SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB.
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: Commission File No.:
September 30, 1997 0-2661
HARRELL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-1946181
(State of Incorporation) (I.R.S. Employer Id. No.)
17218 Preston Road, Suite 3200, Dallas, TX 75252
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 250-6370
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock, Par Value $.01
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d)of the Securities Exchange Act of
1934 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 the past 90 days.
(1) YES X NO
(2) YES X NO
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-KSB or any amendment to this Form 10-KSB.
[ X]
Issuer's revenues for its most recent fiscal year $539,842
The aggregate market value of the registrant's Class A Common Stock held
by non-affiliates of the registrant, computed by reference to the average bid
and asked prices of such stock as of July 1, 1991, the last available
quotation date: Approximately $95,099.
The number of shares of the registrant's Class A, $.01 par value Common
Stock outstanding as of September 30,1997 was 976,580. The number of shares
of the registrant's $1 par value preferred stock outstanding as of September
30, 1997 was 243,331.
PART I
Item I. Description of Business
Since September 30, 1990, the Company's intention has been to engage in
the acquisition, development and management of real estate properties directly
and through affiliates, including joint ventures and partnerships (in which
its interests would be that of a general partner having substantial
involvement or participation in management). The
Company focused its initial real estate activities upon purchase, development
and management of condominiums, apartments and other residential properties
located in the Southwestern and Southeastern United States but did not rule
out the possibility of pursuing similar opportunities with respect to office
buildings, shopping centers and other commercial real estate projects
throughout the United States and abroad.
These proposed activities of the Company were intended to be structured
in such a way as to preclude the Company from being deemed to be an investment
company for purposes of the Investment Company Act of 1940.
In August 1992, with the Company's acquisition of Hotel Management Group,
Inc., the Company expanded its focus to include the acquisition, development,
and management of hotels, directly and through affiliates.
HISTORY
HARRELL INTERNATIONAL, INC. (the "Company") is a Delaware corporation
which was originally incorporated in 1959 in Massachusetts under the name of
Formula 409, Inc. In 1967, the Company's name was changed to The Harrell
Corporation and in 1968 to Harrell International, Inc. The Company changed
its state of incorporation from Massachusetts to Delaware in March, 1987. The
Company originally manufactured and sold a multi-purpose household spray
cleaner under the registered trademark "Formula 409." In 1970, the Company
sold the rights to "Formula 409" to Clorox Corporation. During the period
1970 to 1983 the Company was primarily engaged in the business of acquiring
and operating food and non-food brokers which represented the products of
various unrelated manufacturers to either the U. S. Domestic Civilian Market
or to the U. S. Military Resale System. In 1983, the Company completed the
divestiture of its consumer products brokerage businesses and entered a phase
during which its revenues were derived primarily from the collection of
receivables acquired in connection with such divestitures. Such receivables
included a note from Sarvis, Incorporated, in the amount of $4.2 million
dollars, and to whom the ompany sold its operations and assets.
During fiscal 1988, the Company continued to attempt to develop a business as
an international marketing agent for foreign-produced goods in the United
States and for U.S. products abroad. However, because of disappointing
results and the high costs of continuing to operate the Company, the Board of
Directors decided to explore the liquidation or reorganization of the Company.
During the fall of 1988, Wilson Harrell, then President of the Company, began
the search for a possible merger candidate, and to negotiate the sale of notes
receivable from the divestiture of its consumer product brokerage business.
The Company and Sarvis, Incorporated entered into a Note Purchase agreement
dated as of August 15, 1989. The sale of the Sarvis Note was consummated on
October 11, 1989.
Following the sale of the Sarvis Note, the Company continued searching
for a possible merger candidate. In early March, 1990, Wilson Harrell renewed
discussions with Geoffrey G. Dart ("Dart"), of Clover, Inc., an Australian
businessman with whom the Company had negotiated to the point of a verbal
understanding in September, 1988.
On June 12, 1990, the Company and Clover, Inc. ("Clover") entered into a
Stock Purchase Agreement.
Pursuant to the Stock Purchase Agreement, as amended in August 1990, in
exchange for a purchase price of $500,000, Clover was issued certain shares of
Class A Common Stock and warrants to purchase shares of a new Class B stock.
In addition, Dart was elected president and CEO and added as a new director.
Clover paid $65,000 at closing with the remainder due within approximately six
months, in two installments of $185,000 and $250,000 respectively.
Clover failed to make either additional payment and on December 23, 1991,
the Company and Clover entered into a Restructuring Agreement on the following
terms:
1. Clover returned to the Company for cancellation all of the Clover
Class B Stock, all of the warrants, and all but 50,000 shares of the Company.
2. Clover retained 50,000 shares of the Clover Class A Stock in
settlement of all issues relating to the default by Clover under the Stock
Purchase Agreement, as amended, and the agreements executed pursuant
thereto, and in full satisfaction of all services performed on behalf of the
Company by Dart through December 23, 1991.
3. Dart was to remain president and chief executive officer of the
Company but no new management or employment agreement was entered into at that
time.
In light of Clover's failure to make the additional installments and the
Company's need for capital in order to pursue the business plan discussed
above, the Company determined that it should seek a new capital partner. On
December 23, 1991, the Company's Board of Directors authorized Wilson Harrell
and Geoffrey Dart to actively seek such a partner.
Xenex Transaction
On October 24, 1991, the Company borrowed $50,000 from Xenex International,
Inc., a Florida corporation, with interest at the rate of 10% per annum with
interest and principal due on January 31, 1992.
The maturity date of the loan was extended at January 31, 1992, in
connection with the agreement of the Company and Xenex to enter into Stock
Purchase Agreement giving Xenex an option to acquire up to 80% of the
Company's Class A Common Stock for $1,000,000. Pursuant to the Agreement the
parties agreed that the forgiveness of the $50,000 loan from Xenex would be
treated as a deposit toward Xenex's initial $150,000 investment in the Company
which was due upon closing the transactions contemplated in the Stock Purchase
Agreement.
The Stock Purchase Agreement was executed May 28, 1992 (the
"XenexAgreement"). Its terms provided as follows:
1. Xenex's initial investment of $150,000 entitled Xenex to (I) 291,228
shares, or approximately 37.5% of the Company's then outstanding stock, and
(ii) an option to acquire up to an additional 1,650,292 shares of the
Company's Class A Common Stock for an aggregate purchase price of $850,000
(the "Warrant'); and
2. The Warrant (I) was exercisable in whole or in part at any time
prior to the first anniversary of the closing date, and (ii) was subject to
adjustment to prevent dilution of Xenex's right to acquire 80% control of the
Company as a result of the exercise of certain other options to acquire the
Company's Common Stock.
As part of the transaction with Xenex, Wilson L. Harrell, one of the
Company's directors, agreed to deposit his shares in a one-year voting trust
for the benefit of Xenex. Upon consummation of the transaction with Xenex,
the number of directors of the Company was increased by two and Nasir
Ashemimry and Joseph Vincent, both of whom were officers, directors and
shareholders of Xenex, were elected to the Board.
On February 16, 1993, the Company entered into a modification of the
Xenex Agreement:
(I) The term of the Warrant was extended to June 30, 1995.
