UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB.
[X] ANNUAL REPORT UNDER TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: September 30, 2000
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No.: 0-2661
HARRELL HOSPITALITY GROUP, INC.
(Name of small business issuer in its charter)
Delaware 13-1946181
(State of Incorporation) (I.R.S. Employer Id. No.)
16475 North Dallas Parkway, Suite 410, Dallas, Texas 75248
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (972) 380-0273
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 $.002
(Title of Class)
Check whether the issuer (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
(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
<PAGE>
registrant's
knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this form 10-
KSB or any amendment to this Form 10-KSB.
[ X]
State issuer's revenues for its most recent fiscal year:
$7,662,843.
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 December 22, 2000, the last available quotation date:
Approximately $1,242,654.
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest practical
al
date. The number of shares of the registrant's Class A, $.002
par value Common Stock outstanding as of December 22, 2000 was
7,932,900.
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. The Company continued to follow up with Registrar
and Transfer Company, which investigated the history of activity
and concluded that the additional shares were actually
unexchanged shares arising from splits and reverse splits in the
Company's stock various times in the past. After its review, the
Company accepted the findings of Registrar & Transfer Company.
The number of shares shown above reflect the 5 for 1 split
of common stock declared by the Board of Directors on September
1, 2000.
PART I
Item I. Description of Business
(A) Business Development: During the last three years the Company
has focused on hotel management and in the acquisition,
development and management of hotels through joint ventures and
partnerships.
(B) Business of the Issuer:
HISTORY
HARRELL HOSPITALITY GROUP, INC. (Formerly 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
<PAGE>
revenues were
derived primarily from the collection of
receivables acquired in connection with such divestitures.
From 1983 to 1990 the Company was largely inactive, and
Wilson Harrell, the president of the Company at that time, sought
possible merger candidates. In 1991 and 1992 the Company entered
into agreements with Xenex, Inc., now known as Businesship
International (_BI_), to make an equity investment in the Company
and fund certain loans to the Company.
The Company decided to move into the real estate management
and acquisition business. 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. The principals of HMG, Paul L. Barham and Norman L. Marks,
had significant experience in hotel operations and management.
Effective as of September 1, 1996 the Company and BI entered
into a Preferred Stock Purchase and Release of Debt Agreement
that replaced the debt obligation of the Company with 243,331
shares of $1.00, par value preferred stock (the _Preferred
Stock_). 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 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 $0.01 Par Value Common Stock for US$1.00 per
share, together with certain options to purchase additional
shares. 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. 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.
On July 19, 2000, the Board approved an extension of time of
90 days each for the second and third installments of the stock
purchase by MCH in the amounts of $250,000 and $500,000,
respectively. As of September 30, 2000, half of the second
installment had been received. Subsequent to September 30, 2000,
the remaining half of the second installment was received.
On April 1, 2000, the Company changed its name to Harrell
Hospitality Group, Inc. The name of the Company was changed to
reflect the focus of the Company on hotel related services and
business. Management believes Harrell Hospitality Group, Inc.
more accurately indicates the nature of the Company's business
and believes that this will aid the marketing efforts of the
Company.
On September 1, 2000 the Board declared a five-for-one split
of the Company's Class A Common Stock. By amendment of the
<PAGE>
articles dated
October 23, the par value of the Class A Common
Stock was changed to $0.002 per share, and the number of
authorized shares of Class A Common Stock was increased to
100,000,000.,
OPERATIONS
APARTMENT MANAGEMENT
In late 1992, Hotel Management Group assumed the management
of the Athena Gardens Apartments, Athens, Texas, Riviera
Apartments, Dallas, Texas, and Villa Martinique Apartments,
Irving, Texas. The Riviera Apartments were sold in 1996, the
Villa Martinique Apartments were sold in September 1999, and the
Athena Gardens Apartments were sold in February, 2000. In the
fiscal year ending September 30, 2000. Revenues from apartment
management were approximately $14,833 constituting approximately
0.2% of the Company's total revenues.
HOTEL MANAGEMENT
The primary focus of the Company is on hotel management and
investment in hotels. At the present time virtually all of the
Company's operating revenue is derived from management contracts
to manage two hotels in California. The Company is actively
seeking and negotiating additional management contracts with
other hotels.
The Company has managed nationally recognized franchises,
including Sheraton, Holiday Inn, and Ramada, and is approved as
one of a small group of independent management companies
accepted by Marriott as a franchise for its full service hotels.
The Company is in negotiation on certain hotel projects that, if
consumated, will result in approval of the Company additionally
by Hilton Hotels.
