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, 1999
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.)
724 N. Kline, P.O. Box 786
Aberdeen, South Dakota 57402-0786
---------------------------------
(Address of principal executive offices)Zip Code
Issuer's telephone number: (605) 225-4131
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: $258,000
Aggregate market value of voting stock held by non-affiliates as of December 31,
1999 $-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, 1999 2,640,000.
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
-----------------------
(a) Business Development.
General. World Services, Inc. (the "Registrant" or "World Services") 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. World Services, 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. World Services is the owner of approximately 16% of the
outstanding stock of Super 8 Motel Developers, Inc. ("Super 8"). In 1997, World
Services sold its interest in the outstanding stock of First Savings & Loan
Association of South Dakota, Inc. ("First Savings"). In August 1997, World
Services also completed a 510-for-one reverse stock split followed by a
one-for-300 forward stock split. This recapitalization resulted in World
Services repurchasing a total of 544,000 shares (calculated after giving effect
to the recapitalization) for a total of $138,000 cash paid to shareholders who
submitted their shares for redemption through December 31, 1999, and an
additional $42,000 payable to shareholders who had not submitted their shares
for redemption by that date.
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, World
Services has been maintained as a valid South Dakota corporation, it has been
collecting receivables and settling debts incurred by World Services through the
cessation of its active operations, and has been maintaining the books and
records to allow World Services to obtain audited financial statements as
necessary. World Services has not engaged in any significant business activity
for more than the past five years.
Super 8 -- Summary. In a series of transactions during 1984, World Services
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 (at that
time) had a carrying value of $628,327. In May 1986 S8VC was liquidated and its
assets consisting of cash, World Services' 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, World Services 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. World Services continues to own
these shares. Super 8 Motel Developers Inc. is engaged in the acquisition and
operation of budget motels. See "Narrative Description of Business" and
"Financial Statements."
As noted, the future conduct of World Services' business is dependent upon
a number of factors, and there can be no assurance that World Services will be
able to conduct its operations as contemplated herein. Certain statements
contained in this report, such as the possibility that World Services may
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acquire an operating business or, if any such business is acquired that it can
be successfully operated, are forward-looking statements. The accuracy of these
statements cannot be guaranteed as they are subject to a variety of risks
including, but not limited to: the possibility that World Services will not be
able to complete any such acquisition on economic terms, if at all; and if such
an acquisition does occur, the possibility that World Services will not be able
to operate the business successfully. Furthermore, if any acquisition does
occur, it will likely be accompanied by a change of control, and there can be no
assurance that such change of control will be beneficial to World Services or
its existing shareholders.
(b) Business of Issuer.
In the near future, World Services intends to maintain its investments in
Super 8. In addition, World Services intends to consider business combinations
and financing opportunities, although there can be no assurance that World
Services will be able to complete either.
Super 8 Motel Developers, Inc.
- ------------------------------
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
World Services' 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
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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 $345,226 during the
year ended December 31, 1998, and $344,150 during the year ended
December 31,1999.
Super 8 acquired these franchise rights in July 1984. As of March 1988,
Super 8 had interests in 28 motels operating and four motels under construction;
as of December 31, 1999, Super 8 had interests in 28 operating motels (28 as of
December 31, 1998). The size of motels vary from 42 to 73 units and are, in most
instances, located adjacent to restaurant facilities.
At December 31, 1999, Super 8 was also a general partner in 8 limited
partnerships (11 as of December 31, 1998), (which are in addition to the 28
motels owned by Super 8 at December 31, 1999 (28 at December 31, 1998), all of
which were formed for the purpose of owning and operating Super 8 Motels.
In 1999, World Services received dividend income from Super 8 of
approximately $199,000 (as compared to $319,000 received in 1998). Management of
World Services believes that the market value of its investment in Super 8
exceeds its current cost basis.
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.
First Savings & Loan Association of South Dakota, Inc.
- ------------------------------------------------------
Prior to October 1997, World Services owned approximately 22% of the
outstanding capital stock of First Savings & Loan Association of South Dakota,
Inc. ("First Savings"), a South Dakota corporation, operating primarily in the
city of Aberdeen. In September 1996, World Services was contacted by the federal
Office of Thrift Supervision concerning certain changes in the alleged control
of First Savings stock, the ownership of First Savings stock by certain
affiliates of World Services, and a threatened action against World Services as
a result thereof. OTS notified World Services 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. Although World Services disputed the bases for the OTS' allegations and
pursuant to shareholder approval, World Services sold its entire interest in
First Savings to an unaffiliated buyer in August 1997 for $427,000 ($2.51 per
share).
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Plan of Operations
- ------------------
To date, World Services has not been engaged in any operations other than
attempting to organize its affairs, settle its obligations, collect receivables
and, more recently, bring World Services up to date with required governmental
filings and compliance with other regulatory requirements. In 1997 World
Services held a shareholders meeting and completed the sale of its entire
interest in First Savings. The current Board of Directors has not yet proposed
any possible business combination to the shareholders, although the Board of
Directors has considered several possibilities.
In the future, the Board will seek direction from the shareholders as to an
appropriate course for World Services to follow. This course could include any
of several alternatives, briefly identified as follows:
1. Dissolution and Liquidation. Pursuant to this alternative, World Services
would seek shareholder approval for the liquidation of World Services and
the distribution of net assets to shareholders on a pro rata basis.
2. Continuation of World Services as a going concern. Pursuant to this
alternative, World Services, through its elected Board of Directors and
management, would seek business opportunities and consider various
possibilities of reorganization with the intention of allowing World
Services to engage in active business operations.
3. Sale or distribution of World Services' minority interest. In connection
with either or both of the foregoing alternatives, World Services may
consider the sale of its minority interest in Super 8. This may be
necessary to avoid the application of the Investment Company Act, as
discussed below.
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 World
Services. 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.
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 World Services has attempted to sell its interest in Super 8
previously, there can be no assurance that World Services will be able to do so
in connection with any liquidation plan. Furthermore, there can be no assurance
whether World Services would be offered a fair price in connection with any
attempt to liquidate its interest in Super 8.
