates currently offered for deposits of
similar remaining maturities.
In accordance with Statement 107, the fair value of deposits with no stated
maturity, such as demand deposit, savings, NOW and money market accounts, is
disclosed as the amount payable on demand. The fair value above does not
consider the benefit resulting from the low-cost funding provided by deposit
liabilities as compared to wholesale funding rates nor the benefit derived from
the customer relationship inherent to existing deposits.
NOTE 5 - TRANSACTIONS WITH RELATED PARTIES
- ------------------------------------------
The Association has entered into banking transactions with its directors,
principal officers, their immediate families and affiliated companies in which
they are principal stockholders. Such transactions were made in the ordinary
course of business on substantially the same terms and conditions including
interest rates and collateral, as those prevailing at the same time for
comparable transactions with other customers, and did not, in the opinion of
management, involve more than normal credit risk or present other unfavorable
features. The aggregate amount of loans to such related parties was $210,569 and
$226,497 at September 30, 1996 and 1995, respectively.
(continued on next page)
<PAGE>
14
NOTES TO FINANCIAL STATEMENTS - page 7
- --------------------------------------------------------------------------------
NOTE 5 - TRANSACTIONS WITH RELATED PARTIES - continued
- --------------------------------------------
The activity relating to such loans was as follows:
Balance, September 30, 1995 $ 226,497
Additions 192,013
Repayments and renewals 207,941
--------
Balance, September 30, 1996 $ 210,569
=======
NOTE 6 - OFFICE PROPERTIES AND EQUIPMENT (000's omitted)
- --------------------------------------------------------
Office properties and equipment at September 30, 1996 and 1995 are as follows:
1996 1995
---- ----
Land $ 31 $ 31
Leasehold improvements 65 65
Furniture and equipment 287 264
--- ---
383 360
Accumulated depreciation (201) (167)
--- ---
$ 182 $ 193
=== ===
Depreciation expense totaled $38,325, $34,485 and $34,777 for the years ended
September 30, 1996, 1995 and 1994, respectively.
NOTE 7 - DEPOSITS (000's omitted)
- ---------------------------------
A summary of deposits is as follows:
1996 1995
---- ----
Commercial Checking
(Non-Interest Bearing) $ 1,624 $ 1,515
Super NOW Checking 1,377 1,151
Regular Savings 408 440
Money Market Demand Deposits 1,417 1,489
Certificates of Deposits 7,587 7,880
------ ------
$ 12,413 $ 12,475
====== ======
At September 30, 1996 and 1995, the Association had $1,358,329 and $1,750,831,
respectively, of certificate accounts with balances of $100,000 or more.
(continued on next page)
<PAGE>
15
NOTES TO FINANCIAL STATEMENTS - page 8
- --------------------------------------------------------------------------------
NOTE 7 - DEPOSITS (000's omitted) - continued
- ---------------------------------
The following sets forth the amounts and maturities of time deposits at
September 30, 1996:
Year Ended September 30,
--------------------------------------------
1997 1998 1999 2000 Total
Total $ 6,255 $ 966 $ 359 $ 7 $ 7,587
===== === ===== ==== =====
The Association held deposits of $302,105 and $156,164 for related parties at
September 30, 1996 and 1995, respectively.
NOTE 8 - SPECIAL ASSESSMENT PAYABLE
- -----------------------------------
In 1996, the Federal Deposit Insurance Corporation (FDIC) imposed a one-time
assessment on all thrift institutions holding Savings Association Insurance Fund
(SAIF) deposits (pursuant to legislation passed during 1996) for the purpose of
rebuilding the SAIF to an acceptable level. The assessment is calculated at a
rate of $.657 for every $100 of SAIF deposits held by the Association as of
March 31, 1995.
NOTE 9 - OPERATING LEASE
- ------------------------
The Association leases its office building from Mack Rentals (see Note 5) under
a noncancelable operating lease. The lease requires monthly payments of $2,500
through December, 1991 and has renewal options at $3,000 through December, 1994
and $3,300 through December, 1999. The Association also pays maintenance,
insurance and real estate taxes relating to the building.
Future minimum lease payments under the lease are as follows:
1997 $ 39,600
1998 39,600
1999 39,600
2000 9,900
NOTE 10 - RESTRICTIONS ON THE PAYMENT OF DIVIDENDS
- --------------------------------------------------
The Federal Deposit Insurance Corporation imposed, as a condition of its
insurance of the Association's deposit amounts, that the Association may not pay
a dividend, other than stock dividend, on its common stock if the amount of its
net worth is or would become, as a result of the payment of such dividend, less
than that required under applicable regulations of the Federal Deposit Insurance
Corporation (see note 10). Pursuant to Chapter 52-4-24 of South Dakota statutes,
the Association is authorized to pay dividends on shares of its common stock
after payment or provision has been made for all expenses, losses, required
reserves and dividends payable on its savings accounts.