The Company believes that its approval as a franchisee by these
major franchisors positions the Company ahead of many of its
competitors for management opportunities where a franchise is of
importance. The Company has and is continuing to pursue such
opportunities to capitalize on this advantage.
The hotel management business is highly competitive, and the
Company's market share in the total industry is insignificant.
The Company competes with larger corporations which have greater
financial resources.
Often, management of a hotel is coupled with some degree of
ownership in the hotel, so the Company, to be competitive, must
be prepared to make an equity investment in a hotel if necessary
to comply with a condition to obtaining a management contract.
The capital injections by MCH into the Company may be used for
such equity investments in hotels, and the Company continues to
seek additional sources of debt or equity to use for hotel
investment.
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 by the Company and the securing of equity and debt for
these activities.
Hotel Management Subsidiaries
Harrell Hospitality Group - California, Inc.(_HHG
California_)
Effective January 1, 1994, Hotel Management Group, Inc.
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.
The Biltmore Hotel is a 262 room full service hotel
with 8,000 square feet of meeting space. HMG
California's management contract is a two-year
renewable contract that began in January 1992 and has a
current expiration of December 31, 2002. HMG California
receives a management fee equal to ten percent (10%) of
the hotel's net income pre debt, after a 3% reserve for
furniture, fixtures and equipment.
HMG California entered into a management contract of
the Rancho Santa Barbara Marriott in May 1995.The
Marriott is a 149 room full service hotel with 8,000
square feet of meeting space and health and spa
facilities. HMG California's management contract is a
two-year renewable contract that began in June 1995 and
has a current expiration of December 31, 2002. HMG
California receives a management fee equal to ten
percent (10%) of the hotel's net income pre-debt, after
a 3% reserve for furniture, fixtures and equipment.
Revenues of HMG California amounted to approximately
$6,657,437 constituting approximately 86.9% of the
Company's total revenue.
In March 2000, HMG California changed its name to
Harrell Hospitality Group - California, Inc.
H.M.Group - Alabama, Inc. (_HMG Alabama_)
On December 1, 1998, H.M.Group - Alabama, Inc. assumed
the management of the Governors House Hotel in
Montgomery Alabama, a 200 room full service hotel. The
contract was terminated by mutual agreement on
September 6, 2000. Revenues of HMG Alabama amounted to
approximately $946,130 constituting approximately 12.3%
of the Company's total fees.
Number of Employees
At September 30, 2000, the Company and its subsidiaries had
245 full time employees and 52 part time employees. Of these
employees, 5 are paid from the revenues of the Company. The
remaining 297 are paid from the revenues of the hotels or
apartments.
Item 2. Description of Property
(A) Principal Offices
The Company maintains its administrative and executive
offices in leased commercial office space located at 16475 North
Dallas Parkway, Suite 410, Dallas, Texas. 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.
<PAGE>
(B) Investment Policies
The Company may from time to time invest in hotel
properties. Typically such an investment would be a partial
interest in the hotel property in concert with a hotel developer
or other investors. While it currently has no such investments,
the Company is seeking such investment with both existing hotel
properties and hotels to be constructed. Expected ownership in
any such hotel would be a minority position in a real estate
limited partnership. Such hotel ownership is anticipated to be
coupled with a management contract for the hotel(s). These hotel
investments, if made, are expected to be for long term capital
appreciation rather than primarily for current income. The
Company has placed no express limitations on the amount or number
of investments in hotel properties.
The Company may from time to time invest in marketable
securities.
Item 3. Legal Proceedings
There were no material legal proceedings, either on-going,
instituted by or against, or otherwise involving the Company
during the period ended September 30, 2000.
Item 4. Submission of Matters to a Vote of Security Holders
On September 13, 2000, the holders of a majority of the
shares of common stock of the Company executed a written consent
in lieu of a special meeting of shareholders to approve an
amendment of the articles of incorporation of the Company. The
holders of 4,828,990 shares of the Company's Class A Common
Stock, representing approximately 72.3% of the shares outstanding
at that time, signed the written consent. Under Delaware
corporate law, the written consent of the holders of a majority
of the stock may be substituted for a special meeting of
shareholders. The written consent approved the amendment to the
articles that:
increased the number of authorized shares of the
Company's Class A Common Stock to 100,000,000 shares.
changed the par value of the Class A Common Stock to
$.002 per share.
redesignated the Preferred Stock as Class A Preferred
Stock.
created a new class of preferred stock (Class B
Preferred Stock) with 10,000,000 authorized shares
issuable in series.
The amendment was filed with the Delaware Secretary of State on
September 15, 2000, with a delaying provision that the amendment
would not become effective until October 23, 2000.