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Consequently, it is possible that World Services may propose to the
shareholders that it not attempt to sell World Services' interest in Super 8,
but rather that World Services distribute the Super 8 shares to World Services'
shareholders in a pro rata distribution. There are significant regulatory
hurdles and taxation issues that must be considered in connection with either
spin off or a sale which World Services 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
and state corporation laws.
Business Combinations.
- ----------------------
It is possible that World Services may attempt 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 World Services and
its shareholders. World Services may attempt to do so using its working capital
(including the funds made available by the sale of its interest in First
Savings) and its unissued common stock instead of cash or debt; any issuance of
common stock or other equity interest would dilute the ownership percentage of
World Services' existing shareholders.
Although it has reviewed three different possibilities, World Services has
not yet identified a business opportunity for acquisition. It is expected to
seek out developing companies to allow World Services 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 World
Services 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.
World Services 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,
management believes that there are numerous firms seeking either the limited
additional capital which World Services 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 World
Services' investment. Current income will be only a minor factor in such
decisions.
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It is anticipated that World Services will essentially be limited to one
business venture in the foreseeable future, due to World Services' limited
financing. This lack of diversification will not permit World Services to offset
potential losses from one business opportunity against profits from another, and
should be considered an adverse factor affecting any decision to purchase World
Services' securities.
In some cases, management of World Services 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. There can be no assurance that World Services will be able to complete any
such acquisition.
Sale or Distribution of Minority Interests
- ------------------------------------------
World Services may attempt to sell all or a portion of World Services'
interests in Super 8, in connection with any business combination that may be
pursued by World Services. Alternatively, World Services might consider
distributing to World Services' shareholders, on a pro rata basis, interests in
Super 8. 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 Division of Securities.
Registration Under or Waiver of Investment Company Act
- ------------------------------------------------------
In its proxy statement for the meeting of shareholders held September 29,
1988, World Services stated that if the proposal to sell World Services' assets
was approved and the transactions completed, World Services intended to elect
treatment as a business development company ("BDC") under the Investment Company
Act of 1940 (the "1940 Act"). The transactions anticipated by World Services
were the sale of the travel and the real estate operations to certain affiliates
(which occurred in March 1989), and the sale of World Services' interest in
First Savings (which occurred in August 1997). World Services never made an
election to be treated as a BDC because World Services did not have sufficient
working capital to complete the steps necessary for such an election.
World Services 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 World Services has less than a 50%
interest in the issuer. Under that definition, the Super 8 securities would
classify as investment securities.
Because these securities have such a significant position in World
Services' financial statements, it is possible that the Securities and Exchange
Commission may take the position that World Services is an investment company
and should be registered as such under the 1940 Act. World Services believes,
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however, that if the 1940 Act is applicable at all, World Services is an
inadvertent investment company. This status resulted from the sale by World
Services of its operating assets in 1988-1989, the 1997 sale of its interest in
First Savings, and World Services' inability to sell its interest in Super 8.
World Services does not intend nor does it have authority to engage in the
business of investing, holding, reinvesting, or trading of investment
securities.
World Services 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 World Services' limited
resources.
Employees and Consultants
- -------------------------
World Services currently has no employees. Management anticipates that
employees and/or consultants will be retained as may be necessary to operate
World Services following any business combination. See also "Management."
Item 2. Description of Property
-----------------------
World Services is currently renting a one room office from an unaffiliated
party for the sum of $250 per month, including all utilities. 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.
World Services owns no real property or material personal property.
Item 3. Legal Proceedings
-----------------
World Services is not a party to any legal proceedings, and no such
proceedings are known to be contemplated.
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.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
(a) Market Information.
World Services' 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 World Services, there has been no trading in World
Services' 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 World Services' Common Stock.
(b) Holders.
(b)(1) The approximate number of record holders of World Services' Common
Stock, $.001 par value, as of December 31, 1999 was approximately 1,750. This
figure does not reflect an indeterminable number of shareholders whose shares
are held in "street name."
(c) Dividends.
World Services 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
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Results of Operations
Years Ended December 31, 1998 and 1999
- --------------------------------------
As stated above, World Services has been essentially inactive since early
1988. Until 1995, World Services' activities consisted of nothing more than
maintaining its investments in First Savings and Super 8. After 1995, World
Services has been complying with applicable administrative and regulatory
requirements, and (since 1998) has been considering business opportunities to
present to its shareholders for consideration. World Services' only earnings
have been from dividends received from its investments in 1998 and 1999, and a
nominal amount of interest earned on deposits.
As compared to 1998, expenditures decreased during 1999 due primarily to
lower legal and accounting fees and lower administrative expenses. The
expenditures were less in 1998 as compared to 1997 because of the significantly
lesser activities of World Services during 1998. During 1997, World Services
negotiated with the federal Office of Thrift Supervision regarding its
investment in First Savings, held a shareholder meeting, and sold its interest
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in First Savings; none of these activities occurred in 1998 and, consequently,
legal and accounting expenditures decreased from $55,000 in 1997 to $25,000 in
1998; other general and administrative expenditures during 1997 and 1998 stayed
approximately the same. World Services will continue to incur general and
administrative expenses necessary to continue the effectuation of World
Services' Plan of Operations. World Services does not intend to hold a
shareholders' meeting during 2000.
Except for dividends which may be paid to World Services by Super 8 (which
cannot be assured), and interest from any funds on deposit, World Services
anticipates no other income. World Services anticipates continuing expenditures
during the 2000 fiscal year as it continues to comply with its obligations as a
reporting company pursuant to the Securities Exchange Act of 1934 and the South
Dakota corporations law.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
was issued in June 1998. This statement establishes accounting and reporting
standards for derivative instruments and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
This statement is effective for the Company's financial statements for the year
ended December 31, 2001 and the adoption of this standard is not expected to
have a material effect on the Company's financial statements.
Liquidity and Capital Resources
December 31, 1998 and 1999
- --------------------------
At the time World Services 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. World Services 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. World
Services received approximately $199,000 in dividends from Super 8 in 1999,
$319,000 in 1998 and $239,000 in 1997. In 1997, World Services also received
proceeds of approximately $427,000 from the sale of its investment in First
Savings to an unaffiliated third party.