(continued on next page)
<PAGE>
16
NOTES TO FINANCIAL STATEMENTS - page 9
- --------------------------------------------------------------------------------
NOTE 11 - NET WORTH REQUIREMENTS
- --------------------------------
At September 30, 1996, the Association's regulatory net worth requirements were
as follows:
<TABLE>
<CAPTION>
% of % of Excess
Requirements Assets Actual Assets (Shortfall)
------------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C>
Tangible Capital $ 215,000 1.50% $ 1,650,000 11.52% $ 1,435,000
Core Capital 430,000 3.00 1,650,000 11.52 1,220,000
Risk Based Capital 807,000 8.00 1,776,000 17.60 969,000
</TABLE>
NOTE 12 - INCOME TAX EXPENSES (000's omitted)
- ---------------------------------------------
The Association is allowed a special bad debt deduction under the reserve
method, computed using actual experience percentages (IRC Section 585) in lieu
of bad debt deduction for specific charge-offs. The Association used the
"experience method" for 1995 and 1996 and anticipates using this method in
future years.
The Association has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." Information related to the type and amount of the
Association's deferred tax asset is as follows:
Deferred tax asset related to conversion to cash
basis of accounting for income tax purposes $ 33
==
No valuation allowance has been provided for the deferred tax asset because it
is felt by the Association that this asset will be realized in future years.
The deferred tax asset above has been reflected on the balance sheet of the
Association as follows:
1996 1995
---- ----
Deferred income tax benefit $ 33 $ -
==== ====
Income tax expenses of the Association are less than the amounts computed by
applying the Federal income tax statutory rate to income before income taxes as
indicated in the following analysis:
(000's omitted)
September 30,
1996 1995 1994
---- ---- ----
Expected income tax expense at
federal tax rate (Note 1) $ 87 $ 98 $ 102
Current timing differences (8) (11) (83)
Deferred timing differences (33) - 76
State income taxes (Note 1) 8 21 6
Surtax exemption (4) (3) (11)
--- --- --
$ 50 $ 105 $ 90
== === ==
(continued on next page)
<PAGE>
17
NOTES TO FINANCIAL STATEMENTS - page 10
- --------------------------------------------------------------------------------
NOTE 13 - RECONCILIATION OF NET WORTH AND NET INCOME AS REPORTED
TO THE FEDERAL HOME LOAN BANK
- ---------------------------------------------------------------
Net worth as reported to Federal Home Loan Bank $ 1,651
=====
Net worth per financial statements $ 1,651
=====
Net income as reported to Federal Home Loan Bank $ 206
=====
Net income per financial statements $ 206
=====
NOTE 14 - CUMULATIVE EFFECT ON CHANGE IN ACCOUNTING PRINCIPLE
- -------------------------------------------------------------
Effective October 1, 1994, the Association adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". The cumulative
effect on the change in accounting principle is included in determining net
income for 1994. Financial statements for prior years have not been restated.
# # # # #
<PAGE>
SUPER 8 MOTEL DEVELOPERS, INC.
AND SUBSIDIARIES
ABERDEEN, SOUTH DAKOTA
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996 AND 1995
(With Independent Auditor's Report)
<PAGE>
C O N T E N T S
---------------
Page
----
INDEPENDENT AUDITOR'S REPORT...............................................1
FINANCIAL STATEMENTS:
Consolidated Balance Sheets..............................................3
Consolidated Statements of Operations....................................4
Consolidated Statements of Stockholders' Equity..........................5
Consolidated Statements of Cash Flows....................................6
Notes to Consolidated Financial Statements...............................8
<PAGE>
1
==========================================
Eide Helmeke PLLP
Certified Public Accountants & Consultants
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Super 8 Motel Developers, Inc.
Aberdeen, South Dakota
We have audited the accompanying consolidated historical cost balance sheets of
Super 8 Motel Developers, Inc. and Subsidiaries as of December 31, 1996 and 1995
and the related consolidated statements of operations, stockholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
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 consolidated historical cost financial statements referred
to above present fairly, in all material respects, the financial position of
Super 8 Motel Developers, Inc. and Subsidiaries as of December 31, 1996 and 1995
and the results of their operations and their cash flows for the years then
ended in conformity with generally accepted accounting principles.
We have also compiled the supplemental current value balance sheet of Super 8
Motel Developers, Inc. and Subsidiaries as of December 31, 1996 and 1995 in
accordance with standards established by the American Institute of Certified
Public Accountants.