All shareholders were notified of this action by delivery of a
copy of the Company's Information Statement filed pursuant to
Section 14-C of the Securities Exchange Act of 1934.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
(a) During the fourth quarter of Fiscal 2000, the Company's
Common Stock commenced trading on the NASD Over-the-Counter
Bulletin Board (the _Bulletin Board_) under the symbol _HLTLA._
There was no material market for the Company stock prior to this
time. 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 Bulletin Board.
The quotations represent limited or sporadic trading and,
therefore, do not constitute an "established public trading
market". The quotations represent inter-dealer prices, without
retail markup, markdown or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
<S> <C> <C>
Fiscal 1999 Bid Fiscal 2000 Bid
High Low High Low
First Quarter NOT QUOTED NOT QUOTED
Second Quarter NOT QUOTED NOT QUOTED
Third Quarter NOT QUOTED NOT QUOTED
Fourth Quarter NOT QUOTED 0.55 .01
</TABLE>
(Prices quoted are priced after the 5 for 1 split occurring
September 1, 2000)
(b) As of September 30, 2000, there were 694 record holders
of the Company's $.002 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, 1998, 1999 or any
subsequent year. On September 30, 2000, 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
This discussion contains certain forward-looking statements
that are subject to various factors which could cause actual
results to differ materially from the expectations of management.
These factors include: changes in general, economic and market
conditions involving the hospitality industry, the success of the
Company in securing new management contracts, and the ability of
the Company to make equity investments in hotels. The Company
does not undertake to update any forward-looking statement,
whether written or oral, that may be made from time to time on
behalf of the Company.
RESULTS OF OPERATIONS
A. Revenues
Revenues for the periods ended September 30, 1999 and 2000
were primarily produced from the Company's interest in Hotel
Management Group. Revenues increased from $7,266,463 for the
fiscal year ending September 30, 1999 to $7,662,843 for the
fiscal year ending September 30, 2000. The increase in revenues
in 2000 over 1999 was a result of improved performance in the
hotels with incentive based management fees that the Company
operates in California.
The Company anticipates income from Hotel Management Group
to increase as the subsidiary secures more management contracts
and consulting assignments. The Company expects to be able to
meet its normal cash needs from operations.
B. Employee Compensation
Employee compensation expense includes salaries for Messrs
Barham and Marks, the accounting staff of HHG, as well as the
employees in the hotel locations.
In January 1998, the Company purchased $500,000 and $300,000
increasing life insurance policies on the lives of each Paul L.
Barham and Norman L. Marks, respectively. The purposes of the
policies are both (i) to protect the Company's financial interest
in the event of the premature death of either of these key
employees, and (ii) to provide an employee benefit to these key
employees. The Company is the owner and beneficiary of the
policies, although the cash value accumulation will accrue to the
benefit of the key employees and is payable to the employees upon
their retirement or termination of employment, or their heirs in
the event of their death during employment. Additional policies
were added in the year 2000 to bring coverages to $1,500,000
each.
C. Expenses
Total Expenses for the fiscal year ending September 30, 1999
were $7,239,937, or 99.6% of revenue, and total expenses for the
fiscal year ending September 30, 2000 were $7,817,931 or 102% of
revenue. General and Administrative Expenses were increased
because of efforts to generate additional business by securing
additional management contracts and acquisitions. Additional
insurance and legal expenses were incurred as a result of the
Stock Acquisition and Option Agreement. A London office has been
established to assist in development opportunities in the United
Kingdom, and this is adding additional overhead.
LIQUIDITY AND CAPITAL RESOURCES
Funds generated from the sale of common stock has been the major
source of liquidity in the year ended September 30, 2000. The
Company used $178,147 in cash from operating activities in the
2000 fiscal year in the effort to generate additional business.
At September 30, 2000, the Company had $461,717 in cash and
$1,107,202 in working capital. The Company expects to make one
or more investments in hotel properties in the next fiscal year.
The source of cash for such investments is expected from sale of
the Company's Class A Stock to MCH pursuant to the Stock
Agreement. Management of the Company believes that it will have
sufficient working capital to fund its operating and investing
needs during fiscal 2001.
YEAR 2000 COMPUTER ISSUES
No significant problems were experienced relating to Year 2000
computer issues.
Item 7. Financial Statements
The following financial statements are filed as a part of
<PAGE>
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.