At December 31, 1999 and 1998, World Services had net working capital of
$1,232,000 and $1,035,000 respectively, as a result of cash dividends received
by World Services from Super 8 and the 1997 sale of the First Savings common
stock. Prior to 1994, World Services had significant working capital deficits.
World Services' most significant asset is its investments in Super 8, which
is carried at cost. Management believes that the fair market value of this
investment is in excess of its book value. However, as a result of the extent of
World Services' percentage ownership in Super 8 and its inability to
significantly influence this entity, the ultimate realization of this investment
may be subject to conditions outside the control of World Services. In 1996 and
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previous years, World Services had received dividends from its investment in
First Savings which also added to its working capital. World Services will
receive no additional dividends from First Savings since World Services sold its
entire interest in First Savings in October 1997.
During the years ended December 31, 1999 and December 31, 1998, World
Services had limited cash flows from investing and financing activities.
Year 2000 Compliance
The year 2000 (Y2K) may present problems for computer programs, as well as
other embedded technology which use date recognition methods or time-sensitive
logic based upon two digits. The date "00" may be recognized as the year 1900
rather than the year 2000, resulting in widespread miscalculations or system
failures which could adversely affect business. World Services has experienced
and expects little impact of the Y2K issues on cash flow or financial
conditions.
Expenditures for Y2K issues amounted to $0.00 for fiscal 1999. Although to
date, World Services believes it is adequately prepared, future Y2K issues may
arise requiring further action. World Services is not able to determine the
total costs for its Y2K program, nor is it able to determine the material effect
on the company's financial condition, results of operations or cash flow.
Item 7. Financial Statements
--------------------
World Services' audited financial statements, described as follows, are
appended to the signature page of this report.
World Services, Inc.
- --------------------
Independent Auditor's Report
Balance Sheet - December 31, 1999
Statements of Operations - For the Years
Ended December 31, 1998 and 1999
Statement of Changes in Stockholder's Equity For the Period
from January 1, 1998 through December 31, 1999
Statements of Cash Flow - For the Years
Ended December 31, 1998 and 1999
Notes to Financial Statements
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Super 8 Motel Developers, Inc.
- ------------------------------
Independent Auditors' Report
Financial Statements:
---------------------
Consolidated Balance Sheets - December 31, 1998 and 1999
Consolidated Statements of Operations for the
Years Ended December 31, 1998 and 1999
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1998 and 1999
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Supplementary Information:
--------------------------
Independent Auditor's Report on the
Supplementary Information
Schedules of Consolidated Operating Expenses
Corporate Organizational Data
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
---------------------------------------------------------------
Since inception, World Services 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.
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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 World Services are listed below. The
directors of World Services are elected to hold office until the next annual
meeting of shareholders and until their respective successors have been elected
and qualified. Officers of World Services are elected by the Board of Directors
and hold office until their successors are elected and qualified.
The current officers and directors of World Services are:
Name Age Position
- ---- --- --------
Ronne Tarrell 58 President, Director
Delores Bower 56 Vice President, Director
David Jorgenson 64 Director
Delbert Harty 62 Director
Terry Heinz 44 Secretary, Treasurer, Director
A brief summary of the business experience of each person who is currently
an officer or director of World Services, and such person's service with World
Services is as follows:
Ronne Tarrell. Mr. Tarrell has been president since 1993 and a director of World
Services since 1990. He is a licensed realtor in the State of South Dakota and
is currently a broker-associate with Real Estate Associates in Aberdeen, South
Dakota; prior to that he owned and operated Tarrell Realty for more than the
previous 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. Ms. Bower has been Vice President and a Director of World
Services 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. Mr. Jorgenson was Secretary and Treasurer from 1993 until 1998,
and a director of World Services 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 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.
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Delbert Harty. Mr. Harty has been a director of World Services 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. Mr. Heinz has been a director of World Services since 1993 and
Secretary- Treasurer from 1998. At present Mr. Heinz is the account manager at
NorCom Advanced Technologies, 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.
World Services has no salaried employees at the present time. As described
below, World Services does pay compensation to its president as an independent
contractor.
(c) Family Relationships.
There are no family relationships among any of World Services' 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 World Services 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);
(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
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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.
(e) Section 16(a) Disclosure
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's directors and officers and persons who own more than 10%
of the Company's equity securities to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the "SEC"). Directors,
officers, and greater-than-10% shareholders are required by SEC regulation to
furnish the Company with copies of all Section 16(a) reports filed.
Based solely on its review of the copies of the reports it received from
persons required to file, World Services believes that during the period from
January 1, 1998 through December 31, 1999, all filing requirements applicable to
officers, directors, and greater-than-10% shareholders were complied with in
accordance with the requirements of Section 16(a).
Item 10. Executive Compensation
----------------------
(a)(1) & (2) Cash Compensation.
16
<PAGE>
The following table sets forth information regarding compensation paid to
the chief executive officer of World Services for the three years ended December
31, 1999. No other person who is currently an executive officer of World
Services earned salary and bonus compensation exceeding $100,000 during any of
those years.
<TABLE>
<CAPTION>
Annual Compensation ($$) Long Term Compensation
------------------------ ------------------------------
Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Restricted
Name and Stock Options LTIP Other
Position Year Salary Bonus Other Awards & SARs Payouts Compensation
-------- ---- ------ ----- ----- ------ ------ ------- ------------
($$) ($$) ($$) ($$) (##) ($$) ($$)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ronne Tarrell 1999 22,000 -0- -0- -0- -0- -0- -0-
President and 1998 22,000 -0- -0- -0- -0- -0- -0-
Chief Executive 1997 22,000 -0- -0- -0- -0- -0- -0-
Officer
</TABLE>
(b)(1) Compensation Under Plans.
World Services 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 other compensation was paid or distributed to any officer or director of
World Services for services rendered to World Services during the 1999 fiscal
year.
(d) Compensation of Directors.
World Services paid its directors $150 per directors' meeting attended for
their services for a total of five meetings that were held during fiscal 1998
and seven meetings during fiscal 1999. In addition, officers and directors may
receive reimbursement for out-of-pocket expenses incurred by them in connection
with the business of World Services.
