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1
SECURITY AND EXCHANGE COMMISSION
WASHINGTON, DC.
FORM 10 - QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2000 Commission File No: 0-2661
Harrell Hospitality Group, Inc.
(Exact name of registrant as specified in its charter)
Delaware 13-1946181
(State of jurisdiction) (I.R.S. Employer identification No.)
211 Louisiana Street, McKinney, Texas 75069
(Address of Principal executive offices)
(972)542-9525
(Registrant's telephone no., including area code)
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 _____
The number of shares outstanding of the registrant's
Class A, $.01 par value common stock as of June 30, 2000, was
1,226,580. The number of shares outstanding of the registrant's
$1.00 par value preferred stock as of June 30, 2000 was 243,331.
In October 1997, the Company changed transfer agents from Chase
Mellon to Registrar and Transfer Company. When transferring the
records to Registrar and Transfer Company, Chase Mellon showed
additional shares of common stock of the Company as being issued
and outstanding. Chase Mellon gave no explanation for this
discrepancy, and for the past several years has consistently
reported the number of shares outstanding as approximately
976,580. The Company has made three written inquiries to Chase
Mellon but has received no response. The Company has made
enquiries of _potential_ holders of stock comprising the
additional shares and has yet to receive a response from all such
potential holders . It is not known at this time whether Chase
Mellon's records are in error, and for purposes of this report
and until a satisfactory answer is received from Chase Mellon or
the Company itself resolves the issue, the Company shall continue
to use 976,580 as the number of outstanding shares for that time
period (before the recent issue of 250,000 shares.).
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2
HARRELL HOSPITALITY GROUP, INC.
INDEX
Part I - FINANCIAL INFORMATION ................ 3
Item 1 FINANCIAL STATEMENTS .............. 3
CONSOLIDATED BALANCE SHEETS ............. 3
CONSOLIDATED STATEMENT OF OPERATIONS ........ 4
CONSOLIDATED STATEMENT OF CASH FLOWS ........ 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ..... 6
Item 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ...... 9
Part II. OTHER INFORMATION ................. 13
SIGNATURES ......................... 14
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3
Part I - FINANCIAL INFORMATION Item 1 FINANCIAL STATEMENTS
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of June 30, 2000 and September 30, 1999
<TABLE>
<S> <C> <C>
June 30, September
2000 30, 1999
(Unaudited) (Audited)
ASSETS
Current Assets
Cash $ 378,332 $ 263,694
Accounts Receivable 89,952 66,995
Other Current Assets 25,332 14,237
Total Current Assets 493,616 344,925
Investment in Joint Ventures 1,850 1,850
Furniture & Equipment (Net) 7,304 10,254
Total Assets $ 502,770 $ 357,029
LIABILITIES & STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts Payable and Accrued $ 76,874 $ 39,518
Liabilities
Dividends Payable 0 24,331
Accrued Salaries and Payroll 0 6,632
Taxes
Total Current Liabilities 76,874 70,480
Total Liabilities 76,874 70,480
Stockholders' Equity:
Preferred Stock 243,331 243,331
Common Stock:
Class A $.01 par value, 12,266 9,766
9,000,000 shares authorized,
1,226,580 and 976,580 issued and
outstanding
Class B $.01 par value,
1,000,000 shares authorized, No
shares issued and outstanding
Additional Paid-in Capital 2,324,787 2,077,287
Accumulated Equity (2,154,488) (2,043,835)
Total Stockholders' Deficit 425,896 286,549
Total Liabilities & $ 502,770 $ 357,029
Stockholders' Equity
</TABLE>
See Accompanying Notes and Accountant's Report
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HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<S> <C> <C> <C> <C>
For the Three Months For the Nine Months
Ended June 30 Ended June 30
2000 1999 2000 1999
Revenues:
Management Fees $ 172,758 $ 151,396 $ 430,192 $ 414,422
Consulting Fees 0 0 0 6,300
Other Income 4,562 1,963 22,875 5,109
Total Revenues 177,321 153,359 453,067 425,831
Expenses:
Employee Com- 105,583 110,119 333,973 317,474
pensation &
Related
General & 106,147 33,762 229,747 103,345