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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 Hospitality Group, Inc. (the
"Company") as of September 30, 2000.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name Principal Occupation Consecutive Age
for the past 5 years Service
Since
Paul L. Barham CFO, Hotel Management 1992 47
Group, since December
1989
Current Position:
Chief Executive
Officer, Harrell
Hospitality Group
Norman L. President, Hotel 1995 59
Marks Management Group,
since December 1989
Current Position:
Chief Operating
Officer, Harrell
rell
Hospitality Group
Geoffrey G. Chairman, Merchant 1999 53
Dart Capital Holdings,
Ltd.; Director,
Avatar, Inc.;
Director, Mortgage
Advisors, Ltd.,
Chairman,
Shillington's, Ltd.,
Current Position:
Chairman, Harrell
Hospitality Group
Name Principal Occupation Consecutive Age
for the past 5 years Service
Since
Gerard M. Director, Netcentric 1999 55
Thompson Systems, Ltd.,
Director, Bariston
Associates.
Current Position:
Director, Harrell
Hospitality Group,
Inc.
</TABLE>
The following table provides certain information concerning each
of the executive officers of the Company as of September 30,
2000.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age All Positions and Terms of Office
with the Company and Five Year
Employment History
Paul L. 47 Chief Executive Officer from
Barham November 1999; Vice-President and
Chief Financial Officer of the
Company from August 19, 1992,
Mem ber 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.
Norman L. 59 President since November 1999;
Marks Executive Vice President and Chief
Operating Officer from August 19,
1992, Member of Board of Directors
from September 20, 1995. President
of Hotel Management Group, Inc.
since December 1989
</TABLE>
There has been no involvement by the executive officers or
directors in any legal proceeding during the last five (5) years
that is material to an evaluation of the ability or integrity of
such officer or director.
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.
Item 10. Executive Compensation
The following table contains information concerning the
annual compensation and long-term compensation payable to named
executive officers during each of the last three fiscal years.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation Long term Compensation
<S> <C> <C> <C> <C> <C> <C>
Name and Year Salary Bonus Other Securities All Other
Principal Annual Underlying Compensation
Position Compen Options
sation
Paul L. 2000 $109,900 $2,000 - 937,500 -
Barham,
Chief
Executive
Officer
1999 $102,375 $2,000 - - -
1998 $101,787 $4,000 - - -
Norman L. 2000 $109,900 $2,000 - 937,500 -
Marks,
President
1999 $102,375 $2,000 - - -
1998 $101,787 $4,000 - - -
</TABLE>
This table 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
$15,600 during fiscal year 2000.
The following table provides information with respect to the
executive officers included in the summary compensation table who
received option grants during the fiscal year ending September
30, 2000.
<TABLE>
<CAPTION>
Option / SAR Grants in Last Fiscal Year
Individual Grants
<S> <C> <C> <C> <C>
Name Number of % of Total Exercise Expirat
Securities Options or Base ion
Underlying Granted to Price Date
Options Employees
Granted in fiscal
year
Paul L. 937,500 44.4% $0.20 12/31/0
Barham (1) 5
Chief
Executive
Officer
Norman L. 937,500 44.4% $0.20 12/31/0
Marks (1) 5
President
</TABLE>
(1) The exercise price through the year ending 12/31/2000
is $0.20, through the year ending 12/31/2001 is $0.22,
through the year ending 12/31/2002 is $0.24, through
the year ending 12/31/2003 is $0.26, through the year
ending 12/31/2004 is $0.28, and through the year
ending 12/31/2005 is $0.30.
At the present time the Company has, and at all times during
the past three fiscal years, the Company had no pension, retire-
ment, annuity, deferred compensation, incentive or stock
purchase, thrift or profit-sharing plan, except the accumulated
cash value of the life insurance policies detailed under item 6B
above.
Each of the Directors of the Company who is not employed by
the Company received Director Fees at the rate of $2,083.33 per
month.
Item 11. Security Ownership of Certain Beneficial Owners and
Management
The following table sets forth the persons, as of December
22, 2000, who were directors or who were known to the Company to
be beneficial owners of more than five percent of each class of
the equity securities of the Company:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Class of Name and Address of Amount and Percent of
Securities Beneficial Owner Nature of Class
Beneficial
Owner(1)
DIRECTORS:
Class A Paul L. Barham (2) [see (2) [see (2)
Common 16475 N. Dallas below] below]
Parkway #410
Dallas, Texas 75248
Class A Norman L. Marks (3) [see (3) [see (3)
Common 16475 N. Dallas below] below]
Parkway #410
Dallas, Texas 75248
5% BENEFICIAL
OWNERS:
Class A Merchant Capital 1,000,000 29.3%
Common Holdings Ltd plus
c/o Robert Edwards 1,875,000
17060 Dallas Parkway options
Suite 101
Dallas, TX 75248
Class A Businesship 1,456,140 18.4%
Common International, Inc.