World Services has no other arrangements pursuant to which any director of
World Services was compensated during the 1999 fiscal year for services as a
director.
(e) Termination of Employment and Change in Control.
World Services 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 World Services. World Services has no plan or arrangement with respect to
any such persons which will result from a change in control of World Services or
a change in the individual's responsibilities following a change in control.
17
<PAGE>
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, 1999, as to
the beneficial ownership of shares of World Services' only outstanding class of
securities, its Common Stock, by each person who, to the knowledge of World
Services 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 World Services' Common Stock.
18
<PAGE>
Name & Address of Amount of Percent
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- --------
Murray Woulfe 223,450 shares (1) 8.2%
HCR 70 Box 2206
Lake George, MN 56458
- ----------
(1) Ownership is direct. 155,883 of these shares are held in escrow pursuant to
an agreement with the Director of Securities of South Dakota until, if
even, World Services achieves net earnings per share of $0.10 for any three
year period, two of which must be consecutive.
(b) Security Ownership of Management.
The following table sets forth information as of December 31, 1999, as to
the beneficial ownership of shares of World Services' only outstanding class of
securities, its Common Stock, by each person who is a director and/or executive
officer of World Services, and by all officers and directors of World Services
as a group.
Name & Address of Amount of Percent
Beneficial Owner Beneficial Ownership of Class
- ---------------- -------------------- --------
Ronne Tarrell (1)(3) 3,922 shares *
Delores Bower (4) 141,033 shares 5.3%
David Jorgenson (1) 1,706 shares *
Delbert Harty (1)(3) 8,726 shares *
Terry Heinz (1) 471 shares *
Officers & Directors as a Group 155,858 shares 5.9%
(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 World Services' Common Stock.
19
<PAGE>
(3) These shares are held in escrow pursuant to an agreement with the Director
of Securities of South Dakota until, if ever, World Services achieves net
earnings per share of $0.10 for any three year period, two of which must be
consecutive.
(4) All shares are held in the name of the Delores Bower Trust, Delores Bower
Trustee. 91,177 of these shares are held in escrow pursuant to an agreement
with the Director of Securities of South Dakota until, if ever, World
Services achieves net earnings per share of $0.10 for any three year
period, two of which must be consecutive.
(c) Changes in Control.
There was a change in control of World Services in 1990, by which the
current members of the Board of Directors were 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.
None
(d) Transactions with Promoters.
Not applicable.
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(1)
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)
20
<PAGE>
10.4 Agreement dated August 18, 1997 for the Purchase and Sale of 169,989
shares of Common Stock of First Savings between Spectrum
Bancorporation, Inc., and World Services, Inc.(2)
22.1 Subsidiaries of World Services:
(a) Super 8 Motel Developers, Inc., a South Dakota corporation
(b) During the last quarter of the period covered by this report World
Services filed no reports on Form 8-K.
- ------------
(1) Incorporated by reference from the same numbered exhibit filed with World
Services' Report on Form 10-KSB for the fiscal years ended December 31,
1988, 1990, 1991, 1992, 1993 and 1994.
(2) Incorporated by reference from the same numbered exhibit filed with World
Services' Report on Form 10-KSB for the fiscal years ended December 31,
1997.
21
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
March 27, 2000
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.
March 27, 2000 /s/ Ronne Tarrell
-----------------------------------
Ronne Tarrell, President, Principal
Executive Officer, and Director
March 27, 2000 /s/ David Jorgenson
-----------------------------------
David Jorgenson, Director
March __, 2000
-----------------------------------
Delores Bower, Director
March 27, 2000 /s/ Delbert Harty
-----------------------------------
Delbert Harty, Director
March 27, 2000 /s/ Terry Heinz
-----------------------------------
Terry Heinz, Secretary, Treasurer,
Principal Accounting Officer,
Principal Financial Officer,
and Director
22
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Independent Auditor's Report................................................F-2
Balance Sheet - December 31, 1999...........................................F-3
Statements of Operations - For the Years Ended
December 31, 1999 and 1998................................................F-4
Statement of Changes in Stockholders' Equity -
For the Period from January 1, 1998 through December 31, 1999.............F-5
Statements of Cash Flows - For the Years Ended December 31, 1999 and 1998...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, 1999, and the related statements of operations, changes in
stockholders' equity, and cash flows for the years ended December 31, 1999 and
1998. 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 and the report of other auditors provides a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of World Services, Inc. as of December 31, 1999, and the
results of its operations and its cash flows for the years ended December 31,
1999 and 1998, in conformity with generally accepted accounting principles.
/s/ HEIN + ASSOCIATES LLP
- -------------------------
HEIN + ASSOCIATES LLP
Denver, Colorado
March 15, 2000
F-2
<PAGE>
WORLD SERVICES, INC.
BALANCE SHEET
DECEMBER 31, 1999
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 50,000
Certificates of deposit 1,219,000
Other 16,000
-----------
Total current assets 1,285,000
INVESTMENTS AND OTHER ASSETS -
Investment in Super 8 Motel Developers 568,000
-----------
TOTAL ASSETS $ 1,853,000
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Payable to redeemed stockholders $ 42,000
Other 11,000
-----------
Total current liabilities 53,000
STOCKHOLDERS' EQUITY:
Common stock, par value $.001 per share;
50,000,000 shares authorized, 2,640,000 shares issued 3,000
Additional paid-in capital 6,364,000
Accumulated deficit (4,567,000)
-----------
Total stockholders' equity 1,800,000
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 1,853,000
===========
See accompanying notes to these financial statements.