Administrative
Expenses
Total Expenses 211,730 143,881 563,720 420,819
Income (Loss) before (34,409) 9,478 (110,653) 5,012
Income Taxes
Provision for Income 0 0 0 0
Taxes
Net Income (Loss) $ (34,409) $ 9,478 $(110,653) $ 5,012
Income (Loss) per ($0.05) $0.01 ($0.07) $0.01
common share
Weighted average 1,226,580 976,580 1,138,670 976,580
number of shares
outstanding
</TABLE>
See Accompanying Notes and Accountant's Report
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HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended June 30
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<S> <C> <C>
Cash Flows from Operating 2000 1999
Activities:
Net Income (Loss) $ (110,653) $ 5,012
Adjustments to reconcile the
Net Income (Loss) to Net
Cash Provided (Used) for
Operating Activities:
Depreciation Expense 3,492 4,698
Changes in Assets and
Liabilities:
(Increase) Decrease in Accounts (22,957) 336
Receivable
Decrease in Other Current (11,095) (1,201)
Assets
Increase in Accounts Payable 13,026 55,941
and Accrued Liabilities
Increase (Decrease) in Amounts ---- (8,000)
Due to Related Parties
Decrease in Accrued Salaries (6,632) (12,301)
and Related
Net Cash Provided (Used) by (134,821) 44,486
Operations
Cash Flows from Investing
Activities:
Purchase of Furniture and (541) (474)
Equipment
Cash Flows from Financing
Activities:
Increase in Note Receivable ---- 9,869
Sale of Common Stock 250,000 0
Net Increase in Cash $ 114,638 $ 53,882
Cash at Beginning of Period $ 263,694 $ 194,792
Cash at End of Period 378,332 248,674
Net Increase in Cash $ 114,638 $ 53,882
</TABLE>
See Accompanying Notes and Accountant's Report
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HARRELL HOSPITALITY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPLES OF DISCLOSURE
The balance sheet as of June 30, 2000, and the related statements
of income and cash flows for the three month and nine month
periods ended June 30, 2000 and 1999, are consolidated with the
company's wholly-owned subsidiary (Hotel Management Group, Inc.),
and its wholly owned subsidiaries Harrell Hospitality Group
(California), Hotel Management Group (Tennessee) , Hotel
Management Group (Oklahoma) Hotel Management Group (Virginia),
H M Group (Alabama), and Hotel Management Group (Mississippi),
and are unaudited. In the opinion of management, all adjustments
necessary for a fair presentation of such financial statements
have been included.
TThe accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-QSB of Regulation S-B. They do not
include all information and footnotes required by generally
accepted accounting principles for complete financial statements.
However, except as disclosed herein, there has been no material
change in the information disclosed in the notes to the financial
statements for the year ended September 30, 1999 included in the
Company's Annual report on form 10-KSB filed with the Securities
and Exchange Commission. The interim unaudited financial
statements should be read in conjunction with those financial
statements included in the Form 10-KSB. In the opinion of
Management, all adjustments considered necessary for a fair
presentation, consisting solely of normal recurring adjustments,
have been made. Operating results for the nine months ended June
30, 2000 are not necessarily indicative of the results that may
be expected for the year ending September 30, 2000.
2. STOCK ACQUISITION AND OPTION AGREEMENT
On November 23, 1999, the Company entered into a Stock
Acquisition and Option Agreement (the "Stock Agreement") with
Merchant Capital Holdings, Ltd. ("MCH"), a British Virgin Islands
Company, whereby MCH agreed to buy 1,000,000 shares of the
Company's Class A Common Stock for US$1.00 per share, together
with certain options to purchase additional shares of Class A
Common Stock. As part of the Stock Agreement, two advisors of
MCH, Geoffrey Dart ("Dart") and Gerard Thompson ("Thompson") were
appointed to the Board of Directors of the Company, with Dart
appointed as Chairman of the Board. Paul Barham, a director of
the Company was appointed Vice Chairman. In connection with the
transactions contemplated under the Stock Agreement, the Company,
MCH, Norman L. Marks (and his family affiliates) and Paul L.