One Alhambra Plaza
Suite 1400
Coral Gables, FL
33134
Class A Businesship 243,331 100%
Preferred International, Inc.
One Alhambra Plaza
Suite 1400
Coral Gables, FL
33134
Class A Cybertec Holdings 550,000 6.9%
Common PLC
Rosedale House
Rosedale Road
Richmond Surrey
England TW 92 SZ
Class A Barham Family 500,000 plus 22.5%
Common Interests, Inc. 1,568,195
16475 N. Dallas options (4)
Parkway #410
Dallas, Texas 75248
Class A Marks & Associates, 500,000 plus 22.5%
Common Inc. 1,568,195
16475 N. Dallas options (4)
Parkway #410
Dallas, Texas 75248
Class A Riverhead Services, 625,000 7.9%
Common Ltd
c/o Lloyds TSB Bank
PLC
Geneva Branch
Place Bel-Air 1
PO Box 5145 CH 1211
Geneva 11
Switzerland FR
Class A Gerard Thompson 625,000 plus 14.6%
Common c/o Wachovia Bank 625,000
Attn: Larry Wachtel options
180 Royal Palm Way
Palm Beach , FL
33480
Class A The Estate of Wilson 822,850 (5) 10.4%
Common Harrell
7380 Pine Valley
Road
Cumming, GA 30131
</TABLE>
(1) Except as noted below, the individual listed has sole
voting and investment power.
(2) Barham and his other family members own 500,000 shares
through Barham Family Interests, Inc. and Barham Family
Interests, Inc. also has options to acquire 1,568,195
shares as set forth in footnote 4 below.
(3) Marks and his other family members own 500,000 shares
through Marks and Associates, Inc., and Marks and
Associates, Inc. also has options to acquire 1,568,195
shares as set forth in footnote 4 below.
(4) On September 27, 1996, Businesship International
granted Barham Family Interests, Inc., and Marks and
Associates, Inc., each an option to acquire 318,195
shares from BI. The options shall automatically expire
on September 30, 2001, if not exercised. The Company
granted Marks and Associates, Inc. and Barham Family
Interests, Inc. each the option to acquire 1,250,000
shares of the Company's Class A Common stock. These
options granted by Company expire, if not exercised, on
December 31, 2005.
(5) The 29,250 shares of Class A Common Stock owned by
Charlene Echols Harrell, Wilson L. Harrell's widow, are
included in the estate's beneficial ownership in the
above table.
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. Restated Certificate of Incorporation as last amended,
effective as of March 31, 2000, a copy of which was
filed with the Company's Form 14-C report February 14,
2000.
3. Bylaws as amended July 19, 2000 and filed with the Form
10-Q report for the quarter ended June 30, 2000
4. Material Contracts:
(a) 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.
(b) Stock Acquisition and Option Agreement between the
Company and Merchant Capital Holdings, Ltd., dated
November 23, 1999.
(c) Employment Agreements (2) between the Company and
Messrs. Marks and Barham dated November 23, 1999.
(d) Shareholders' Agreement dated November 23, 1999 by
and among the Company, Merchant Capital Holdings,
Ltd., Messrs. Marks and Barham, Barham Family
Interests, Inc., and Marks & Associates, Inc.
5. Acquisition or Disposition of Assets reporting the sale
of 110,000 shares of Class A Common Stock at $2.75 to
Cybertec Holdings, PLC.
6. Other Events statement reporting that effective
September 5, 2000, the Company relocated its principal
offices to 16475 Dallas Parkway, Suite 410, Dallas,
Texas 75248; telephone:(972) 380-0273; fax: (972) 380-
4795.
7. Information Statement filed on September 15, 2000 and
furnished to the stockholders of record of Harrell
Hospitality Group, Inc. (the _Company_) as of
September, 2000, in connection with the adoption of the
Certificate of Amendment of Restated Certificate of
Incorporation (the _Certificate of Amendment_) by the
written consent of the holders of a majority interest
of the Company's voting capital stock consisting of the
Company's outstanding Class A Common Stock, $0.01 par
value (the "Common Stock") and a five-for-one stock
split of the Company's Common Stock, reporting:
(a) an increase in the number of authorized shares of
the Company's Class A Common Stock to 100,000,000
shares.
(b) a change in the par value of the Class A Common
Stock to $.002 per share.
(c) the redesignation of the Preferred Stock as Class
A Preferred Stock.
