U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended May 31, 1998.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ______________ to ______________.
Commission file number 0-17978
HOTELECOPY, INC.
(Name of small business issuer in its charter)
FLORIDA 59-2605868
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
17850 N.E. 5TH AVENUE, MIAMI, FLORIDA 33162
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (800) 322-0530
Securities registered pursuant to Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
None None
Securities registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, $.01 PAR VALUE
(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. 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. [ ]
The issuer's revenues for its most recent fiscal year $434,306.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of the registrant as of August
24, 1998 - None - (There was no trading activity of the stock.)
There were 1,933,318 shares outstanding of the issuer's common stock, $.01 par
value, as of August 24, 1998.
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HOTELECOPY, INC. AND SUBSIDIARY
FORM 10-KSB
TABLE OF CONTENTS
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PART I PAGE
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Item 1. DESCRIPTION OF BUSINESS 2
Item 2. DESCRIPTION OF PROPERTY 5
Item 3. LEGAL PROCEEDINGS 5
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 6
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 6
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 7
Item 7. FINANCIAL STATEMENTS FS-1 to FS-12
Item 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 10
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 10
Item 10. EXECUTIVE COMPENSATION 11
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 12
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 13
PART IV
Item 13. EXHIBITS AND REPORTS ON FORM 8-K 13
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
Hotelecopy, Inc. (Company), is a Florida corporation organized in 1985 to
build and operate a public facsimile terminal network. From these public
terminal locations, the Public is able to send and receive facsimile documents,
at rates competitive with overnight mail. Hotelecopy calls its public
communications network FAXMAIL. The Company installs, operates and maintains
self-service credit card FaxMailers throughout the United States. The equipment
is placed in locations with a high demand for business services. The locations
include, but are not limited to, private airline clubs, airports, hotels,
colleges and universities. The customer can send or receive documents and pay
for the service with a major credit card.
As of May 31, 1998, there were approximately 118 revenue producing
locations, of which 101 were self-service locations.
During 1989, the United States Postal Service (USPS) and Hotelecopy
entered into a joint venture agreement to provide self-service fax terminals in
265 postal lobbies. The Company filed two lawsuits against the USPS alleging
default in its contracts and wrongful termination. On November 3, 1992, the
Court issued an adverse decision to the Company by dismissing the Company's
complaints and ordered that the United States Postal Service recover $88,400 on
its counterclaim from the Company. The Company does not have the funds to
satisfy this judgement. (SEE ITEM 3. LEGAL PROCEEDINGS).
PRODUCTS AND SERVICES
THE SELF-SERVICE FAXMAILER
The Company has developed a number of credit card operated self-service
facsimile terminals marketed as the FaxMailer. The Company assembles and
integrates specially adapted components manufactured by others into a unique
cabinet design. The Company developed highly sophisticated, flexible and
proprietary computer software for the FaxMailers. The self-service FaxMailer
allows the public to send a fax, receive a fax, or to access any of the
Company's enhanced FaxMail services. The Company contracts directly with various
locations to provide self-service FaxMailers under a Membership Agreement.
As of August 24, 1998, the Company operated 71 self-service FaxMailers
throughout the United States. The Company had exclusive agreements with United
Airlines and Alaska Airlines to offer self-service FaxMailers in all of their
private membership airport clubrooms nationwide. The agreement with United
Airlines expired on July 31, 1998, and is presently in the process of
renegotiation. In addition to private airline clubrooms, FaxMail service is
available within airports, colleges, universities, train stations and hotels.
During fiscal 1998, revenues from self-service FaxMailers contributed
approximately 94% of the Company's total revenues.
ATTENDED FAXMAIL LOCATIONS
The Company owns and operates 17 attended fax machines in hotels. Under a
Membership Agreement, the Company provides the Member location with a complete
public fax program including location referral, marketing literature and
support, point of sale materials, special FaxPak envelopes in which received fax
messages are delivered, staff assistance, fax equipment and maintenance.
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In most cases, the attended Member location offering Hotelecopy FaxMail
service pays the Company either a commission based on the respective terminal's
revenues, or a fixed monthly fee. The public purchases the Company's FaxMail
services directly from hotel personnel at attended locations.
HOTELECOPY'S FAXMAIL CENTRAL
From the Company's Operations Center in Miami, Hotelecopy remotely
monitors and manages all of its public fax terminals across the United States.
Hotelecopy developed this proprietary host software and hardware system for the
specific purpose of managing a diverse public FaxMail terminal network. It has
been continuously refined and upgraded since 1986. At the present time, it is
capable of managing additional public terminal locations anywhere in the world.