(II) Xenex agreed to loan $150,000 to the Company such loan to bear
interest at the rate of 2% above Prime, with the Principal and all interest
due on June 30, 1995. The Note was secured by the Company's interest
in the real property owned by partnerships in which the Company was a partner
and by the Company and by some of Class A Common Stock of the Company. The
loan together with accrued interest was to be converted to stock at December
15, 1994. The Warrant expired on June 30, 1995, without Xenex purchasing
additional shares in the Company.
On December 15, 1994, an agreement was reached between the Company and
Xenex, Inc. (the "Debt Agreement"), to convert the Xenex $216,932.80 loan to
the Company, plus accumulated interest, into 472,396 shares of the Company's
Common Stock, based on the option price of $.5151 per share as outlined in the
Stock Purchase Agreement of May 28, 1992, as modified on February 16, 1993.
The parties agreed that the transaction would close only after all regulatory
delinquencies or deficiencies had been cured.
On December 15, 1994, Agreement was reached between Businesship International,
Inc.("BI") and its wholly owned subsidiary Xenex, Inc. to merge Xenex, Inc.
into Businesship International, Inc. The effect was to transfer 291,228
shares of the Company's Common Stock from Xenex, Inc. to BI.
Effective as of September 1, 1996 the Company and BI entered into a
Preferred Stock Purchase and Release of Debt Agreement (the Modification
Agreement") that modified and replaced the Debt Agreement. Under the terms of
the Modification Agreement, the parties agreed that the Company would issue
243,331 shares of $1.00 , a new class of par value preferred stock (the
"Preferred Stock") in exchange for a release of the Company's obligation to BI
on the Xenex Loan. Under the Modification Agreement the Preferred Stock is
nonconvertible, nonvoting, noncumulative dividend, with dividends of 10% of
par value. The Company has the right, but not the obligation, to redeem the
Preferred Shares at any time at par value. The Preferred Shares are not
registered under federal securities laws or the laws of any state.
On December 31, 1996, the Articles of Incorporation of the Company were
amended to authorize 1,000,000 shares of Preferred Stock and to eliminate the
Class B Common Stock. On December 31, 1996, the closing of the Modification
Agreement occurred and the 243,331 shares of Preferred Stock were issued to
BI.
OPERATIONS
In furtherance of the Company's intention at September 30, 1990, to
acquire, develop and manage real estate projects, the Company has, since
December, 1990, entered into the three separate transactions involving
residential real estate, the Riviera Project, the Villa Martinique Project and
the Athena Garden Project. All such transactions included
as a component the Company's entering into a joint venture agreement with
another corporation and the acquisition by such joint venture of an interest
in an existing apartment complex. After any necessary renovations, the
apartment complexes were, and in the case of Villa Martinique and Athena
Gardens, continue to be, operated by the joint ventures.
Riviera Project
The Company entered into a joint venture agreement dated December 7,
1990, with Riviera Investors Corporation, a Texas Corporation ("RIC"), forming
the "Riviera Joint Venture." RIC contributed $232,000 to the venture's
capital, and the Company assigned to the venture its rights under that
certain Contract of Sale dated October 20, 1990, by and between Clover, Inc.
and the Estate of James Devereaux Stahlman.
The venture exercised its rights under the Contract of Sale on December
7, 1990, and purchased a 37 unit apartment complex known as Riviera Apartments
(the "Riviera Project") located in Dallas, Texas, for a purchase price of
$222,000.
Pursuant to the Riviera Joint Venture Agreement, the venture's
distributable cash is to be distributed as follows:
(1) The first $32,480 to RIC;
(2) The second $32,480 to the Company;
(3) The balance, 50% to RIC and 50% to the Company.
In February, 1991, RIC and the Company agreed to restructure the voting
and profits interests of the Riviera Joint Venture whereby the Company's
voting interest and its net profits interest in excess of $64,960 were both
decreased from 50% to 40% in exchange for $11,600 from RIC.
While RIC and the Company share equally the venture's management, the
Company supervised its day-to-day operations. The Riviera Project was
operated by Hotel Management Group, a wholly owned subsidiary, until the
property was sold on August 5, 1996.
On August 5, 1996, the property was sold to a Mr. Dallas Smith, an
unrelated party, for the sum of $260,000. The net proceeds due to the original
investors in RIC was approximately the same as their original investment, and
therefore the sale resulted in no proceeds to the Company. The partners
elected to sell the property due to its lack of past performance or potential
future performance as an investment.
Villa Martinique Project
The Company entered into a joint venture agreement dated July 15, 1991,
with Villa Martinique Investors Corporation, a Texas corporation ("VMIC"),
forming the "Villa Martinique Apartments Joint Venture." VMIC
contributed $275,000 to the venture's capital and the Company contributed
80.714% of its rights in an agreement dated June 17, 1991, to purchase a 146
unit apartment complex (the "VM Project") known as the Villa Martinique
Apartments located in Irving, Texas, from Home Savings of America, F.A. ("Home
Savings"). The Company's remaining 19.286%
interest in the contract was assigned to Wilson L. Harrell in consideration
for his agreement to be a co-maker with VMIC of the purchase money promissory
note. On August 13, 1991, the VM Project was acquired by the Villa Martinique
Joint Venture and Wilson L. Harrell from Home Savings for a purchase price of
$1,750,000.
Pursuant to the joint venture agreement, 87.6% and 12.4% of the joint
venture's distributable cash, less reasonable reserves, was distributable to
VMIC and the Company, respectively. The Company's 12.4% interest in the
venture equated to a 10% interest in the VM Project. Although VMIC and the
Company shared equally the right to
manage the venture, the Company supervised the venture's day-to-day
operations, through Hotel Management Group.
On July 13, 1994, the Company, along with the other partners of Villa
Martinique Apartments Joint Venture entered into a Compromise, Settlement and
Release Agreement (the "Settlement") with Home Savings, settling claims by the
venture against Home Savings as seller of the Villa Martinique Project for
roof problems, which caused the complex to experience leaking and ceiling
failures rendering 15 units uninhabitable. The Settlement called for a new
roof being installed at the Villa Martinique Project, as well as an allowance
for other minor repairs.
Additionally, the partners negotiated a reduction in the interest rate on
the Mortgage and an increase of $100,000 to the Mortgage, which amount has
been used to make other improvements to the property.
In order to enhance the Company's liquidity, on November 30, 1996, the
Company sold its 10% interest in the Villa Martinique Apartments Joint Venture
to the Villa Martinique Investors Corporation, the Company's joint venture
partner in the apartment project, for the sum of $38,889, payable as to
$29,020 in cash at closing with a note in the
amount of $9,869 bearing interest at the prime rate, with principal and
interest all due in 2 years. The VM Project continues to be operated by
Hotel Management Group.
Athena Gardens Project
The Company entered into a joint venture agreement dated November 26,
1991, with Athena Gardens Investors Corporation, a Texas corporation ("AGIC"),
forming the "Athena Gardens Joint Venture." AGIC contributed $235,500 to the
venture's capital and the Company contributed its rights in an agreement dated
October 9, 1991, to purchase a 72-unit apartment complex (the "AG Project")
known as the Athena Gardens Apartments located in Athens, Texas, from
Camarilla Development, Inc. for $600,000. Financing in the amount of $420,000
was secured from First State Bank of
Athens, Texas, in order to complete the acquisition.