(d) the creation of a new class of preferred stock
(Class B Preferred Stock) with 10,000,000
authorized shares issuable in series.
8. Additional Exhibits:
(a) Letter from Chase Mellon Shareholder Services
dated September 22, 1999, together with an
attached memorandum dated June 8, 1992 to W.
Powers, Vice President of Mellon Securities Trust
Company.
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 HOSPITALITY GROUP, INC.
By:
Paul L. Barham
Chief Executive 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.
_________________________________________
_________________________________________ __________________
Geoffrey Dart Date
Chairman
________________________________________ __________________
Paul L. Barham, Date
Chief Executive Officer and Director
_________________________________________ __________________
Norman L. Marks, President Date
Chief Operating Officer and Director
HARRELL HOSPITALITY GROUP, INC.
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Page
Independent Auditors' Report...............................F-2
Consolidated Balance Sheets at September 30, 2000 and 1999.F-3
Consolidated Statements of Income For the Years Ended
September 30, 2000 and 1999 ...........................F-4
Consolidated Statements of Changes in Shareholders' Equity
For the Years Ended September 30, 2000 and 1999 .......F-5
Consolidated Statements of Cash Flows For the Years Ended
September 30, 2000 and 1999 ...........................F-6
Notes to Consolidated Financial Statements.................F-7
</TABLE>
F-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Harrell Hospitality Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Harrell Hospitality Group, Inc. and subsidiaries as of September
30, 2000 and 1999, 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 Hospitality Group, Inc. and
subsidiaries as of September 30, 2000 and 1999, 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
November 29, 2000
F-2
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
September 30, 2000 and 1999
Assets
<S> <C> <C>
2000 1999
Current assets:
Cash $461,717 $263,693
Accounts receivable 101,072 66,994
Marketable securities (Note 3) 603,859 0
Other assets 27,891 14,237
Total current assets 1,194,539 344,924
Property and equipment:
Furniture and fixtures 46,145 42,483
Less accumulated depreciation (40,045) (32,228)
Total property and equipment 6,100 10,255
Other assets:
Investment in limited partnerships
(Note 5) 1,850 1,850
$1,202,489 $357,029
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable and accrued
liabilities $63,006 $39,518
Dividends payable 24,331 24,331
Accrued salaries 0.000 6,632
Total current liabilities
87,337 70,481
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 4) 243,331 243,331
Common stock:
Class A, $.002 par; 100,000,000
shares authorized, 7,307,900
and 4,882,900 shares issued and 14,616 9,766
outstanding, respectively
Additional paid-in capital 2,722,437 2,077,287
Accumulated deficit (1,856,336) (2,043,836)
Cumulative translation adjustment (8,896) 0.000
Total shareholders' equity 1,115,152 286,548
$1,202,489 $357,029
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
Years Ended September 30, 2000 and 1999
<S> <C> <C>
2000 1999
Revenues:
Management fees $611,485 $568,117
Consulting fees 15,000 7,300
Hotel expense reimbursements 7,036,358 6,691,046
Total revenues 7,662,843 7,266,463
Expenses:
Employee compensation 7,456,969 7,084,023
General and administrative 360,962 155,914
Total expenses 7,817,931 7,239,937
Operating income (loss) (155,088) 26,526
Other income (expense):
Unrealized gain on marketable 366,919 0.000
securities
Total other income (expense) 366,919 0
Net income (see Note 7) 211,831 26,526
Preferred dividends accrued 24,331 24,331
Net income available for common $187,500 $2,195
shareholders
Basic earnings per common share $0.03 $0.00
Weighted average shares outstanding 6,068,315 4,882,900
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years Ended September 30, 2000 and 1999
<S> <C> <C> <C>
Common
Stock -
Preferred Stock Class A
Shares Amount Shares
Balance, September 30,
1998 243,331 $243,331 4,882,900
Net income 0.000 0.000 0.000
Preferred dividends
payable
0.000 0.000 0.000
($.10 per share)
Balance, September 30,
1999 243,331 243,331 4,882,900
Net income 0.000 0.000 0.000
Cumulative translation 0.000 0.000 0.000
adjustment
Total comprehensive income
0.000 0.000 2,425,000
Sale of common stock
Preferred dividends
payable
($.10 per share) 0.000 0.000 0.000
Balance, September 30,
2000 243,331 $243,331 7,307,900
<C> <C> <C> <C> <C>
Common
Stock - Additional Cumulative Total
Class A Paid-In Accumulated Transaction Shareholders'
Amount Capital Deficit Adjustment Equity
$9,766 $2,077,287 ($2,046,031) $0.000 $284,353
0.000 0.000 26,526 0.000 26,526
0.000 0.000 (24,331) 0.000 (24,331)
9,766 2,077,287 (2,043,836) 0.000 286,548
0.000 0.000 211,831 0.000 211,831
0.000 0.000 0.00 (8,896) (8,896)
202,935
4,850 645,150 0.000 0.000 650,000
0.000 0.000 (24,331) 0.000 (24,331)
$14,616 $2,722,437 ($1,856,336) ($8,896) $1,115,152
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended September 30, 2000 and 1999