F-3
<PAGE>
WORLD SERVICES, INC. AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
YEARS ENDED
DECEMBER 31,
-----------------------
1999 1998
---------- ----------
REVENUES:
Interest income and other $ 59,000 $ 44,000
Dividend income 199,000 319,000
---------- ----------
258,000 363,000
---------- ----------
EXPENSES:
Legal and accounting 19,000 25,000
Other general and administrative expenses 42,000 59,000
---------- ----------
61,000 84,000
---------- ----------
NET INCOME $ 197,000 $ 279,000
========== ==========
INCOME PER SHARE OF COMMON STOCK (BASIC AND DILUTED) $ .07 $ .11
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,640,000 2,640,000
========== ==========
See accompanying notes to these financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
WORLD SERVICES, INC. AND SUBSIDIARIES
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FROM JANUARY 1, 1998 THROUGH DECEMBER 31, 1999
COMMON STOCK Additional
------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998 2,640,000 3,000 6,364,000 (5,043,000) 1,324,000
Net income -- -- -- 279,000 279,000
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1998 2,640,000 3,000 6,364,000 (4,764,000) 1,603,000
Net income -- -- -- 197,000 197,000
----------- ----------- ----------- ----------- -----------
BALANCE, December 31, 1999 2,640,000 $ 3,000 $ 6,364,000 $(4,567,000) $ 1,800,000
=========== =========== =========== =========== ===========
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,
----------------------
1999 1998
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 197,000 $ 279,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Decrease in other assets 3,000 5,000
(Decrease) increase in accounts payable and accrued expenses (2,000) 11,000
--------- ---------
Net cash provided by operating activities 198,000 295,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Redemption of United States Treasury note -- 399,000
Purchase of certificate of deposit (196,000) (683,000)
--------- ---------
Net cash used in investing activities (196,000) (284,000)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITY:
Redemption of common stock -- (29,000)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 2,000 (18,000)
CASH AND CASH EQUIVALENTS, at beginning of period 48,000 66,000
--------- ---------
CASH AND CASH EQUIVALENTS, at end of period $ 50,000 $ 48,000
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Income taxes $ -- $ --
========= =========
Interest $ -- $ --
========= =========
Noncash investing and financing activities:
Unpaid portion of common stock redeemed $ -- $ 44,000
========= =========
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 one investment.
The Company's investment in First Savings & Loan Association, Inc. (FSL)
(see Note 2) was stated at the Company's equity in net assets, which was
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. During 1997, the
Company sold its investment in FSL. The Company's investment in Super 8
Motel Developers, Inc. (S8MD) is carried at cost.
Earnings Per Share - In 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings
Per Share. SFAS No. 128 provides for the calculation of "basic" and
"diluted" earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity. The Company had no
potentially dilutive securities during 1999 or 1998 and as such, basic and
dilutive earnings per share are the same for each year.
Comprehensive Income - Comprehensive income is defined as all changes in
stockholders' equity, exclusive of transactions with owners, such as
capital investments. Comprehensive income includes net income or loss,
change in certain assets and liabilities that are reported directly in
equity such as translation adjustments on investments in foreign
subsidiaries, and certain changes in minimum pension liabilities. The
Company's comprehensive income was equal to its net income for all periods
presented in these financial statements.
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.
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.
F-7
<PAGE>
WORLD SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Impairment of Long-Lived Assets - Effective January 1, 1996, the Company
adopted SFAS No. 121. In the event that facts and circumstances indicate
that the cost of long-lived 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 SFAS
121 had no effect on the financial statements.
Recently Issued Accounting Pronouncements - SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities, was issued in June 1998.
This statement establishes accounting and reporting standards for
derivative instruments and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair
value. This statement is effective for the Company's financial statements
for the year ended December 31, 2001 and the adoption of this standard is
not expected to have a material effect on the Company's financial
statements.
2. INVESTMENTS IN COMPANIES:
-------------------------
The Company owns approximately 16% of the outstanding common stock of S8MD.
The investment is accounted for under the cost method, which management
believes is less than its market value. S8MD is a privately held company,
for which the Company does not exercise significant influence. The Company
recorded approximately $199,000 and $319,000 in dividend income from S8MD
during 1999 and 1998, respectively.
The financial statements of S8MD were audited by other auditors. Summarized
statements of financial information for S8MD is as follows:
SUMMARIZED FINANCIAL INFORMATION FOR S8MD
-----------------------------------------
(Amounts in 000's)
For the Years Ended
December 31
-------------------
1999 1998
------- -------
Total assets $31,794 $30,080
======= =======
Total liabilities $27,410 $26,058
======= =======
Total stockholders' equity $ 4,384 $ 4,022
======= =======
Revenues $16,686 $16,992
======= =======
Expenses $15,126 $15,125
======= =======
Net income $ 1,560 $ 1,867
======= =======
F-8
<PAGE>
WORLD SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
3. FAIR VALUE OF FINANCIAL INSTRUMENTS:
------------------------------------
The estimated fair values for financial instruments under SFAS 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 fair value of the Company's investment in S8MD is
determined on the basis of comparisons with similar companies whose shares
are publicly traded. Based on these comparisons, return on investment, and
percentage ownership in the equity of S8MD management believes its cost
basis is less than the market value. However, because of a lack of
marketability of the S8MD shares and the Company's lack of control over
S8MD, management believes it is difficult to provide an estimate as to the
fair value of its S8MD shares.
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 SFAS No. 105, Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and 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,
------------
1999 1998
---- ----
Statutory Rate 34% 34%
Dividend received deduction (24%) (24%)
Use of net operating loss carryforward (10%) (10%)
--- ---
Effective tax rate 0% 0%
=== ===
F-9
<PAGE>
WORLD SERVICES, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
Long-term deferred tax assets (liabilities) are comprised of the following:
December 31,
--------------------------
1999 1998
----------- -----------
Net operating loss carryforward and
investment tax credit carryforwards $ 1,050,000 $ 1,131,000
Less valuation allowance (1,050,000) (1,131,000)
----------- -----------
$ -- $ --
=========== ===========
As of December 31, 1999, the Company has net operating loss carryforwards
for income tax purposes of $2,745,000 which expire in the years 2000 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 1998 to 1999 was a decrease of $81,000.
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 429,424 shares)
until the Company generates earnings per share of $.10 (based on
approximately 1.1 million outstanding shares) for three years, two of which
must be consecutive. An additional 147,000 shares issued to an officer and
director, are also restricted under the escrow agreement. The Division of
Securities in 1986 released 66,962 shares that were issued to a founder and
were sold on a bankruptcy auction. The remaining 421,286 shares are to be
held in escrow until the above conditions are met.