A compilation is limited to presenting information that is the representation of
management in the form of financial statements. We have not audited or reviewed
the current value balance sheets and, accordingly, do not express an opinion or
any other form of assurance on them.
<PAGE>
2
As described in Note 18 to the balance sheet, the supplemental current value
balance sheets have been prepared by management to present relevant financial
information that is not provided by the historical cost balance sheets and are
not intended to be a presentation in accordance with generally accepted
accounting principles. In addition, the supplemental current value balance
sheets do not purport to present the net realizable, liquidation, or market
value of the Company as a whole. Furthermore, amounts ultimately realized by the
Company from the disposal of assets may vary significantly from the current
values presented.
Eide Helmeke PLLP
March 5, 1997
Aberdeen, South Dakota
<PAGE>
<TABLE>
<CAPTION>
2
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
- ------------------------------------------------------------------------------------------------------------
ASSETS
1996 1995
------------------------------- --------------------------------
Supplemental Supplemental
Current Current
Value Historical Value Historical
(Note 18) Cost (Note 18) Cost
- --------------------------------------------------------------------------------------------------------------
(Compiled) (Compiled)
<S> <C> <C> <C> <C>
CASH AND CASH
EQUIVALENTS $ 1,205,451 $ 1,205,451 $ 158,431 $ 158,431
- --------------------------------------------------------------------------------------------------------------
RECEIVABLES:
Trade 274,098 274,098 269,433 269,433
Note 155,492 155,492 178,332 178,332
Other 12,945 12,945 20,680 20,680
- --------------------------------------------------------------------------------------------------------------
Total receivables 442,535 442,535 468,445 468,445
- --------------------------------------------------------------------------------------------------------------
PREPAID EXPENSES 233,660 233,660 226,570 226,570
- --------------------------------------------------------------------------------------------------------------
INVESTMENT IN LIMITED
PARTNERSHIPS 763,041 763,041 951,310 951,310
- --------------------------------------------------------------------------------------------------------------
MOTEL PROPERTIES AND
EQUIPMENT, NET 46,710,000 25,601,748 44,132,000 26,663,396
- --------------------------------------------------------------------------------------------------------------
OTHER ASSETS:
Unamortized sub-franchise rights 1,516,000 -- 1,631,000 --
Unamortized financing costs -- 1,419,386 -- 916,642
Unamortized franchise fees -- 178,101 -- 192,692
Unamortized organization costs -- -- -- 21
Deferred income taxes 8,000 8,000 -- --
Restricted cash 737,223 737,223 24,766 24,766
Other 18,800 18,800 7,616 7,616
- --------------------------------------------------------------------------------------------------------------
Total other assets 2,280,023 2,361,510 1,663,382 1,141,737
- --------------------------------------------------------------------------------------------------------------
Total assets $51,634,710 $30,607,945 $ 47,60O,138 $29,609,889
==============================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
3
- ----------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
1996 1995
---------------------------------- ----------------------------------
Supplemental Supplemental
Current Current
Value Historical Value Historical
(Note 18) Cost (Note 18) Cost
- ----------------------------------------------------------------------------------------------------------------------
(Compiled) (Compiled)
<S> <C> <C> <C> <C>
LIABILITIES:
Operating line of credit $ -- $ -- $ 750,000 $ 750,000
Accounts payable and
accrued expenses, other
than income taxes 718,467 718,467 725,426 725,426
Income taxes -- -- 25,028 25,028
Notes payable 25,522,950 25,522,950 23,540,379 23,540,379
Deferred income taxes -- -- 141,000 141,000
Income taxes and sales
commissions on realization
of estimated values 8,103,800 -- 7,022,900 --
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 34,345,217 26,241,417 32,204,733 25,181,833
- ----------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND
CONTINGENCIES -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY:
Common stock: authorized
500,000,000 shares, $.10 par
value; issued and outstanding,
4,882508 shares 488,251 488,251 488,251 488,251
Additional paid-in capital 2,279,628 2,279,628 2,279,628 2,279,628
Retained earnings 1,598,649 1,598,649 1,660,177 1,660,177
Unrealized appreciation 12,922,965 -- 10,967,349 --
- ----------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 17,289,493 4,366,528 15,395,405 4,428,O56
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities and
stockholders' equity $51,634,710 $ 30,607,945 $47,600,138 $29,609,889
=======================================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
4
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATIONS
REVENUES:
Motel revenues $ 14,372,606 $ 13,477,148
Motel management fees 339,957 327,711
Accounting fees 85,800 85,020
Sub-franchise fees 422,600 433,357
Equity in net income (loss) of limited partnerships 77,569 (280,898)
Interest income 219,632 247,608
Other income 27,508 24,241
Net loss on disposal of assets (34 240) (8,698)
- --------------------------------------------------------------------------------------------------------
Total revenues 15,511,432 14,305,489
- --------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Operating expenses:
Motel operating and management expenses 9,258,170 8,396,971
Administration expenses 374,680 341,667
Special charge 250,000 --
- --------------------------------------------------------------------------------------------------------