<S> <C> <C>
2000 1999
Cash flows from operating activities:
Net income available for common
shareholders $187,500 $2,195
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 7,817 6,240
Unrealized gain on marketable
securities (366,919) 0
Changes in assets and liabilities:
Accounts receivable (34,078) 49,549
Other assets (13,654) (4,218)
Accounts payable and accrued 23,488 11,921
liabilities
Accounts payable to related parties 0.000 (8,000)
Preferred dividends accrued 24,331 24,331
Accrued salaries (6,632) (12,642)
Net cash provided by (used in) (178,147) 69,376
operating activities
Cash flows from investing activities:
Purchase of furniture and equipment (3,662) (475)
Purchase of marketable securities (245,836) 0.000
Net cash used in investing
activities (249,498) (475)
Cash flows from financing activities:
Sale of common stock 650,000 0
Dividends paid (24,331) 0
Net cash provided by financing
activities 625,669 0.000
Net increase in cash 198,024 68,901
Cash at beginning of year 263,693 194,792
Cash at end of year $461,717 $263,693
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2000 and 1999
1. Description of Business
Organization
Harrell Hospitality Group, Inc., a Delaware corporation (the
_Company_), began operations in 1959. The Company changed
its name from Harrell International, Inc. on March 31, 2000.
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)
beginning 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 United States. The Company acquired Hotel Management
Group, Inc. (_HMG_) in August 1992. The Company has five
other wholly-owned subsidiaries _ see Note 5.
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.
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.
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.
F-7
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
2. Summary of Significant Accounting Policies (Continued)
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.
Reclassification
The 1999 financial statements have been reclassified to
confirm to the 2000 presentation.
Earnings Per Common Share
The Company computes earnings per common share in accordance
with Statement of Financial Accounting Standards No. 128,
Earnings Per Share ("SFAS 128"). SFAS 128 provides a
different method of calculating earnings per share than was
formerly used in APB Opinion 15. SFAS 128 provides for the
calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the
weighted average number of common shares outstanding for the
period. Dilutive earnings per share reflects the potential
dilution of securities that could share in the earnings of
the Company. Because the Company has no potential dilutive
securities outstanding, the accompanying presentation is only
of basic earnings per share. The Company's Board of
Directors has authorized a common stock split of five-for-
one, effective as of September 1, 2000. All share and per
share amounts in the accompanying financial statements have
been retroactively adjusted for the split.
Foreign Currency Translation
The financial statements are presented in United States
dollars. In accordance with Statement of Financial
Accounting Standards No. 52, _Foreign Currency Translation,_
foreign denominated monetary assets and liabilities are
translated to their United States dollar equivalents using
foreign exchange rates which prevailed at the balance sheet
date. Revenue and expenses are translated at average rates
F-8
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
of exchange during the year. Related translation adjustments
are reported as a separate component of stockholders' equity,
whereas gains or losses resulting from foreign currency
transactions are included in results of operations.
3. Investments in Marketable Securities
Marketable securities at September 30, 2000 consist of common
stocks. Statement of Financial Accounting Standards No. 115,
_Accounting for Certain Investments in Debt and Equity
Securities_ (FAS 115) requires certain investments be
recorded at fair value or amortized cost. The appropriate
classification of the investments in marketable equity
securities is determined at the time of purchase and re-
evaluated at each balance sheet date. The Company's
marketable equity securities are classified as trading
securities. Marketable equity securities trading securities
are carried at fair value, with unrealized gains and losses
are reported in the income statement. The cost of marketable
equity securities sold is determined on a specific
identification basis. The fair value of marketable equity
securities is based on quoted market prices.
4. Preferred Stock Transaction
By agreement with Businesship International (_Businesship_)
dated September 27, 1996, the outstanding balance of a
certain 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.
5. Acquisition of Hotel Management Group
In August 1992, the Company purchased 100% of the issued and
outstanding common stock of HMG. HMG is engaged in the
business of managing the general operations of hotels and
providing them with accounting services.
Harrell Hospitality Group _ California, Inc.