Pursuant to the joint venture agreement between the Company and AGIC, 80%
and 20% of the venture's distributable cash is distributed to AGIC and the
Company, respectively. Although AGIC and the Company share equally the right
to manage the venture, the Company supervises the venture's day-to-day
operations, through Hotel Management Group.
In order to enhance the Company's liquidity, on August 20, 1996, the
Company sold its 20% Interest in Athena Garden Apartments Joint Venture, to
AGIC, the Company's joint venture partner in the apartment project, for the
sum of $100,000. The AG Project continues to be operated by Hotel Management
Group, Inc.
Hotel Management Group Transaction
On August 18, 1992, the Company entered into an Agreement with Hotel
Management Group, Inc., a Texas corporation ("HMG"), wherein the Company
acquired one hundred percent (100%) of HMG's issued and outstanding shares in
exchange for 200,000 shares of the Company's Class A Common Stock.
Additionally, as a condition of closing the transaction:
(i) the number of directors of the Company was increased by one,
and Paul Barham was elected to fill the vacancy;
(ii) HMG's Board of Directors was increased from two to five members
and Nasir M. Ashemimry, Wilson L. Harrell and B. Joseph Vincent were elected
thereto;
(iii) as an inducement to become officers and employees of the Company, the
Company paid each of Messrs. Marks and Barham a $12,500 signing bonus on
account of $25,000 each, the balance to be paid within 180 days, and entered
into three-year employment agreements with them providing for annual salaries
of $75,000, automobile allowances, a health care package and plans for both
incentive compensation and stock options; and
(iv) HMG was granted a right to rescind the transaction in the event
the Company did not receive at least $1,000,000 in working capital within the
twelve (12) month period following the closing.
On September 1, 1993, the Company completed the acquisition of Hotel
Management Group, Inc.
Apartment Management
Effective November 2, 1992, Hotel Management Group assumed the
management of the Athena Gardens, Riviera and Villa Martinique apartments at
that time, and continues to operate Athena Gardens and Villa Martinique
Apartments at September 30, 1997.
Director Resignation
On August 9, 1996, Mr. Nasir Ashemimry resigned as Chairman and Director
of the Company, to pursue other interests.
Hotel Management
Effective January 1, 1994, Hotel Management Group, Inc. formed a wholly
owned subsidiary, Hotel Management Group - California, Inc., to hold the
management contract for the operations of the Biltmore Hotel and Suites in
Santa Clara, California. Additionally, as part of a restructuring undertaken
by the Owners of that hotel, the food and beverage operations at the property
were leased to HMG California Partners, L.P. a California Limited Partnership,
of which Hotel Management Group - California, Inc. was the General Partner,
and the limited partners were members of the Owner's family. Hotel Management
Group - California, Inc ceased to be the General Partner of HMG California
Partners L.P. on June 22, 1995 as part of further restructuring by the hotel's
owner.
HMG - California entered into a management contract of the Rancho Santa
Barbara Marriott in May 1995.
The management contract on the Days Inn Pass Christian Mississippi was
terminated in July 1995, as the property was to be purchased and demolished by
the State of Mississippi for the expansion of the highway system. As
compensation for the early termination of the management agreement, HMG
Mississippi received a fee of $15,000. Additionally, for the period July
1995 through July 1996, HMG Mississippi performed marketing consulting
services for the property.
Memphis Airport Sheraton
On October 17, 1996 the Company purchased a minority limited partnership
interest in the Sheraton Four Points Hotel, located near the Memphis Airport
in Memphis, Tennessee. At the same closing a subsidiary of the Company
contracted with the new ownership to manage the hotel.
In June of 1996 an unaffiliated company, LTS Group, Inc. entered into a
contract to purchase the hotel for a purchase price of $9 million. Hotel
Management Group, Inc. entered into an agreement with LTS Group, Inc. to
study feasibility and prepare recommendations and budgets. Hotel Management
Group, Inc. was paid at the closing $25,000 for these efforts. Costs to
renovate the hotel are budgeted to be approximately $2.5 million, which
together with closing costs and working capital for the hotel estimated at
$1.2 million comprise the $12.65 million transaction. Of the $12.65 million,
Lehman Brothers Holdings, Inc. loaned approximately $11.65 million and
contributed equity of $700,000. LTS Group and others contributed equity of
$200,000 and the Company contributed $100,000. The hotel is owned through
limited partnerships with the Company owning a limited partnership interest
equating to a 7% interest in the hotel, LTS Group, Inc., its affiliates and
others 23%, and Lehman Brothers and its affiliates 70%. LTS Group, Inc., the
Company and others comprise Texas Memphis Investors Limited, a Texas limited
partnership. The Lender required as a condition of the loan to the
partnership, that Paul L. Barham ("Barham") an officer and director of the
Company, and Norman L. Marks ("Marks"), also an officer and director of the
Company, individually guarantee certain recourse provisions of the loan,
guarantee certain environmental warranties regarding the hotel, and
guarantee completion of the Renovations (collectively "Guaranties"). Texas
Memphis Investors Limited offered Barham and Marks, or their assigns, in
exchange for their Guaranties, each a limited partnership interest in Texas
Memphis Investors Limited, which constitutes an interest in the hotel of one
percent (1%). The $11.65 million loan in connection with the purchase is for a
three year term secured by a first lien mortgage on the hotel, and contains
provisions for required payment to the loan of all net operating income of the
hotel (after expenses, certain reserves and management fees), with a final
additional payment of approximately $2 million.
Also in connection with the transaction, a newly formed subsidiary of the
Company, HMG-Tennessee, entered into a management agreement to manage the
hotel and supervise the renovations. HMG- Tennessee and LTS Group, Inc. have
agreed to share certain fees in connection with the management agreement.
HMG- Tennessee receives a minimum net monthly management fee of $5,000 per
month changing to be a net 8% of the net operating income of the hotel before
debt service, based on performance criteria of the profitability of the hotel.
HMG-Tennessee has managed the hotel for nearly one year, completing a $2.5
million renovation.
Tulsa Hotel Project
On June 4, 1997, the Company acquired a limited partnership interest in
the Ramada Inn, located on I-44 in Tulsa, Oklahoma. At the same closing a
subsidiary of the Company contracted with the new ownership to manage the
hotel. In March of 1997, an unaffiliated company, LTS Group, Inc. entered into
a contract to purchase the hotel for a purchase price of $4,575,000. Hotel
Management Group, Inc. entered into an agreement with LTS Group, Inc. to study
feasibility and prepare recommendations and budgets. Hotel Management Group,
Inc. was not paid a fee for its work, but was instead provided a 2 1/2%
Limited Partnership interest in the project. Costs to renovate the hotel
are budgeted to be approximately $4.5 million which together with closing
costs and working capital for the hotel estimated at $1 million comprise the
$10 million transaction. Of the $10 million, Lehman Brothers Holdings, Inc.
loaned approximately $9 million and contributed equity of $700,000. LTS Group
and others contributed equity of $300,000. The hotel is owned through limited
partnerships with the Company owning a limited partnership interest equating
to 2 1/2% interest in the hotel, LTS Group, Inc., its affiliates and others 27
%, and Lehman Brothers and its affiliates 70%. LTS Group, Inc. the Company
and others comprise Texas Tulsa Investors Limited, a Texas limited
partnership. The Lender required as a condition of the loan to the
partnership that Paul L. Barham ("Barham") an officer and director of the
Company, and Norman L. Marks ("Marks"), also an officer and director
of the Company, individually guarantee certain recourse provisions of the
loan, guarantee certain environmental warranties regarding the hotel, and
guarantee completion of the Renovations (collectively "Guaranties"). Texas
Tulsa Investors Limited offered Barham and Marks, or their assigns, in
exchange for their Guaranties, each a limited partnership interest in Texas
Tulsa Investors Limited, which constitutes and interest in the hotel of one
percent (1%). The $9 million loan in connection with the purchase is for a
three year term secured by a first lien mortgage on the hotel, and contains
provisions for required payment to the loan of all net operating income of the
hotel (after expenses, certain reserves and management fees), with a final
additional payment of approximately $1.6 million. Also in connection with the
transaction, a newly formed subsidiary of the Company, HMG(OK) entered into
a management agreement to manage the hotel and supervise the renovations.