9,882,850 8,738,638
Interest 2,325,410 2,293,313
- --------------------------------------------------------------------------------------------------------
Total costs and expenses 12,208,260 11,031,951
- --------------------------------------------------------------------------------------------------------
Income before depreciation and amortization 3,303,172 3,273,538
Depreciation and amortization 1,491,903 1,566,146
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 1,811,269 1,707,392
PROVISION FOR INCOME TAXES 725,000 590,000
- --------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 1,086,269 1,117,392
EXTRAORDINARY ITEM:
Loss on early extinguishment of debt net of
related income taxes of $115,000 171,295 --
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 914,974 $ 1,117,392
========================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
5
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31,1996 AND 1995
- -------------------------------------------------------------------------------------------------
Additional
Common Paid-in Retained
Stock Capital Earnings
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ 488,251 $2,279,628 $ 542,785
NET INCOME -- -- 1,117,392
- -------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 488,251 2,279,628 1,660,177
CASH DIVIDENDS -- -- (976,502)
NET INCOME -- -- 914,974
- -------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $ 488,251 $2,279,628 $ 1,598,649
=================================================================================================
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
6
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 914,974 $ 1,117,392
Adjustments to reconcile net income to net
cash provided bv operating activities:
Depreciation 1,383,438 1,444,553
Amortization 108,465 121,593
Special charge 250,000 --
Noncash portion of loss on extinguishment of debt 286,295 --
Net loss on disposal of property 34,240 8,698
Allocation of net (income) loss of limited partnerships (77,569) 280,898
Deferred income taxes (149,000) 89,000
Changes in assets and liabilities:
Accounts and notes receivable 25,910 (48,021)
Net repayments from (advances to) limited partnerships 249,688 (79,059)
Prepaid expenses (7,090) (124,957)
Other assets (723,641) 114,151
Accounts payable, accrued expenses and income taxes (31,987) (745,875)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,263,723 2,178,373
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Distributions from limited partnerships 16,150 67,091
Investment in limited partnership -- (151,896)
Payments for motel properties and equipment (624,202) (1,566,948)
Proceeds from sale of property and equipment 18,172 3,090
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (589,880) (1,648,663)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments on operating line (750,000) (225,000)
Proceeds from notes payable 24,517,725 957,749
Financing costs (882,892) (650,077)
Principal payments on notes payable (22,535,154) (1,767,489)
Cash dividends paid (976,502) --
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (626,823) (1,684,817)
- --------------------------------------------------------------------------------------------------------------
(continued on next page)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
7
CONSOLIDATED STATEMENTS OF CASH FLOWS - page 2
- ------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------
<S> <C> <C>
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 1,047,020 (1,155,107)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 158,431 1,313,538
- ------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,205,451 $ 158,431
====================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest $ 2,244,286 $ 2,316,208
====================================================================================
Cash paid for income taxes $ 723,427 $ 1,484,935
=====================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
8
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Principles of consolidation - The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Cash and cash equivalents - For the purpose of reporting cash flows, the Company
considers time deposits with a maturity of three months or less, cash held as
compensating balances, and bank repurchase agreements to be cash equivalents.
Receivables - The Company grants credit to customers in the Virginia, West
Virginia, Maryland, Delaware and District of Columbia areas. The direct
write-off method is used for recognizing bad debt expense.
Motel properties and equipment - These assets are stated at cost less any
impairment losses relating to FAS 121. Expenditures for renewals and
improvements that significantly add to the productive capacity or extend the
useful life of an asset are capitalized. Expenditures for maintenance and
repairs are charged to expense currently. When depreciable properties are
retired or sold, the cost and related accumulated depreciation are eliminated
from the accounts and the resultant gain or loss is reflected in income.
Depreciation is provided for over the estimated useful lives of the individual
assets using the straight-line method. The range of the estimated useful lives
used in the computation of depreciation is as follows:
Motel buildings and improvements 10-31 years
Furniture, fixtures and equipment 3- 7 years
Sub-franchise rights - This cost is being written-off on the straight-line basis
over ten years. The territorial rights are subject to certain terms and
conditions as set forth in the agreement.
Financing costs - Financing costs consist of direct costs, such as loan fees,
legal costs and commitment fees, associated with obtaining financing for motel
properties. The costs are being amortized using the straight-line method over
the term of the loan.