F-10
<PAGE>
SUPER 8 MOTEL DEVELOPERS, INC.
AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
Table of Contents
================================================================================
Page
----
INDEPENDENT AUDITOR'S REPORT F-12
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-13
Consolidated Statements of Operations F-14
Consolidated Statements of Stockholders' Equity F-15
Consolidated Statements of Cash Flows F-16
Notes to Consolidated Financial Statements F-18
F-11
<PAGE>
[LETTERHEAD]
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, 1999 and 1998
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, 1999 and 1998
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, 1999 and 1998 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.
As described in Note 14 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.
/s/ Eide Bailly LLP
- -------------------
Eide Bailly LLP
Aberdeen, South Dakota
February 24, 2000
F-12
<PAGE>
<TABLE>
<CAPTION>
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
=========================================================================================
ASSETS
1999 1998
------------------------- -------------------------
Supplemental Supplemental
Current Current
Value Historical Value Historical
(Note 14) Cost (Note 14) Cost
----------- ----------- ----------- -----------
(Compiled) (Compiled)
<S> <C> <C> <C> <C>
CASH AND CASH
EQUIVALENTS $ 728,737 $ 728,737 $ 2,146,547 $ 2,146,547
----------- ----------- ----------- -----------
RECEIVABLES
Trade 235,340 235,340 263,479 263,479
Other 32,405 32,405 22,699 22,699
----------- ----------- ----------- -----------
267,745 267,745 286,178 286,178
----------- ----------- ----------- -----------
PREPAID EXPENSES 361,196 361,196 184,518 184,518
----------- ----------- ----------- -----------
INVESTMENT IN LIMITED
PARTNERSHIPS 155,335 155,335 490,897 490,897
----------- ----------- ----------- -----------
MOTEL PROPERTIES AND
EQUIPMENT, NET 48,961,000 27,891,871 49,301,000 24,551,681
----------- ----------- ----------- -----------
OTHER ASSETS
Developed outlots 377,446 377,446 377,446 377,446
Unamortized sub-franchise rights 2,250,000 -- 1,605,000 --
Unamortized financing costs -- 1,171,317 -- 1,269,447
Unamortized franchise fees -- 153,425 -- 149,450
Restricted cash 677,220 677,220 677,154 677,154
Other 9,849 9,849 99,633 99,633
----------- ----------- ----------- -----------
3,314,515 2,389,257 2,759,233 2,573,130
----------- ----------- ----------- -----------
$53,788,528 $31,794,141 $55,168,373 $30,232,951
=========== =========== =========== ===========
(continued on next page)
F-13
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998 (Continued)
=============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
1999 1998
------------------------- --------------------------
Supplemental Supplemental
Current Current
Value Historical Value Historical
(Note 14) Cost (Note 14) Cost
----------- ----------- ----------- -----------
(Compiled) (Compiled)
<S> <C> <C> <C> <C>
LIABILITIES
Accounts payable and
accrued expenses, other
than income taxes $ 620,143 $ 620,143 $ 638,907 $ 638,907
Income taxes -- -- 34,642 34,642
Notes payable 26,582,179 26,582,179 25,354,656 25,354,656
Distributions and net losses
allocated in excess of investment
in limited partnerships 156,504 156,504 152,761 152,761
Deferred income taxes 51,000 51,000 30,000 30,000
Income taxes and sales
commissions on realization
of estimated values 8,492,300 -- 9,486,200 --
----------- ----------- ----------- -----------
35,902,126 27,409,826 35,697,166 26,210,966
----------- ----------- ----------- -----------
COMMITMENTS AND
CONTINGENCIES -- -- -- --
----------- ----------- ----------- -----------
STOCKHOLDERS' EQUITY
Common stock: authorized
500,000,000 shares, $.10 par
value; issued and outstanding,
4,895,008 shares in 1999 and
4,882,508 shares in 1998 489,501 489,501 488,251 488,251
Additional paidin capital 2,303,378 2,303,378 2,279,628 2,279,628
Retained earnings 1,591,436 1,591,436 1,254,106 1,254,106
Unrealized appreciation 13,502,087 -- 15,449,222 --
----------- ----------- ----------- -----------
17,886,402 4,384,315 19,471,207 4,021,985
----------- ----------- ----------- -----------
$53,788,528 $31,794,141 $55,168,373 $30,232,951
=========== =========== =========== ===========
F-13(a)
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
1999 1998
----------- -----------
OPERATIONS
REVENUES
Motel revenues $15,275,152 $15,601,862
Motel management fees 301,171 328,328
Accounting fees 88,750 86,400
Sub-franchise fees 344,150 345,226
Equity in net income of limited partnerships 171,992 71,189
Interest income 160,142 207,504
Other income 85,088 70,380
Net gain on disposal of assets 259,315 281,561
----------- -----------
16,685,760 16,992,450
----------- -----------
COSTS AND EXPENSES
Operating expenses:
Motel operating and management expenses 10,159,670 9,928,316
Administration expenses 408,727 414,759
----------- -----------
10,568,397 10,343,075
Interest 2,169,268 2,244,378
----------- -----------
12,737,665 12,587,453
----------- -----------
Income before depreciation and amortization 3,948,095 4,404,997
Depreciation and amortization 1,348,263 1,293,119
----------- -----------
INCOME BEFORE INCOME TAXES 2,599,832 3,111,878
PROVISION FOR INCOME TAXES 1,040,000 1,245,000
----------- -----------
NET INCOME $ 1,559,832 $ 1,866,878
=========== ===========
See Notes to Consolidated Financial Statements.