Barham (and his family affiliates) entered into a Shareholders
Agreement, providing for certain transfer restrictions and voting
agreements, on the Class A Common Stock held by certain of the
parties. Also, MCH required, as part of the Stock Agreement, that
two Employment Agreements be entered into between the Company and
Norman Marks and Paul Barham. Under the terms of the Employment
Agreement, Norman Marks retained his position of President and
Chief Operating Officer, and Paul Barham was promoted to Chief
Executive Officer.
On December 15th, 1999, MCH funded the initial installment of
$250,000 and was issued 250,000 shares and 250,000 options in
accordance with the Stock Agreement. Under the Stock Agreement,
at each closing of a stock purchase, MCH is granted an option to
purchase one additional share of Class A Common Stock for each
share purchased. In addition, upon receipt by the Company of the
full $1,000,000, MCH will be granted options to purchase an
additional 1,000,000 shares of Class A Common Stock. All of such
options are exercisable at a price which begins at $1.00 per
share in 2000 and esclates $0.10 per share each year until the
options expire on December 31, 2005. Therefore, under the Stock
Agreement MCH has agreed to purchase 1,000,000 shares, and, if it
does so, will also hold options to purchase an additional
2,000,000 shares. On July 19,2000 the Board of Directors agreed
to an extension of up to 90 days of the due date, of the second
and final installment of the MCH Stock Purchase Agreement.
As an inducement to enter into the employment agreements, the
Company agreed to issue options to Barham and Marks to acquire
shares of the Company's Class A Common Stock. The strike price
and the term of the options to Barham and Marks are the same as
the options issued to MCH. Barham and Marks will be granted
options in installments as MCH is granted options, except that
each will be granted the option to purchase one share for every
two shares that MCH is given the option to purchase.
In October 1995, the Financial Accounting Standards Board
("FASB") issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 defines a fair value based method of
accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method of
accounting for all of their employee stock compensation plans.
Under the fair value based method, compensation cost is measured
at the grant date based on the value of the award. However, SFAS
123 also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees."
Under the intrinsic value based method, compensation cost is the
excess, if any, of the quoted market price of the stock at grant
date or other measurement date over the amount an employee must
pay to acquire the stock. Entities electing to remain with the
accounting in Opinion 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method
of accounting had been applied effective for financial statements
for fiscal years beginning after December 15, 1995. The Company
has elected to measure compensation cost, including options
issued, under Opinion 25. Under this method, no compensation
expense has been recorded. The options value under SFAS 123 are
nominal and no expense on a pro forma basis has been recorded.
The fair value of the awards was estimated at the grant date
using a Black-Scholes option pricing model with the following
weighted average assumptions: risk-free interest rate of 4.5%;
volatility factor of 0%; and an expected life of the awards of
three years.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Material Changes in the Results of Operations.
1. Hotel Management Group, Inc. (HMG)
The Company's wholly owned subsidiary (HMG) has the
following wholly owned subsidiaries:
Harrell Hospitality Group - California, Inc.
(HHG(CA))(formerly known as Hotel Management Group -
California, Inc.)
Hotel Management Group - Mississippi, Inc. (HMG(MS))
Hotel Management Group - Tennessee, Inc. (HMG(TN))
Hotel Management Group - Oklahoma, Inc. (HMG(OK))
Hotel Management Group - Virginia, Inc. (HMG(VA))
H M Group - Alabama, Inc. (HMG(AL))
The following reflects a summary of the results of
operations for the nine months ended June 30, 2000, and is
fully consolidated with HMG, HMG(CA) HMG(TN), HMG(OK),
HMG(VA), and HMG(AL).