Franchise fees - Franchise fees consist of the amounts paid to Super 8 Motels,
Inc. for the right to use the Franchisor's trademark. These fees are being
amortized using the straight-line method over the term of the franchise
agreements, twenty years.
Organization costs - Organization costs are being amortized using the
straight-line method over a five-year period.
Investments in limited partnerships - The Company's investments in the limited
partnerships are stated at cost, adjusted for the Company's share of partnership
earnings or losses, cash distributions received, unrecognized gain on sale of
the property and advances made to supplement operations of the partnerships.
Deferred income taxes - Deferred taxes arise primarily from differences in
recognizing income from sales of motel properties, depreciation methods and
asset lives for book and tax reporting purposes.
(continued on next page)
<PAGE>
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 2
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - continued
- ---------------------------------------------------
Estimates - 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.
NOTE 2 - NATURE OF OPERATIONS AND BASIS OF FINANCIAL STATEMENT PRESENTATION
- ---------------------------------------------------------------------------
The Company was organized in April 1984, and is engaged in the business of
developing, owning and operating Super 8 Motels, primarily in the States of
Virginia, West Virginia, Maryland, Delaware and the District of Columbia.
The essential nature of the Company's operation is such that current obligations
must be liquidated out of future revenues to be derived from the rental of its
motel properties. Therefore, assets are essentially reflected in the balance
sheet in relative order of liquidity and liabilities in relative order of
currency.
NOTE 3 - CASH AND CASH EQUIVALENTS
- ----------------------------------
At December 31, 1996 and 1995, the carrying amount of the Company's total cash
and cash equivalents was $1,205,451 and $158,431, respectively. In addition, the
Company considers as cash equivalents its share of deposits held in a combined
cash account with related parties. Accordingly, the Company's cash equivalents
may be affected by negative cash balances of related parties included in the
combined account (see Note 17).
The Company maintains its temporary cash with high credit quality financial
institutions and limits the amount of credit exposure through the use of bank
repurchase agreements which are collateralized by United States treasury
securities. At times, cash on deposit may exceed the federally insured limit.
NOTE 4 - NOTES RECEIVABLE
- -------------------------
At December 31, 1996, the Company held a contract receivable from the purchasers
of its Dumfries, Virginia motel property. The note bears interest at 10%, is
secured by a second deed of trust and is due December 2001.
Minimum principal payments to be received on the above note for the next five
years are as follows:
1997 $ 25,200
1998 27,900
1999 30,800
2000 34,000
2001 37,600
(continued on next page)
<PAGE>
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 3
- --------------------------------------------------------------------------------
NOTE 5 - INVESTMENT IN LIMITED PARTNERSHIPS
- -------------------------------------------
At December 31, 1996, the Company was a general partner in ten limited
partnerships, all of which were formed for the purpose of owning and operating
Super 8 Motels. The Company's investment is increased for its share of earnings
and any advances to the partnerships which are made for the purpose of
supplementing operations and, in one instance, to guarantee cash distributions
to its limited partners. Any advances to the partnerships are unsecured, due on
demand, and bear interest at variable rates, currently 9.5% to 10.5%. The
Company's investment is decreased by its share of partnership losses and cash
distributions received. The investment is also increased by syndication costs
incurred and decreased by unrecognized gains on the sale of the property. At
December 31, 1996 and 1995, syndication costs incurred totaled $179,521 and
unrecognized gains on the sale of property totaled $744,253. The following is a
schedule of the Company's investments in limited partnerships at December 31,
1996 and 1995:
Location 1996 1995
-------- ---- ----
Aberdeen, Maryland $ (40,604) $ (40,782)
Bristol, Virginia (56,300) (55,363)
Culpeper, Virginia 23,292 1,632
Farmville, Virginia 74,259 (21,878)
Fredericksburg/
Waynesboro, Virginia (11,198) (12,788)
Havre de Grace, Maryland 339,597 524,450
Richmond Airport/
Harrisonburg, Virginia (10,698) (10,210)
Richmond Broad St., Virginia/
Martinsburg, West Virginia 120,109 72,063
Richmond Midlothian, Virginia 323,980 339,582
Waldorf, Maryland 604 154,604
--------- --------
$ 763,041 $ 951,310
======== ========
The condensed combined financial information on the above investments is as
follows:
December 31,
----------------------------------
1996 1995
---- ----
Assets $15,375,389 $16,575,723
=========== ===========
Liabilities $12,428,478 $15,125,141
Partners' equity 2,946,911 1,450,582
----------- -----------
$15,375,389 $16,575,723
=========== ===========
Net income before depreciation
and amortization $ 1,512,761 $ 882,917
=========== ===========
Net income $ 735,439 $ 95,137
=========== ===========
(continued on next page)
<PAGE>
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 4
- ---------------------------------------------------
NOTE 6 - MOTEL PROPERTIES AND EQUIPMENT
- ---------------------------------------
The Company's property and equipment consisted primarily of 29 and 28 operating
motels as of December 31, 1996 and 1995, respectively.