HMG(OK) and LTS Group, Inc. have agreed to share certain fees in connection
with the management agreement. HMG(OK) will receive a net monthly management
fee of $5,000 per month for the first 8 months, with fees thereafter changing
to be a net 8% of the net operating income of the hotel before debt service.
In recent years the hotel has had no net operating income, although the
Company believes that if the proposed renovations and management of the hotel
are successful, net income may be able to be increased substantially. The
renovations of approximately $4.6 million have been started. Holiday Inn
Worldwide has accepted the application of the hotel to become a Holiday Inn -
Select upon the completion of the renovation.
McKinney Texas Development
On November 19, 1996, Hotel Management Group, Inc., as Agent for McKinney
Hotel Development Group, Ltd., a Texas Limited Partnership in organization,
entered into an agreement to purchase approximately five acres of land in
McKinney, Texas, on which the Partnership intends to build two small hotels
and a conference center. The Company will be a limited partner in the venture
and Hotel Management Group will manage the hotels and conference centers if
the project is completed.
Number of Employees
At September 30, 1997, the Company and its subsidiaries had 409 full time
employees and 105 part time employees.
Item 2. Description of Property
The Company maintains its administrative and executive offices in a
commercial office building located at 17218 Preston Road, Suite 3200, Dallas,
TX 75252. However, the Company has entered into a lease for office space
located at 211 East Louisiana Street, McKinney, Texas, 75069, effective
January 1,1998. The lease for this space was entered into by Hotel Management
Group, Inc. In the opinion of management, the premises are suitable and
adequate for the present requirements of the Company and ample comparable
space is available on comparable terms in the market.
Item 3. Legal Proceedings
There were no material legal proceedings, either on-going, instituted by
or against, or otherwise involving the Registrant during the period ended
September 30, 1997.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
year ended September 30, 1997.
PART II
Item 5. Market for Common Equity and Related Security Holder Matters
(a) The following table shows the range of closing bid prices for the
Company's Common Stock in the over-the-counter market for the fiscal quarters
indicated, as reported by the National Quotation Bureau. The quotations
represent limited or sporadic trading and, therefore, do not constitute an
"established public trading market". The quotations represent prices in the
over-the-counter market between dealers in securities, do not include retail
markup, markdown or commission and do not represent actual transactions.
<TABLE>
<CAPTION>
Fiscal 1996 Fiscal 1997
Bid Prices Bid Prices
Fiscal Period High Low High Low
<S> <C> <C>
First Quarter NOT QUOTED NOT QUOTED
Second Quarter NOT QUOTED NOT QUOTED
Third Quarter NOT QUOTED NOT QUOTED
Fourth Quarter NOT QUOTED NOT QUOTED
</TABLE>
(b) As of September 30, 1997, there were 694 record holders of the
Company's $.01 par value Class A Common Stock.
(c) There have been no cash dividends paid on the Company's
Common Stocks in fiscal years 1996, 1997 or any subsequent year. On October
31, 1997, the Company paid the 10% dividend on the 243,331 shares of Preferred
Stock. The Company has no present plans to pay further dividends on the
Company's Common Stock.
Item 6. Management's Discussion and Analysis or Plan of Operation
RESULTS OF OPERATIONS
A. Revenues
Revenues for the periods ended September 30, 1996 and 1997 were
primarily produced from the Company's interest in Hotel Management Group. Sale
of the Company's interest in Athena Gardens and Villa Martinique Apartments
produced gains as other income.
The Company anticipates income from Hotel Management Group to increase as
the subsidiary secures more management and consulting assignments, and that
the Company will be able to meet its cash requirements from operations.
B. Employee Compensation
Employee compensation expense includes salaries for Messrs Barham and
Marks as well as accounting staff of HMG.
C. General and Administrative Expenses
In 1995 and 1996 the Company incurred increased legal and professional
fees associated with the Company's goal to be compliant with SEC and other
reporting obligations.
Item 7. Financial Statements
(1) The following financial statements are filed as a part of this
report:
See the Index to Financial Statements on page F-1 immediately
following page 23 of this report. All such financial statements, schedules and
supplementary data are incorporated herein by this reference.
(2) The following financial statement schedules are filed as part of
this report:
Not applicable.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
The Company engaged Arthur Andersen, LLP, as its independent accountant
on November 1, 1994, to succeed Price Waterhouse, which had audited the
Company's financial statements for the fiscal years ended September 30, 1991
and 1992. There were no disagreements regarding matters of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure. Thus, pursuant to Item 304 of Regulation 8-KSB, and Rule 12b-2
under the Exchange Act, no further disclosure regarding the Company's change
in accountants is necessary or provided herein.
The Company engaged Jackson & Rhodes, P.C. as its independent accountant
on May 31, 1996 to succeed Arthur Andersen which had audited the Company's
financial statements for the fiscal years ended September 30, 1993 and 1994.
There were no disagreements regarding matters of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
Thus, pursuant to Item 304 of Regulation 8-KSB, and Rule 12b-2 under the
Exchange Act, no further disclosure regarding the Company's change in
accountants is necessary or provided herein.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons:
Compliance with Section 16 (a) of the Exchange Act
The following table provides certain information concerning each of the
directors of Harrell International, Inc. (the "Company") as of September 30,
1997.
<TABLE>
<CAPTION>
Name Principal Occupation Consecutive Age
for the Past 5 Years Service Since
<S> <C> <C> <C>
Paul L. Barham CFO, Hotel Management Group 1992 44
since December, 1989; V. P.
Finance, Savoy Resorts,
March,1986 to December,1989.
Current Position: Chief
Financial Officer of
Harrell International.
Norman L. Marks President, Hotel Management 1995 56
Group since December , 1989
Current Position: Chief
Operating Officer, of
Harrell International, Inc.
</TABLE>
The following table provides certain information concerning each of the
executive officers of the Company as of September 30, 1997.
<TABLE>
<CAPTION>
Name Age All Positions and Terms of
Office with the Company and
Five Year Employment History
<S> <C> <C>
Norman L. Marks 56 Executive Vice President and Chief
Operating Officer from August 19,
1992, Member of Board of Directors
from Sept. 20, 1995. President of
Hotel Management Group, Inc.
since December 1989.