Nine Months
Total $ 453,067
Revenues
Total $ 563,720
Expenses
Net Loss $(110,653)
Revenues for the nine months ended June 30, 2000 are similar
to the prior year, approximately 6.5% higher. However,
general and administrative expenses during this period were
more than double the corresponding prior year. Additional
costs incurred by the Company during the nine months ended
June 30, 2000 include: a.) Directors and Officers liability
insurance of $4,750, b.) Directors' Fees of $30,277, c.)
London Office Rent of $24,111, d.) The production of a
company brochure of $7,015, e.) The establishment of a
Website of $4,800, f.) Consulting fees of $27,375, and g.)
Travel expenses for purposes of developing new business of
approximately $17,000 more than the prior year. These
expenditures were consciously committed for the future
growth of the Company. Executives of the Company have spent
considerable time and effort towards the development of new
hotels, the acquisition of management contracts of existing
hotels, investment in hotels to be managed and the securing
of equity and debt for these developments.
2. In August 1997, HMG entered into a management agreement to
manage the Holiday Inn Express in Ennis, Texas. Under the
agreement HMG received a management fee of $2,500 per
month. The owners decided to operate the hotel without the
use of a third party management company and by mutual
agreement the contract was terminated effective February 1,
1999.
3. On December 1, 1998, HMG(AL) entered into a management
agreement to manage the Governors House Hotel and Conference
Center in Montgomery, Alabama. Under the agreement, HMG(AL)
receives a management fee of $5,000 per month for the first
year and $4,500 per month for the second year, with
additional incentive fees based on achieving performance
goals. At June 30, 2000, the owners of the property continue
to be determined to sell the Hotel.
4. On February 26, 1999, HMG entered into a Technical Service
Agreement and on March 17, 1999, a Management Agreement,
with Second Century Investments ("SCI"), a Dallas based
development company for the pre and post opening management
of a proposed Hilton Garden Inn to be developed in Allen,
Texas. At June 30, 2000, the total equity required for the
development of the hotel had not been secured, but SCI and
the Company continued to endeavor to locate investors to
provide the shortfall.
5. On November 23, 1999, the Company entered into a Stock
Acquisition and Option Agreement (the "Stock Agreement")
with Merchant Capital Holdings, Ltd. ("MCH"), a British
Virgin Islands Company, whereby MCH agreed to buy 1,000,000
shares of the Company's Class A Common Stock for US$1.00 per
share, together with certain options to purchase additional
shares of Class A Common Stock. As part of the Stock
Agreement, two advisors of MCH, Geoffrey Dart ("Dart") and
Gerard Thompson ("Thompson") were appointed to the Board of
Directors of the Company, with Dart appointed as Chairman of
the Board. Paul Barham, a director of the Company was
appointed Vice Chairman. In connection with the transactions
contemplated under the Stock Agreement, the Company, MCH,
Norman L. Marks (and his family affiliates) and Paul L.
Barham (and his family affiliates) entered into a
Shareholders Agreement, providing for certain transfer
restrictions and voting agreements, on the Class A Common
Stock held by certain of the parties. Also, MCH required, as
part of the Stock Agreement, that two Employment Agreements
be entered into between the Company and Norman Marks and
Paul Barham. Under the terms of the Employment Agreement,
Norman Marks retained his position of President and Chief
Operating Officer, and Paul Barham was promoted to Chief
Executive Officer.
On December 15th, 1999, MCH funded the initial installment
of $250,000 and was issued 250,000 shares and 250,000
options in accordance with the Stock Agreement. Under the
Stock Agreement, at each closing of a stock purchase, MCH is
granted an option to purchase one additional share of Class
A Common Stock for each share purchased. In addition, upon
receipt by the Company of the full $1,000,000, MCH will be
granted options to purchase an additional 1,000,000 shares
of Class A Common Stock. All of such options are
exercisable at a price which begins at $1.00 per share in
2000 and esclates $0.10 per share each year until the
options expire on December 31, 2005. Therefore, under the
Stock Agreement MCH has agreed to purchase 1,000,000 shares,
and, if it does so, will also hold options to purchase an
additional 2,000,000 shares. On July 19,2000 the Board of
Directors agreed to an extension of up to 90 days of the due
date, of the second and final installment of the MCH Stock
Purchase Agreement.