1996 1995
---- ----
Land $ 6,425,967 $ 6,231,269
Motel buildings and improvements 24,025,861 23,234,539
Furniture, fixtures and equipment 6,471,025 6,183,685
----------- -----------
36,922,853 35,649,493
Less accumulated depreciation 11,321,105 10,239,357
----------- -----------
25,601,748 25,410,136
Construction in progress -- 1,253,260
----------- -----------
$25,601,748 $26,663,396
=========== ===========
NOTE 7 - SUB-FRANCHISE RIGHTS
- -----------------------------
The sub-franchise rights, acquired July 11, 1984 for $250,000, was an amount
paid to Super 8 Motels, Inc. for the exclusive rights in the states of Virginia,
West Virginia, Maryland, Delaware and the District of Columbia to construct,
own, and operate motels using the Super 8 name and to represent Super 8 Motels,
Inc. in the sale of franchises within said territory.
Significant terms of the agreement and amendments thereto are as follows:
a. The term of the agreement is 20 years from the date of execution.
b. The initial franchise fee payable by motels, which are owned at least 51
percent by the Company, is $10,000.
c. The Company is to receive one-third of the initial franchise fee, presently
$20,000, of each franchise sold by the Super 8 system in said territory.
d. Under the current franchise agreement of Super 8 Motels, Inc., a specified
percentage of the annual gross room rentals of each operating unit is to be
tendered to Super 8 Motels, Inc. as a fee for services rendered and
royalties. The Company will receive from Super 8 Motels, Inc. 25% of the
fee received from each motel located in the territory as compensation for
services rendered. Those payments are to continue from the date such motel
unit in said territory first commences monthly royalty payments for 10
years for motels open on or before July 11, 1990 and 15 years for motels
opened after July 11, 1990.
Sub-franchise fee income under this agreement totaled $422,600 and $433,357
during the years ended December 31, 1996 and 1995.
(continued on next page)
<PAGE>
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 5
- --------------------------------------------------------------------------------
NOTE 8 - NOTES PAYABLE
- ----------------------
The Company's long-term debt consists of mortgage notes collateralized by real
estate, furniture, fixtures and equipment. The notes which have fixed and
variable rates ranging from 8.25% to 10.25% are generally payable in monthly
installments and due at varying dates through 2016. The weighted average
interest rate of the notes was 8.73% and 9.5% as of December 31, 1996 and 1995,
respectively.
Approximate principal maturities during the next five years are as follows:
1997 $ 558,500
1998 610,400
1999 666,800
2000 728,400
2001 1,244,500
At December 31, 1995, the Company had one motel under construction. The Company
had a construction and permanent financing commitment of $1,025,000 of which
only $477,750 had been drawn against the construction loan as of December 31,
1995. Interest expense capitalized totaled $18,507.
The Company had an operating line of credit which matured during 1996 and was
not renewed.
NOTE 9 - SPECIAL CHARGE
- -----------------------
The Company has entered into a contract to sell its Portsmouth, Virginia, motel
property. The transaction, which is anticipated to close February 26, 1997, will
result in a loss of approximately $250,000.
NOTE 10 - LAND LEASE
In July 1987, the Company entered into an agreement to lease a parcel of land on
which it has developed a motel. The initial term of the lease is 60 years and
called for initial rental of $35,200 per year. The lease payments increase by
10% at the end of five years and by 10% at the end of each five-year period
thereafter throughout the term of the lease. The lease also requires contingent
rental payments equal to two and one-half percent of the amount by which the
motel's gross sales exceed $1,200,000. For the years ended December 31, 1996 and
1995, there were no payments required under this provision as the motel's sales
did not exceed $1,200,000.
Future minimum payments for the initial term as of December 31, 1996 under the
lease are as follows:
1997 $ 39,688
1998 42,592
1999 42,592
2000 42,592
2001 42,592
Thereafter 3,212,969
---------
$ 3,423,025
=========
(continuied on next page)
<PAGE>
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 6
- --------------------------------------------------------------------------------
NOTE 11 - RELATED PARTY TRANSACTIONS AND OTHER AGREEMENTS
- ---------------------------------------------------------
The Company conducts business with a major shareholder and certain limited
partnerships (see Note 5).