Paul L. Barham 44 Vice President and Chief Financial
Officer of Company from August 19,
1992, Member of Board of Directors
of Company from August 19, 1992;
Secretary to Board of Directors of
Company from August 19, 1992; CFO,
Hotel Management Group since
December , 1989.
</TABLE>
The Company has not made inquiry of its Directors, Officers and 10 % or more
security holders, and otherwise does not have information to determine the
level of compliance with the reporting obligation under Section 16 (a) of the
Exchange Act. <PAGE>
Item 10. Executive Compensation
The following table shows the aggregate cash compensation for services in all
capacities paid or accrued by the Company and its subsidiaries during the
fiscal year ended September 30, 1997, to (i) each executive officer whose
aggregate cash compensation exceeded $100,000 during such year and (ii) all
executive officers of the Company as a group.
<TABLE>
<CAPTION>
Name of Individual
or Number of
Persons in Group Capacity in which served Compensation (1)
<S> <C> <C>
Norman L. Marks COO $103,700
Paul L. Barham CFO $103,700
(1) This does not include medical expense reimbursement, club dues, or the
value of automobiles (and their maintenance, repair and insurance) furnished
to all of the executive officers of the Company, which in the aggregate for
all officers amounted to $12,000 during fiscal year 1997.
At the present time the Company has, and at all times during the past three
fiscal years, the Company had no pension, retirement, annuity, deferred
compensation, incentive or stock purchase, thrift or profit-sharing plan.
Directors receive no fees for serving in such capacity.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth as of September 30, 1997, (I) the name of each
current director of the Company and each person or entity known to the Company
to be the beneficial owner of more than 5% of the Company's Class A Common
Stock, (ii) the number of shares of the Company's Class A Common Stock
beneficially owned by each such current director and 5% beneficial owner and
all officers and directors of the Company as a group, and (iii) the percent of
outstanding Class A Common Stock so owned by each such director, 5% beneficial
owner and management group:
</TABLE>
<TABLE>
<CAPTION>
Name and Address Number of shares Approximate
of Beneficial Owner of Class A Common Percent of Class
Stock Beneficially
Owned as of
September 30, 1997 (1)
DIRECTORS:
<S> <C> <C>
Paul L. Barham (2) 0 0
17218 Preston Road
Suite 3200
Dallas, TX 75252
Norman L. Marks (3) 0 0
17218 Preston Road
Suite 3200
Dallas, TX 75252
</TABLE>
5% BENEFICIAL OWNERS:
<TABLE>
<S> <C> <C>
Businesship International, Inc. 291,288 29.82%
One Alhambra Plaza
Suite 1400
Coral Gables, FL 33134
Barham Family Interest, Inc. 100,000 10.24%
17218 Preston Road 63,639 options (4)
Suite 3200
Dallas, TX 75252
Marks & Associates, Inc. 100,000 10.24%
17218 Preston Road 63,639 options (4)
Suite 3200
Dallas, TX 75252
Wilson Harrell 164,570 (5) 16.85%
7380 Pine Valley Road
Cumming, GA 30131
Clover, Inc. 50,000 5.12%
2661 Midway Road
Suite 224
Carrollton, TX 75006
</TABLE>
(1) Except as noted below, the individual listed has sole voting and
investment power.
(2) Barham and his other family members own 100,000 shares through
Barham Family Interests, Inc.
(3) Marks and his other family members own 100,000 shares through
Marks and Associates, Inc.
(4) On September 27, 1996, Businesship International granted Barham
Family Interests, Inc., and Marks and Associates, Inc., each an option to
acquire 63,639 shares from BI. The options shall automatically expire on
September 30, 2001, if not exercised.
(5) The 5,850 shares of Class A Common Stock owned by Charlene Echols
Harrell, Wilson L. Harrell's wife, are included in Mr. Harrell's beneficial
ownership in the above table. Mr. Harrell passed away subsequent to September
30, 1997.
As of September 30, 1997, the Company had 976,580 shares of Class A
Common Stock, issued and outstanding.
Item 12. Certain Relationships and Related Transactions
Transactions involving related parties in the last two years are outlined in
Item 1 of this report.
PART IV
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits --
(1) The following exhibits, as required by Item 601 of
Regulation SB, are attached hereto or incorporated herein by this reference:
(2) Certificate of Incorporation as last amended, effective as of
January 21, 1989, a copy of which was filed with the Company's Form 10-K
report for the fiscal year ended September 30, 1990.
(3) Material Contracts:
(A) Stock Purchase Agreement between the Company and Clover, Inc., dated June
12, 1990, and the amendment thereto dated August 27, 1990, copies of which
were filed with the Company's Form 10-K report for the fiscal year ended
September 30, 1990.
(B) Restructuring Agreement between the Company and Clover, Inc., dated
December 23, 1991, a copy of which was attached to the Company's Form 10-K
report for the fiscal year ended September 30, 1990.
(C) Stock Option Agreements between the Company and each Douglas C. Echols,
Irvin Atkins and David A. Woodcock, Jr., all of which are dated December 7,
1991, copies of which were attached to the Company's Form 10-K report for the
fiscal year ended September 30, 1990.
(D) Stock Purchase Agreement between the Company and Xenex International,
Inc., dated May 28, 1992, a copy of which was attached to the Company's Form
10K report for the fiscal year ended September 30, 1992.
(E) Acquisition agreement between the Company and the Hotel Management Group,
Inc., dated August 18, 1992, a copy of which was attached to the Company's
Form 10K report for the fiscal year ended September 30, 1992.
(F) Employment agreements between the Company and Messrs. Marks and Barham,
copies of which were attached to the Company's Form 10 K report for the fiscal
year ended September 30, 1992.
(G) Settlement Compromise and Release Agreement between Villa Martinique
Apartments Joint Venture, Wilson L. Harrell, the Company and Home Savings of
America F. S. B., a copy of which was attached to the Company's Form 10-KSB
report for the fiscal year ended September 30, 1994.
(H) Preferred Stock Purchase and Release of Debt Agreement between the
Company and Businesship International, Inc. dated September 1, 1996, a copy of
which was attached to the Company's Form 10-KSB for the fiscal year ended
September 30, 1996.
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.
HARRELL INTERNATIONAL, INC.
By:
Paul L. Barham
Vice President,
Chief Financial Officer
And Director
DATE: ________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons comprising the majority
of the current Directors on behalf of the registrant and in the capacities and
on the dates indicated.
/s/ PAUL L. BARHAM 12/29/97
_________________________________________ _____________________
Paul L. Barham, Vice President, Date
Chief Financial Officer and Director
/s/ NORMAN L. MARKS 12/29/97
_________________________________________ _____________________
Norman L. Marks, Vice President Date
Chief Operating Officer and Director
HARRELL INTERNATIONAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . .F-2
Consolidated Balance Sheets at September 30, 1997 and 1996 . . . . .F-3
Consolidated Statements of Income For the Years Ended
September 30, 1997 and 1996 . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended September 30, 1997 and 1996 . . . . . .F-5
Consolidated Statements of Cash Flows For the Years Ended
September 30, 1997 and 1996 . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . .F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Harrell International, Inc.