Effective January 1, 1994, HMG formed a wholly-owned
subsidiary, Harrell Hospitality Group _ California, Inc.
(formerly Hotel Management Group - California, Inc.) (_HHG -
California_), to hold the management contract for the
F-9
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
operations of the Biltmore Hotel and Suites in Santa Clara,
California. HHG _ California now also manages the Rancho
Santa Barbara Marriott.
5. Acquisition of Hotel Management Group (Continued)
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
had a limited partnership interest in the hotel. (See Note
6.)
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 had a limited partnership
interest in the hotel. (See Note 6.)
Hotel Management Group _ Virginia, Inc.
On February 17, 1998, HMG formed a wholly-owned subsidiary,
Hotel Management Group _ Virginia, Inc. to hold the
management contract for the Chamberlin Hotel in Hampton,
Virginia which was managed until November 6, 1998.
H. M. Group _ Alabama, Inc.
On December 1, 1998, H.M. Group _ Alabama, Inc., a wholly
owned subsidiary of HMG, assumed the management of the
Governors House Hotel in Montgomery, Alabama which was
managed until September 6, 2000.
6. 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.
F-10
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company completed negotiations for the sale of its
limited partnership interest in the hotel, received the
return of its investment on April 3, 1998, and resigned as
manager.
6. Hotel Investments (Continued)
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.
On June 3, 1998, the Company sold its interest in the hotel
and resigned as manager of the hotel.
7. Income Taxes
As of September 30, 2000, the Company had net operating loss
carryforwards of approximately $1,843,444 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.
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
<S> <C>
2002 $ 31,444
2003 26,000
2004 1,116,000
2005 278,000
2006 35,000
2007 134,000
2008 105,000
2009 118,000
$1,843,444
</TABLE>
F-11
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. Commitments and Contingencies
Leases
The Company leases its office facilities from an unrelated
party. The lease expires in February, 2003. The Company
also leases an off-site storage facility on a month-to-month
basis. Rental expense for the years ended September 30, 2000
and 1999 amounted to $87,760 and $29,290, respectively.
8. Commitments and Contingencies (Continued)
Lease commitments are as follows:
2001 $63,360
2002 63,442
2003 27,007
Concentration of Credit Risk
The Company invests its cash and certificates of deposit
primarily in deposits with major banks. Certain deposits, at
times, are in excess of federally insured limits. The
Company has not incurred losses related to its cash.
9. Management Fee Revenues
The Company received approximately 80% and 81% of gross
management revenues from the Biltmore Hotel in California for
the years ended September 30, 2000 and 1999, respectively.
10.
Shareholders' Equity
On November 23, 1999, the Company entered into a Stock
Acquisition and Option Agreement (the _Stock Agreement_) with
Merchant Capital Holdings, Ltd. (_MCH_), a British Virgin
Islands Company, whereby MCH agreed to buy 5,000,000 shares
of the Company's Class A Common Stock for US$.20 per share.
MCH also received certain options to purchase additional
shares of Class A Common Stock. MCH has funded the first
1,875,000 share purchase before September 30, 2000 and
requested an extension of time to acquire the remaining
3,125,000 shares. Subsequent to September 30, 2000, MCH has
acquired an additional 625,000 shares of its obligation under
the Stock Agreement. 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. In
connection with the transactions contemplated under the Stock
Agreement, the Company, MCH, Norman L. Marks (and his family
F-12
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
10.
Shareholders' Equity (Continued)
The Company's Board of Directors has authorized a common
stock split of five-for-one, effective as of September 1,
2000. All share and per share amounts in the accompanying
financial statements and notes have been retroactively
adjusted for the split. The par value for common stock was
also changed to $.002 per share and authorized Class A common
shares were increased to 100,000,000.
11.
Stock Options
In connection with the Stock Agreement (Note 10), MCH will be
granted options to purchase an additional 5,000,000 shares of
Class A Common Stock upon receipt by the Company of the
initial $1,000,000 investment. All such options are
exercisable at a price which begins at $.20 per share in 2000
and escalates $.02 per share each year until the options
expire on December 31, 2005. Therefore, under the Stock
Agreement, MCH has agreed to purchase 5,000,000 shares, and,
if it does so, will also hold options to purchase an
additional 10,000,000 shares.
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
F-13
HARRELL HOSPITALITY GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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. The
Company has elected to
1. Stock Options (Continued)
measure compensation cost, including options issued, under
Opinion 25. Under this method, there was no compensation
expense for the year ended September 30, 2000.
Pro forma disclosures as required by SFAS 123 for the year
ended September 30, 2000 are as follows:
Net income $106,208
Net income per share $ 0.02