The following is a summary of transactions with related parties:
1996 1995
---- ----
Revenues:
Management fees $ 339,957 $ 327,711
Accounting fees 85,800 85,020
Interest income 131,440 219,110
Costs and expenses:
Travel expenses 4,455 7,260
Office rent 44,539 38,908
NOTE 12 - FRANCHISE AGREEMENTS
- ------------------------------
The Company's wholly-owned subsidiaries operate Super 8 motels under franchise
agreements with Super 8 Motels, Inc. As part of the agreement, the subsidiaries
are obligated to pay Super 8 Motels, Inc. room royalties equal to 4% of total
room rental revenues and 1% or 2% of room rentals as a national advertising fee.
The Company participates in a national media campaign sponsored by Super 8
Motels, Inc. under which the motels contribute an additional 1% of room revenues
through December 31, 1997.
The following is a summary of fees paid under the franchise agreements:
1996 1995
---- ----
Royalty fees $ 563,472 $ 526,806
National advertising fee 245,979 229,315
National media fee 141,108 131,702
The franchise agreements also place restrictions on the transfer of the
franchise and the sale or lease of the motel without prior written consent of
the franchisor.
NOTE 13 - LIFE INSURANCE
- ------------------------
The Company is the owner and beneficiary of two $1,000,000 life insurance
policies insuring the lives of its president and chief executive officer.
(continued on next page)
<PAGE>
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 7
- --------------------------------------------------------------------------------
NOTE 14 - INCOME TAXES
- ----------------------
The provision for income taxes consists of the following components:
1996 1995
---- ----
Current taxes $ 759,000 $ 501,000
Deferred income taxes (149,000) 89,000
------- -------
$ 610,000 $ 590,000
======= =======
Deferred tax assets and liabilities are calculated based on their estimated
effect on future cash flows. Deferred tax assets are recognized for asset
impairment losses in 1996 and alternative minimum tax (AMT) credits in 1995. In
addition, a deferred tax liability has been recognized for the taxable temporary
differences related to different depreciation methods for financial and tax
purposes. The net deferred tax asset (liability) in the accompanying balance
sheets consists of the following:
1996 1995
---- ----
Deferred tax assets $ 100,000 $ 78,000
Deferred tax liabilities ( 92,000) (219,000)
------- -------
Net deferred tax asset (liability) $ 8,000 $(141,000)
======== =======
NOTE 15 - EXTRAORDINARY ITEM
- ----------------------------
The extraordinary item represents the write-off of unamortized financing costs
in connection with the refinancing of twenty-four of the Company's motel
properties in January, 1996. The amount of the write-off was $171,295, net of
related income taxes of $115,000.
NOTE 16 - STOCK OPTION AGREEMENTS
- ---------------------------------
The Company has entered into stock option agreements with various employees
which allow the employees to purchase up to 55,589 shares of the Company's
common stock at fair market value as of December 31, 1996 and 1995. No options
were exercised in 1996 or 1995 and options for 29,411 shares expired during
1995.
(continued on next page)
<PAGE>
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 8
- --------------------------------------------------------------------------------
NOTE 17 - COMMITMENTS AND CONTINGENCIES
- ---------------------------------------
The Company, as general partner, is contingently liable for liabilities of the
limited partnerships as listed in Note 5. The balance of the mortgage notes
totaled approximately $3,548,000 at December 31, 1996. The Company also remains
contingently liable on the mortgage notes of the Dumfries property, totaling
approximately $1,784,000 at December 31, 1996. Management believes these
obligations are adequately secured by the underlying collateral.
The Company maintains a combined bank account for the limited partnership motels
managed by the Company (see Notes 5 and 11). As such, the overdrafts of one
partnership are offset by cash balances of the Company and other partnerships.
Upon dissolution of the combined bank account or sale or liquidation of a
partnership with a positive cash balance, the Company may be liable for any
unfunded positive balances. The December 31, 1996 and 1995 balances relating to
these entities totaled approximately $521,500 and $396,300, respectively. These
balances are not included in the consolidated balance sheet.
At December 31, 1996, the Company and its subsidiaries were the defendants in
two lawsuits in which the plaintiffs allege they were denied full and equal
enjoyment of services, facilities, privileges and accommodations for the alleged
refusal to rent rooms. The plaintiffs in both lawsuits seek compensatory and
punitive damages. The trial for one lawsuit began on March 17, 1997 and the
Company was found innocent of all charges. The trial for the other lawsuit is
set for June 1997. Potential loss exposure could range from $1 nominal damages
to $1,000,000. However, the ultimate outcome of this litigation is unknown at
the present time. Accordingly, no provision for any liability that might result
has been made in the accompanying financial statements. Based on management's
understanding and evaluation of the relevant facts and circumstances, they
believe that the Company has meritorious defenses to the litigation described
above. Management believes that the litigation should not have a material
adverse effect on the financial condition of the Company.