F-14
<PAGE>
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999 AND 1998
================================================================================
Additional
Common Paid-in Retained
Stock Capital Earnings
----------- ----------- -----------
BALANCE, JANUARY 1, 1998 $ 488,251 $ 2,279,628 $ 1,340,231
CASH DIVIDENDS -- -- (1,953,003)
NET INCOME -- -- 1,866,878
----------- ----------- -----------
BALANCE, DECEMBER 31, 1998 488,251 2,279,628 1,254,106
ISSUANCE OF COMMON STOCK 1,250 23,750 --
CASH DIVIDENDS -- -- (1,222,502)
NET INCOME -- -- 1,559,832
----------- ----------- -----------
BALANCE, DECEMBER 31, 1999 $ 489,501 $ 2,303,378 $ 1,591,436
=========== =========== ===========
See Notes to Consolidated Financial Statements.
F-15
<PAGE>
<TABLE>
<CAPTION>
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999 AND 1998
==================================================================================
1999 1998
----------- -----------
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 1,559,832 $ 1,866,878
Adjustments to reconcile net income to net
cash from operating activities:
Depreciation 1,230,049 1,174,538
Amortization 118,214 118,581
Net gain on disposal of property and other assets (259,315) (281,561)
Allocation of net income of limited partnerships (171,992) (71,189)
Deferred income taxes 21,000 (11,000)
Changes in assets and liabilities:
Accounts receivable 18,433 155,966
Net repayments from limited partnerships 432,917 133,678
Prepaid expenses (176,678) 17,130
Other assets (22,843) (158,693)
Accounts payable and accrued expenses (53,406) 45,264
----------- -----------
NET CASH FROM OPERATING ACTIVITIES 2,696,211 2,989,592
----------- -----------
INVESTING ACTIVITIES
Distributions from limited partnerships 78,380 68,898
Payments for motel properties and equipment (5,216,335) (1,962,621)
Proceeds from sale of property and equipment 1,039,428 1,365,983
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (4,098,527) (527,740)
----------- -----------
FINANCING ACTIVITIES
Issuance of common stock 25,000 --
Proceeds from notes payable 2,843,180 1,159,682
Financing costs (45,515) --
Principal payments on notes payable (1,615,657) (1,296,639)
Cash dividends paid (1,222,502) (1,953,003)
----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (15,494) (2,089,960)
----------- -----------
(continued on next page) 6
F-16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS page 2
==================================================================================
1999 1998
---------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (1,417,810) 371,892
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 2,146,547 1,774,655
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 728,737 $ 2,146,547
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid for interest $ 2,176,305 $ 2,247,260
Cash paid for income taxes 1,213,246 1,186,719
=========== ===========
See Notes to Consolidated Financial Statements. 7
F-17
</TABLE>
<PAGE>
SUPER 8 MOTEL DEVELOPERS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
================================================================================
NOTE 1 - PRINCIPAL ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES
Principal Business Activity
Super 8 Motel Developers, Inc. and Subsidiaries (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.
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 10-40 years
Furniture, fixtures and equipment 3-7 years
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
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.
Advertising Costs
The Company expenses all advertising costs as they are incurred. Total
advertising costs for the years ended December 31, 1999 and 1998 were $392,513
and $362,228, respectively.
Stock Option Agreements
The Company accounts for the fair value of its grants under their stock option
agreements in accordance with FASB Statement 123. The compensation cost that has
been charged against income for these agreements was $0 for the year ended
December 31, 1999.
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 - CASH AND CASH EQUIVALENTS
At December 31, 1999 and 1998, the carrying amount of the Company's total cash
and cash equivalents was $728,737 and $2,146,547, 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 13).
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 3 - INVESTMENT IN LIMITED PARTNERSHIPS
At December 31, 1999 and 1998, the Company was a general partner in eight and
nine limited partnerships, respectively, 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 7%. 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, 1999 and 1998, syndication costs incurred totaled
$114,503 and $179,521, respectively, and unrecognized gains on the sale of
property totaled $315,186 and $744,253, respectively. During the year ended
December 31, 1999, the Havre de Grace, Maryland limited partnership sold their
motel. The Company's share of the gain on sale of the motel was $181,899. The
following is a schedule of the Company's investments in limited partnerships at
December 31, 1999 and 1998:
Location 1999 1998
-------- ---- ----
Aberdeen, Maryland $ (41,382) $ (40,873)
Bristol, Virginia (63,563) (60,841)
Culpeper, Virginia (7,228) (7,532)
Farmville, Virginia (19,336) (19,441)
Fredericksburg/
Waynesboro, Virginia (12,976) (12,065)
Havre de Grace, Maryland -- 263,101
Richmond Airport/
Harrisonburg, Virginia (12,019) (12,009)
Richmond Broad St., Virginia/
Martinsburg, West Virginia 108,375 159,664
Richmond Midlothian, Virginia 46,960 68,132
--------- ---------
$ (1,169) $ 338,136
========= =========
The amounts are presented in the balance sheet as follows:
1999 1998
--------- ---------
Investment in Limited Partnerships $ 155,335 $ 490,897
Distributions and Net Losses Allocated
In Excess of Investment in Limited
Partnerships (156,504) (152,761)
--------- ---------
Total $ (1,169) $ 338,136
========= =========
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The condensed combined financial information on the above investments is as
follows:
December 31, December 31,
1999 1998
---- ----
Assets $12,968,965 $14,677,510
=========== ===========
Liabilities $11,144,455 $11,988,219
Partners' equity 1,824,510 2,689,291
----------- -----------
$12,968,965 $14,677,510
=========== ===========
Net income before depreciation
and amortization $ 995,818 $ 1,218,663
=========== ===========
Net income $ 302,416 $ 481,197
=========== ===========
NOTE 4 - MOTEL PROPERTIES AND EQUIPMENT
The Company's property and equipment consisted primarily of 28 operating motels
as of December 31, 1999 and 1998, and three motels under construction at
December 31, 1999.
1999 1998
---- ----
Land $ 6,417,499 $ 6,183,887
Motel buildings and improvements 25,039,899 24,184,699
Furniture, fixtures and equipment 6,909,323 6,713,237
----------- -----------
38,366,721 37,081,823
Less accumulated depreciation 13,012,892 12,530,142
----------- -----------
25,353,829 24,551,681
Construction in progress 2,538,042 --
----------- -----------
$27,891,871 $24,551,681
=========== ===========
NOTE 5 - 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.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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 $344,150 and $345,226
during the years ended December 31, 1999 and 1998.