We have audited the accompanying consolidated balance sheets of Harrell
International, Inc. and subsidiaries as of September 30, 1997 and 1996, and
the related consolidated statements of income, changes in shareholders' 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 consolidated 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 audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Harrell International, Inc. and subsidiaries as of September 30, 1997 and
1996, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
Jackson & Rhodes P.C.
Dallas, Texas
December 9, 1997
HARRELL INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 1997 and 1996
Assets
</TABLE>
<TABLE>
<CAPTION>
1997 1996
Current assets:
<S> <C> <C>
Cash $98,908 $140,288
Accounts receivable 89,464 49,712
Accounts receivable - affiliate 0.000 5,125
Note receivable 9,869 0.000
Other assets 3,939 2,888
Total current assets 202,180 198,013
Property and equipment:
Furniture and fixtures 30,767 25,343
Less accumulated depreciation (22,604) (20,211)
Total property and equipment 8,163 5,132
Other assets:
Investment in limited partnerships (Note 5) 101,200 2,798
$311,543 $205,943
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued liabilities $31,977 $41,641
Dividends payable 24,331 24,331
Accrued salaries 8,215 551
Total current liabilities 64,523 66,523
Long-term debt:
Amounts payable to related parties 8,000 8,000
Investments in joint ventures (Note 5) 0.000 12,961
Total liabilities 72,523 87,484
Commitments and contingencies (Note 8) 0.000 0.000
Shareholders' equity:
Preferred stock, $1 par, 1,000,000 shares
authorized, 243,331 shares issued
and outstanding (Note 3) 243,331 243,331
Common stock:
Class A, $.01 par; 9,000,000 shares
authorized, 976,580 shares issued
and outstanding 9,766 9,766
Class B, $.01 par; 1,000,000 shares
authorized, no shares issued or
outstanding 0.000 0.000
Additional paid-in capital 2,077,287 2,077,287
Accumulated deficit (2,091,364) (2,211,925)
Total shareholders' equity 239,020 118,459
$311,543 $205,943
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
HARRELL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Revenues:
Management fees $486,226 $373,094
Consulting fees 42,800 15,900
Equity in income of joint ventures 0.000 3,623
Other 10,816 9,978
Total revenues 539,842 402,595
Expenses:
Employee compensation 343,653 253,157
General and administrative 100,349 99,373
Total expenses 444,002 352,530
Operating income 95,840 50,065
Gain on sale of joint ventures 49,052 96,070
Net income (see Note 7) 144,892 146,135
Preferred dividends accrued 24,331 24,331
Net income available for common
shareholders $120,561 $121,804
Earnings per common share $0.12 $0.12
Weighted average shares outstanding 976,580 976,580
</TABLE>
HARRELL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Preferred
Stock to Preferred Stock Common Stock-Class A
be Issued Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C>
Balance, September 30, 1 243,331 0 0 976,580 9,766
Preferred stock issued (243,331) 243,331 243,331 0 0
Net income 0 0 0 0 0
Preferred dividends payable
($.10 per share) 0 0 0 0 0
Balance, September 30, 1 0 243,331 243,331 976,580 9,766
Net income 0 0 0 0 0
Preferred dividends payable
($.10 per share) 0 0 0 0 0
Balance, September 30, 1 0 243,331 243,331 976,580 9,766
<CAPTION>
Additional Total
Paid-In AccumulatedShareholders
Capital Deficit Equity
<S> <C> <C> <C>
Balance, September 30, 1 2,077,287 (2,333,729) (3,345)
Preferred stock issued 0 0 0
Net income 0 146,135 146,135
Preferred dividends payable
($.10 per share) 0 (24,331) (24,331)
Balance, September 30, 1 2,077,287 (2,211,925) 118,459
Net income 0 144,892 144,892
Preferred dividends payable
($.10 per share) 0 (24,331) (24,331)
Balance, September 30, 1 2,077,287 (2,091,364) 239,020
</TABLE>
HARRELL INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income available for common
shareholders $120,561 $121,804
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 2,393 2,385
Gain on sale of joint venture (49,052) (96,070)
Equity in (income) losses of joint venture 0.000 (3,624)
Accretion of equity interest in assets of
joint venture over initial investments 0.000 (3,121)
Changes in assets and liabilities:
Accounts receivable (39,752) (8,511)
Other assets (1,051) 3,073
Accounts payable and accrued liabilities (9,664) (10,162)
Preferred dividends payable 24,331 24,331
Amounts payable to related parties 0.000 (7,078)
Accrued salaries 7,664 (15,965)
Net cash provided by operating
activities 55,430 7,062
Cash flows from investing activities:
Purchase of furniture and equipment (5,424) (3,446)
Return of capital in joint ventures 0.000 7,752
Proceeds from sale of joint venture 29,020 100,000
Receivable from affiliate 5,125 (5,125)
Investment in limited partnership (101,200) (2,798)
Net cash provided by (used in)
investing ac (72,479) 96,383
Cash flows from financing activities:
Dividends paid (24,331) 0.000
Net increase (decrease) in cash (41,380) 103,445
Cash at beginning of year 140,288 36,843
Cash at end of year $98,908 $140,288
Supplemental cash flow information:
Interest paid during year 0 0
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
1. Description of Business
Organization
Harrell International, Inc., a Delaware corporation (the "Company"),
began operations in 1959. The Company entered into the acquisition,
development and management of real estate properties including joint ventures
and partnerships (in which its interests would be that of a general partner
having substantial involvement in management) in December 1990. The Company
plans to focus its real estate activities upon purchase, development and
management of hotels, and other income-producing properties located in the
southwestern and southeastern United States. The Company acquired Hotel
Management Group, Inc. ("HMG") in August 1992. The Company has created four
other wholly-owned subsidiaries - see Note 4.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany balances and
transactions are eliminated in consolidation.
Use of Estimates and Assumptions
Preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Reclassification
Certain amounts in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.
Cash Equivalents
For statement of cash flow purposes, the Company considers short-term
investments with original maturities of three months or less to be cash
equivalents.
2. Summary of Significant Accounting Policies (Continued)
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed
on the straight-line method over the estimated lives of the assets,
principally over three years.
Investments in Joint Ventures
The Company uses the equity method of accounting for its investments
in joint ventures. Accordingly, the Company recorded its investment in joint
ventures at cost and records subsequent contributions, returns of capital and
equity in earnings as an adjustment to the initial investment (Note 6).
Income Taxes
The Company accounts for income taxes pursuant to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS
109) which utilizes the asset and liability method of computing deferred
income taxes. The objective of the asset and liability
method is to establish deferred tax assets and liabilities for the temporary
differences between the financial reporting basis and the tax basis of the
Company's assets and liabilities at enacted tax rates expected to be in effect
when such amounts are realized or settled.
Earnings Per Common Share
Earnings per common share is computed on the weighted average number
of shares outstanding during the period.
3. Capital Transaction with Xenex International, Inc.
On May 28, 1992, the Company entered into a stock purchase agreement
(the "Agreement")with Xenex International, Inc. ("Xenex"), a Florida
corporation, whereby upon successful completion of the terms of the Agreement,
Xenex would purchase, or be granted an option to purchase, up to 1,941,520
shares of Class A common stock of the Company.