As an inducement to enter into the employment agreements,
the Company agreed to issue options to Barham and Marks to
acquire shares of the Company's Class A Common Stock. The
strike price and the term of the options to Barham and Marks
are the same as the options issued to MCH. Barham and Marks
will be granted options in installments as MCH is granted
options, except that each will be granted the option to
purchase one share for every two shares that MCH is given
the option to purchase.
In October 1995, the Financial Accounting Standards Board
("FASB") issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 defines a fair value based method
of accounting for an employee stock option or similar equity
instrument and encourages all entities to adopt that method
of accounting for all of their employee stock compensation
plans. Under the fair value based method, compensation cost
is measured at the grant date based on the value of the
award. However, SFAS 123 also allows an entity to continue
to measure compensation cost for those plans using the
intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees."
Under the intrinsic value based method, compensation cost is
the excess, if any, of the quoted market price of the stock
at grant date or other measurement date over the amount an
employee must pay to acquire the stock. Entities electing
to remain with the accounting in Opinion 25 must make pro
forma disclosures of net income and earnings per share as if
the fair value based method of accounting had been applied
effective for financial statements for fiscal years
beginning after December 15, 1995. The Company has elected
to measure compensation cost, including options issued,
under Opinion 25. Under this method, no compensation
expense has been recorded. The options value under SFAS 123
are nominal and no expense on a pro forma basis has been
recorded.
The fair value of the awards was estimated at the grant date
using a Black-Scholes option pricing model with the
following weighted average assumptions: risk-free interest
rate of 4.5%; volatility factor of 0%; and an expected life
of the awards of three years.
6. On September 30, 1999, the Villa Martinique Apartments were
sold. As a result of that transaction, the contract to
manage that property was terminated.
7. On February 9, 2000, the Athena Gardens Apartments were
sold. As a result of that transaction, the contract to
manage that property was terminated.
8. At the end of the quarter HMG managed three hotels. A
substantial amount of time and effort was given by the
executives of the Company to the location of additional
management contracts. The Company has retained the services
of two consulting companies to assist in the search for
equity and additional management opportunities.
9. Harrell International, Inc. changed its name to Harrell
Hospitality Group, Inc., effective April 1, 2000. Hotel
Management Group California, Inc., changed its name to
Harrell Hospitality Group California, Inc., on the same
date.
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Part II. OTHER INFORMATION
Item 1. Legal.
There were no material legal proceedings, either on-going,
instituted by or against, or otherwise involving the
Registrant during the quarter ended June 30, 2000.
Item 2. Change in Securities.
250,000 shares of the Company's Class A Common Stock were
issued on December 3, 1999 to Merchant Capital Holdings,
Ltd. in a private transaction, exempt under Section 4(2) of
the 1933 Securities Act.
Item 3. Defaults Upon Senior Securities.
The Registrant does not have any outstanding debt or
securities of this nature.
Item 4. Submission of Matters to a Vote of Security Holders.
No items were submitted to a vote of the security holders
during this quarter.
Item 5. Other Information.
The Company changed its name from Harrell International,
Inc. to Harrell Hospitality Group, Inc., effective April 1,
2000. The Board of Directors adopted new bylaws for the
Company at a board meeting held July 19, 2000.
Item 6. Exhibits and Reports on Form 8-K.
(a) No report on Form 8-K was filed by the Registrant for
the quarter ended June 30, 2000.
(b) Bylaws of the Company adopted on July 19, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto fully authorized.
HARRELL HOSPITALITY GROUP,INC.
Date:__________________________ _________________________________
Paul L. Barham
Chief Executive Officer and
Director