NOTE 6 - 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 7.75% to 8.68% are generally payable in monthly
installments and due at varying dates through 2019. The weighted average
interest rate of the notes was 8.51% and 8.57% as of December 31, 1999 and 1998,
respectively.
Approximate principal maturities during the next five years are as follows:
2000 $ 852,100
2001 1,353,400
2002 972,200
2003 1,058,600
2004 1,134,900
At December 31, 1999, the Company had three motels under construction. The
Company had construction and permanent financing commitments of $4,982,500 of
which only $1,162,179 had been drawn against the construction loan as of
December 31, 1999. Interest expense capitalized totaled $35,671 and $34,583 in
1999 and 1998, respectively.
NOTE 7 - 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, 1999 and
1998, there were no payments required under this provision as the motel's sales
did not exceed $1,200,000.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Future minimum payments for the initial term as of December 31, 1999 under the
lease are as follows:
2000 $ 42,592
2001 42,592
2002 43,657
2003 46,851
2004 46,851
Thereafter 3,075,610
-----------
$ 3,298,153
===========
Lease expense was $42,592 for the years ended December 31, 1999 and 1998,
respectively.
NOTE 8 - RELATED PARTY TRANSACTIONS AND OTHER AGREEMENTS
The Company conducts business with a major shareholder and certain limited
partnerships (see Note 3).
The Company leases its office space from a related party under the terms of an
operating lease agreement with an expiration date of June 30, 2004. In addition
to base rent, the Company must pay a pro rata share of the facility operating
expenses. Future minimum rental payments for the office lease are as follows:
2000 $ 37,368
2001 37,368
2002 37,368
2003 37,368
2004 18,684
The following is a summary of transactions with related parties:
1999 1998
---- ----
Revenues:
Management fees $301,171 $328,328
Accounting fees 88,750 86,400
Interest income 52,200 71,740
Costs and expenses:
Travel and meeting expenses 5,616 34,508
Office rent 48,404 47,345
NOTE 9 - 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% or 5% of
total room rental revenues and 1% or 2% of room rentals as a national
advertising and reservation fee. Certain subsidiaries are obligated under their
franchise agreement to contribute an additional 1% of room revenues towards the
Franchisor's national media campaigns.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following is a summary of fees paid under the franchise agreements:
1999 1998
---- ----
Royalty fees $607,158 $611,762
National advertising and reservation fees 262,972 267,967
National media fees 15,064 11,544
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 10 - 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.
NOTE 11 - INCOME TAXES
The provision for income taxes consists of the following components:
1999 1998
---- ----
Current taxes $ 1,019,000 $ 1,256,000
Deferred income taxes 21,000 (11,000)
----------- -----------
$ 1,040,000 $ 1,245,000
=========== ===========
A deferred tax liability has been recognized for the taxable temporary
differences related to different depreciation methods for financial and tax
purposes. The deferred tax liability as of December 31, 1999 and 1998 was
$51,000 and $30,000, respectively.
NOTE 12 - STOCK OPTION AGREEMENTS
In 1999, the Company adopted an Incentive Stock Option Plan under which certain
key employees were granted the option to purchase up to 150,000 shares of stock
at an exercise price of $2.00 per share. The number of stock options that vest
to employees are 55,000, 55,000 and 40,000 in 1999, 2000 and 2001, respectively.
No option can be exercised more than 10 years after the date the option is
granted. The fair value of each option grant is estimated on the date of grant
with the following assumptions: dividend payments of $0.25 per year; risk free
interest rate of 6.54% and expected life of six years. The fair value of the
options granted during 1999 was $0. During 1999, 12,500 shares were exercised at
a price of $2.00 per share. As of December 31, 1999, the number of options
outstanding was 137,500 and the number of options exercisable was 42,500.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 13 - COMMITMENTS AND CONTINGENCIES
The Company, as general partner, is contingently liable for liabilities of the
limited partnerships as listed in Note 3. The balance of the mortgage notes
totaled approximately $3,591,000 at December 31, 1999. 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 3 and 8). 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, 1999 and 1998 balances relating to
these entities totaled approximately $747,200 and $714,200, respectively. These
balances are not included in the consolidated balance sheet.
The Company and subsidiaries are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate resolution of such claims and lawsuits will not
have a material adverse effect on the consolidated financial position of the
Company.
NOTE 14 - 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.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Management's estimates of unrealized appreciation at December 31, 1999 and 1998,
are summarized as follows:
1999 1998
---- ----
Motel properties $48,961,000 $49,301,000
Sub-franchise rights 2,250,000 1,605,000
----------- -----------
51,211,000 50,906,000
Less:
Historical cost basis 29,216,613 25,970,578
Sales commissions on realization
of estimated current values 1,536,300 1,527,200
----------- -----------
20,458,087 23,408,222
Income taxes on realization of
estimated current values 6,956,000 7,959,000
----------- -----------
Unrealized appreciation $13,502,087 $15,449,222
=========== ===========
Assumptions for current value estimates:
Assets and liabilities included in current value estimation:
------------------------------------------------------------
The current value computation of assets is limited to operating motels (28
at December 31, 1999 and 1998), three motels under construction at December
31, 1999 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 open longer than one
year was determined by capitalizing adjusted net income at 11.5% in 1999
and 1998. Adjusted net income consists of net income before debt service,
amortization and depreciation. The Company's motels under construction were
valued at historical cost at December 31, 1999. For any motel which was
open less than one year (one at December 31, 1999 and 1998), the Company
used the appraised value as its current value.
Sub-franchise rights:
---------------------
The Company receives from Super 8 Motels, Inc. (the franchisor) 25% 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.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Income taxes and sales commissions on realization of estimated 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.
# # # #
F-27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 50,000
<SECURITIES> 1,219,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,285,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 1,853,000
<CURRENT-LIABILITIES> 53,000
<BONDS> 0
0
0
<COMMON> 3,000
<OTHER-SE> 1,797,000
<TOTAL-LIABILITY-AND-EQUITY> 1,853,000
<SALES> 0
<TOTAL-REVENUES> 258,000
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 61,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 197,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 197,000
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