NOTE 18 - CRITERIA USED IN THE SUPPLEMENTAL CURRENT VALUE PRESENTATION
(COMPILED)
- -----------------------------------------------------------------------
A variety of criteria may be used in the preparation of current value
presentations; accordingly, the criteria used could vary from one enterprise to
another. The supplemental current value balance sheets have been prepared using
the criteria which the Company believes are appropriate in the circumstances.
The supplemental current value balance sheets present relevant financial
information that is not provided by the historical cost balance sheets and is
not intended to be a presentation in conformity with generally accepted
accounting principles. The supplemental current value amounts are intended to
represent normal exchange prices of the tangible net assets. Current value
amounts are not intended to represent amounts that might result from a forced
sale of the net assets, nor do such amounts contemplate the value of the
business which might include identifiable and unidentifiable intangibles.
Amounts that may ultimately be realized by the Company from the disposal of
assets may vary significantly from the current values presented. Because current
values are not presented for certain properties under development, current-value
equity does not necessarily represent the market value of the net assets or of
the Company as a whole. Therefore, the current value presentation is a
supplement to, and not a replacement for, the historical cost basis balance
sheet. The preceding notes to balance sheet should be read in conjunction with
the supplemental current value presentation.
(continued on next page)
<PAGE>
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 9
- --------------------------------------------------------------------------------
NOTE 18 - CRITERIA USED IN THE SUPPLEMENTAL CURRENT VALUE PRESENTATION
(COMPILED) - continued
- ----------------------------------------------------------------------
Management's estimates of unrealized appreciation at December 31, 1996 and 1995,
are summarized as follows:
1996 1995
---- ----
Motel properties $ 46,710,000 $ 44,132,000
Sub-franchise rights 1,516,000 1,631,000
----------- -----------
48,226,000 45,763,000
Less:
Historical cost basis 27,199,235 27,772,751
Sales commissions on realization
of estimated current values 1,446,800 1,372,900
----------- -----------
19,579,965 16,617,349
Income taxes on realization of
estimated current values 6,657,000 5,650,000
----------- -----------
Unrealized appreciation $ 12,922,965 $ 10,967,349
========== ==========
Assumptions for current value estimates:
Assets and liabilities included in current value estimation:
------------------------------------------------------------
The current value computation of assets is limited to operating motels (29
and 28 at December 31, 1996 and 1995, respectively), one motel under
construction at December 31, 1995 and the Company's sub-franchise rights
for all Super 8 Motels in its territory.
General business intangibles, such as financing costs, franchise fees and
organization costs have not been carried forward from the historical cost
basis to the supplemental current value presentation. Other assets and
liabilities have not been revalued since the historical cost of those
assets and the recorded basis of those liabilities approximate current
values.
The current value of the operating motel properties was determined by
capitalizing adjusted net income at 12% in 1996 and 1995. Adjusted net
income consists of net income before debt service, amortization and
depreciation. The Company's motel under construction was valued at
historical cost.
(continued on next page)
<PAGE>
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - page 10
- --------------------------------------------------------------------------------
NOTE 18 - CRITERIA USED IN THE SUPPLEMENTAL CURRENT VALUE PRESENTATION
(COMPILED) - continued
- ----------------------------------------------------------------------
Sub-franchise rights:
---------------------
The Company receives from Super 8 Motels, Inc. (the franchisor) twenty-five
percent of the annual royalty fees Super 8 Motels, Inc. receives from each
motel located in the Company's territory. Estimates of the current value of
this agreement are based upon the present value (using an interest rate of
10%) of future estimated cash flows from royalty fees under the agreement
on operating motels in the Company's territory.
Income taxes and sales commissions on realization of estimate current
values:
---------------------------------------------------------------------------
Even though the Company does not anticipate a sale of its property
interests, a provision of 3% of the estimated gross current value of such
interests has been made for estimated sales costs which would be payable on
realization of the current values. Likewise, income taxes have been
provided at an assumed rate of 34% of the estimated current value in excess
of historical cost.
NOTE 19 - SUBSEQUENT EVENT
- --------------------------
Subsequent to December 31, 1996, the Company sold its Portsmouth, Virginia,
motel property.
# # # # #
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 28,000
<SECURITIES> 290,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 335,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,242,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 5,000
<OTHER-SE> 1,237,000
<TOTAL-LIABILITY-AND-EQUITY> 1,242,000
<SALES> 0
<TOTAL-REVENUES> 220,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 56,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 164,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 164,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 164,000
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