On the closing date, Xenex acquired 291,228 shares and a one-year
warrant to purchase up to 1,650,292 shares at a purchase price of $.5151 per
share or $850,000 in the aggregate, the term of which was to expire on June
30, 1993. In consideration for purchase of the 291,228 shares and the
warrant, Xenex paid a total of $150,000 comprised of $100,000 cash and the
forgiveness of a $50,000 loan to the Company.
3. Capital Transaction with Xenex International, Inc. (Continued)
Further, on the closing date, the Company's chairman and Xenex
established a voting trust which provided that Xenex, or its designees, as
trustee, had the right to vote the chairman's shares for a time period not to
exceed one year from the closing date. This voting trust,
together with the shares owned by Xenex, gave Xenex control of approximately
59% of the total outstanding shares of the Company for the year ended
September 30, 1994.
Upon and as a condition of closing, the board of directors of the
Company was increased from three to five members. Two executives of Xenex
were elected to the board. In addition, the chief executive officer of Xenex
was elected chairman of the board of the Company.
On February 16, 1993, the Company entered into a modification of the
common stock warrant with Xenex which extended the term of the warrant to June
30, 1995. The warrant expired on June 30, 1995, without Xenex purchasing
additional shares in the Company. In addition, Xenex
agreed to loan the Company $150,000. The loan bore interest at 2% above prime
with principal and interest due on June 30, 1995. The note was secured by the
Company's joint venture interests (see Note 6). The note was increased and an
additional $66,933 was funded during 1994.
By agreement with Businesship (see below) dated September 27, 1996,
the outstanding balance of the note of $243,331, including accrued interest of
$26,398, was converted into preferred stock to be issued by the Company. The
preferred shares were from a new class of stock authorized by the Company
and are nonvoting, non-convertible and will pay a 10% dividend ($24,331
annually), beginning with the year ended September 30, 1996. The Company
shall have the right, but not the obligation, to redeem the shares at any time
at par value. By agreement, the Company paid a full year's dividend
on the preferred shares for 1996.
In March 1993, an agreement was reached between Xenex and Businesship
International ("Businesship") for the sale of Xenex to Businesship. Xenex and
Businesship are majority owned by Mr. Nasir Ashemimry, a former director of
the Company. Under the terms of the
agreement, Businesship purchased Xenex's rights, duties and obligations under
the Xenex Agreement with the Company.
On December 15, 1994, an agreement was reached between Businesship
and its wholly-owned subsidiary, Xenex, to merge Xenex into Businesship. The
effect was to transfer 291,228 shares of the Company's Class A common stock
from Xenex to Businesship.
3. Capital Transaction with Xenex International, Inc. (Continued)
On December 15, 1994, the board of directors of Businesship resolved
to declare a dividend of all the stock that it owned in the Company to its
shareholders of record as of January 15, 1995. The effect of this action was
that a total of up to 291,228 shares of Class A common stock of the Company
was to be issued to sixty-eight people and/or entities. As a result of these
events, Nasir Ashemimry was to own or beneficially own 14.9% or more of the
Company's Class A common stock. Delivery of the stock certificates had been
delayed pending the resolution of all deficiencies in the Company's
reporting obligations under the Securities Exchange Act of 1934. On January
31, 1996, the shareholders of Businesship resolved not to issue stock in the
Company to Businesship shareholders, but that Businesship International
would remain holder of the 291,228 shares in the Company.
4. Acquisition of Hotel Management Group
In August 1992, the Company purchased 100% of the issued and
outstanding common stock of HMG. The common stock was purchased from Barham
Family Interests, Inc. and Marks and Associates, Inc. for stock and
consideration of $15,149, which represented the net book value of HMG at the
time of acquisition. In addition, the Company issued 200,000 shares of its
Class A common stock to Barham Family Interests, Inc. and Marks and
Associates, Inc.(100,000 shares each). HMG is engaged in the business of
managing the general operations of hotels and providing them with accounting
services.
In conjunction with the purchase, the Company signed a three year
employment agreement with the former officers of HMG, Paul L. Barham and
Norman A. Marks. As an inducement to sign, the officers were granted signing
bonuses of $25,000 each, to be paid $12,500 each upon execution of
the agreement and $12,500 each by June 30, 1995. The Company paid the
remaining $12,500 each in October 1993. Additionally, they are to receive an
annual salary of $75,000 each, monthly car allowances of $500 each, a health
care package and plans for both incentive compensation and stock
options. In addition, the officers were granted the right to rescind the
transaction in the event the Company did not receive an additional $850,000 in
equity capital any time prior to June 30, 1995. The officers elected not to
rescind the
transaction.
Hotel Management Group - California, Inc.
Effective January 1, 1994, HMG formed a wholly-owned subsidiary,
Hotel Management Group - California, Inc. ("HMG - California"), to hold the
management contract for the operations of the Biltmore Hotel and
Suites in Santa Clara, California. Additionally, as
4. Acquisition of Hotel Management Group (Continued)
Hotel Management Group - California, Inc. (Continued)
part of a restructuring undertaken by the owners of that hotel, the food and
beverage operations at the property were leased to HMG California Partners LP,
a California Limited Partnership, of which HMG - California is the General
Partner, and the limited partners are members of the
owner's family. HMG - California ceased to be the General Partner of HMG
California Partners, LP on June 22, 1995, as part of further restructuring by
the hotel's owner.
Hotel Management Group - Mississippi, Inc.
Effective July 22, 1994, HMG formed a wholly-owned subsidiary, Hotel
Management Group - Mississippi, Inc. ("HMG - Mississippi"), to hold the
management contract for the operation of the Days Inn in Pass Christian,
Mississippi. HMG opened this property on August 25, 1994. The
management contract on the Days Inn was terminated in July 1995. The property
was to be purchased by the State of Mississippi and demolished for the
expansion of the highway system. As compensation for the early termination of
the management agreement, HMG - Mississippi has received a fee of $15,000.
For the years ended September 30, 1997 and 1996, HMG - Mississippi
has not had any operations.
Hotel Management Group - Tennessee, Inc.
Effective September 23, 1996, HMG formed a wholly-owned subsidiary,
Hotel Management Group - Tennessee, Inc. ("HMG - Tennessee"), to hold the
management contract for the Sheraton Four Points Hotel in Memphis, Tennessee.
The Company also has a limited partnership interest in the hotel.
(See Note 5.)
Hotel Management Group - Oklahoma, Inc.
Effective May 20, 1997, HMG formed a wholly-owned subsidiary, Hotel
Management Group - Oklahoma, Inc. ("HMG - Oklahoma"), to hold the management
contract for the Ramada Inn in Tulsa, Oklahoma. The Company also has a
limited partnership interest in the hotel. (See Note 5.)
5. Hotel Investments
Tennessee Hotel Project
On October 17, 1996 the Company purchased, for $100,000, a minority
limited partnership interest in the Sheraton Four Points Hotel, located near
the Memphis Airport in Memphis, Tennessee and a subsidiary of the Company was
contracted to manage the hotel. The hotel is owned through limited
partnerships, with the Company owning a limited partnership interest equating
to 7%. The Company has accounted for its interest in the hotel utilizing the
cost method. The Lender required as a condition of a loan to the partnership
that Paul L. Barham ("Barham") an Officer and Director of the Company, and
Norman L. Marks ("Marks"), also an Officer and Director of the Company,
individually guarantee certain non-recourse provisions of the loan, guarantee
certain environmental warranties regarding the hotel and guarantee completion
of the renovations (collectively "Guaranties"). Texas Memphis Investors
Limited offered Barham and Marks, or their assigns, in exchange for their
Guaranties, each a limited partnership interest in Texas Memphis Investors
Limited, which constitutes an interest in the Hotel of one percent (1%).
The $11.65 million loan in connection with the purchase is for a
three-year term secured by a first lien mortgage on the hotel, and contains
provisions for required payment on the loan of all net operating income of the
hotel (after expenses, certain reserves and management fees), with a final
additional payment of approximately $2 million.
Also in connection with the transaction, a newly formed subsidiary of
the Company, HMG - Tennessee, entered into a management agreement to manage
the hotel and supervise the renovations. HMG - Tennessee will receive a net
monthly management fee of $5,000 per month for the first eight months, with
fees thereafter to be 8% of the net operating income of the hotel before debt
service.
Tulsa Hotel Project
On June 4, 1997, the Company acquired a limited partnership interest
in the Ramada Inn, located on I-44 in Tulsa, Oklahoma. At the same closing a
subsidiary of the Company contracted with the new ownership to manage the
hotel. In March of 1997, an unaffiliated Company, LTS Group, Inc.
("LTS") entered into a contract to purchase the hotel for a purchase price of
$4,575,000. HMG entered into an agreement with LTS to study feasibility and
prepare recommendations and budgets. HMG was not paid a fee for its work, but
instead provided a 2% Limited Partnership interest in the project. Costs to
renovate the hotel are budgeted to be approximately $4.5 million
which together with closing costs and working capital for the hotel estimated
at $1 million comprise the $10 million transaction. Of the $10 million,
Lehman Brothers Holdings, Inc. ("Lehman Brothers") loaned approximately $9
million and contributed equity of $700,000. LTS and others contributed equity
of $300,000. The hotel is owned through limited partnerships with the Company
owning a limited partnership interest equating to 2% interest in the hotel,
LTS and others 27 %, and Lehman Brothers and its affiliates 70%. LTS, the
Company and others comprise Texas Tulsa Investors Limited ("Texas Tulsa"), a
Texas limited partnership. The Lender required as a condition of the loan to
the partnership that Barham and Marks individually guarantee certain recourse
provisions of the loan, guarantee certain environmental warranties regarding
the hotel and guarantee completion of the renovations (collectively
"Guarantees"). Texas Tulsa offered Barham and Marks, or their assigns, in
exchange for their Guarantees, each a limited partnership interest in Texas
Tulsa, which constitutes an interest in the hotel of one percent (1%). The $9
million loan in connection with the purchase is for a three year term secured
by a first lien mortgage on the hotel and contains provisions for required
payment to the loan of all net operating income of the hotel (after expenses,
certain reserves and management fees), with a final additional payment of
approximately $1.6 million.
Also in connection with the transaction, a newly formed subsidiary of
the Company, HMG - Oklahoma entered into a management agreement to manage the
hotel and supervise the renovations. HMG - Oklahoma and LTS have agreed to
share certain fees in connection with
the management agreement. HMG - Oklahoma will receive a net monthly
management fee of $5,000 per month for the first eight months, with fees
thereafter changing to 8% of the net operating income of the hotel before debt
service. In recent years the hotel has had no net operating income,
although the Company believes that if the proposed renovations and management
of the hotel are successful, net income may be able to be increased
substantially.
McKinney Texas Development
On November 19, 1996, HMG, as Agent for McKinney Hotel Development
Group, Ltd., a Texas Limited Partnership in organization, entered into an
agreement to purchase approximately five acres of land in McKinney, Texas, on
which the Partnership intends to build two small hotels and a conference
center. The Company will be a limited partner in the venture and HMG will
manage the hotels and conference centers if the project is completed.
6. Investments in Joint Ventures
In furtherance of management's stated intention to acquire, develop
and manage real estate projects, the Company entered into three separate
related party transactions with directors of the Company (among others). The
initial transactions involved contributions by the Company of rights
or assets other than cash. All three transactions required the Company to
enter into a joint venture agreement with another corporation whereunder the
joint venture acquired an interest in an apartment complex. During 1996, the
Company sold two of the properties, Athena Gardens and Riviera, resulting in a
gain of $96,070. Also, in November of 1996, the Company sold the third joint
venture, Villa Martinique, resulting in a gain of $49,052. The Company still
operates the Athens Gardens and Villa Martinique projects, receiving
management fees aggregating $42,000 each year in 1997 and 1996.
7. Income Taxes
As of September 30, 1997, the Company had net operating loss
carryforwards of approximately $2,726,000 for book and tax purposes. Unused
operating loss carryforwards may provide future tax benefits, although there
can be no assurance that these net operating losses can be recognized in the
future. Also, if substantial changes in the Company's ownership should occur,
there may be an annual limitation on the amount of the carryforwards which can
be utilized. Accordingly, deferred tax assets have been offset in the
accompanying financial statements by a valuation allowance.
The loss carryforwards expire as follows:
<TABLE>
<CAPTION>
Year of Operating Loss
Expiration Carryforward Expirations
<C> <C>
1998 $ 267,000
1999 485,000
2002 20,000
2003 27,000
2004 1,116,000
2005 295,000
2006 87,000
2007 158,000
2008 157,000
2009 114,000
$ 2,726,000
</TABLE>
8. Commitments and Contingencies
Leases
The Company leases its office facilities from an unrelated party.
The lease expired on October 31, 1996, and as of December 9, 1996, the lease
is on a month-to-month basis. The Company also leases an off-site storage
facility on a month-to-month basis. Rental expense for the years ended
September 30, 1997 and 1996 amounted to $13,824 and $17,663, respectively.
8. Commitments and Contingencies
Concentration of Credit Risk
The Company invests its cash and certificates of deposit primarily in
deposits with major banks. Certain deposits, at times, are in excess of
federally insured limits. The Company has not incurred losses related to its
cash.
9. Related Party Transactions
During the year ended September 30, 1991, the Company entered into
two joint venture agreements with entities controlled by certain directors of
the Company (Note 6). Also, on December 4, 1991, the Company entered into a
third joint venture agreement with certain entities controlled by
certain directors of the Company. Under the terms of the joint venture
agreements, all joint venturers can exert significant influence over the
operations of the joint ventures.
Amounts payable to related parties includes $8,000 to Villa
Martinique Joint Venture for capital contributions and cash calls as of
September 30, 1997 and 1996.
10. Management Fee Revenues
The Company received approximately 76% and 71% of gross management
revenues from the Biltmore Hotel in California for the years ended September
30, 1997 and 1996, respectively.
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 98908
<SECURITIES> 0
<RECEIVABLES> 89464
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 202180
<PP&E> 30767
<DEPRECIATION> 22604
<TOTAL-ASSETS> 311543
<CURRENT-LIABILITIES> 64523
<BONDS> 0
0
243331
<COMMON> 9766
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 311543
<SALES> 0
<TOTAL-REVENUES> 539842
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 419281
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 120561
<INCOME-TAX> 0
<INCOME-CONTINUING> 120561
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> 120561
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