The Company's computer system integrates computer-based fax systems, traditional
fax systems, voice prompting, point of sale transaction processing and credit
card processing with traditional data processing systems. The system also allows
the Company to provide enhanced FaxMail services at all Hotelecopy public access
fax terminal locations.
YEAR 2000 DISCLOSURE
The year 2000 issue results in certain computer systems and software
applications that use only two digits (rather than four), to define the
applicable year. Consequently, such systems and applications may recognize a
date of "00" as the year 1900, instead of the intended year 2000, which could
result in data miscalculations and software failures. The Company has conducted
an initial assessment of its computer system and software applications and the
Company believes that the terminals will be 2000 compliant. The Company plans to
communicate with all key suppliers, financial institutions and customers during
fiscal 1999 to identify and coordinate the resolution of any year 2000 issues
which might arise from these constituencies. Based on its initial assessment,
the Company believes the cost of addressing the year 2000 issue will not have a
material impact on the Company's financial position or results of operations.
HOTELETICKET INSTANT AIRLINE TICKETING
The Company owns Hoteleticket, Inc., (Hoteleticket) a licensed travel
agency. Hoteleticket provided a service allowing business travelers to pick up
their tickets, boarding passes and seat assignments at the front desk of
Hoteleticket locations. In the past, this service was used on a limited basis
and has been inactive since November of 1993. Hoteleticket has not operated
profitably since inception. Presently because of severe cash limitations, the
Company discontinued operations. The Company is still in compliance with all
relevant regulatory authorities and the only expenses being incurred are those
that are required in order to comply with those authorities.
The Company does not expect any expansion until it can generate sufficient
capital, or some arrangement can be made with another company.
FAXMAIL REVENUES
GENERAL
The Company earns its principal revenues from the sale of its services to
the public, based on the terms of the particular Membership Agreement for the
public fax terminal location. When the Company first began contracting with
members in 1986, the locations were primarily hotels offering attended FaxMail
services to the public. Members now include hotels, airports, colleges,
universities, and primarily private airline clubrooms. The Company offers
attended and self-service location membership agreements.
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ATTENDED MEMBER LOCATIONS
Attended Member locations use their employees to collect FaxMail fees
directly from the Public, and then on a monthly arrears basis pay either a
percentage of those receipts to the Company or a fixed monthly fee.
While most original attended Member locations elected to pay the Company a
percentage of receipts, most new and renewed attended Member locations elected
to pay the Company on a fixed monthly fee. Therefore, the Company's revenues in
prior years from attended Member sites were higher. The Company attributes the
decline in revenues from attended Member sites to a number of factors including
maturation of the public fax marketplace, and expiration and non-renewal of the
attended Member locations. The Company's revenues from its attended Member
locations continue to decline and this will materially adversely affect
revenues. Because of these factors, the Company now directs it primary sales
efforts towards self-service Member locations.
SELF-SERVICE MEMBER LOCATIONS
Self-Service Member locations provide FaxMail services directly to the
Public, with FaxMail usage fees paid directly from the customer to the Company
by major credit card. The Company electronically collects self-service FaxMail
usage receipts on a daily basis and pays the self-service Member location a
commission based on those usage revenues.
When the self-service FaxMailer terminal is Company owned, the Company
earns a higher percentage of the FaxMail usage fees when compared to its
attended location Membership Agreements. Self-service receipts are collected
simultaneous with the sale compared to attended receipts being collected on a
monthly arrears basis.
SUPPLIERS
The Company's equipment used at its Member locations consists principally
of products sold by AT&T and Ricoh. The Company's self-service units integrate
certain designed components, which are manufactured by others and are readily
available from any one of many suppliers. The Company believes its present
suppliers can adequately meet the Company's needs for the near future.
CYCLICALITY OF THE INDUSTRY
The Company's revenues are derived primarily from business travelers.
Consequently, during periods of lessened business travel, such as holiday
seasons, the Company's revenues decline.
ECONOMIC DEPENDENCE
Each Member location contracts with the Company for FaxMail services. The
majority of the Company's attended Member location agreements are for single
locations. The Company does have master contracts for some multiple self-service
Member locations, has exclusive agreements with United (presently in
negotiations to renew) and Alaska Airlines to offer self service FaxMailers in
all of their private membership airport clubrooms nationwide. Although the
Company is not dependent upon a single customer, the loss of any individual
master contract could have a material adverse effect on continuing operations.
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GOVERNMENT REGULATION
At the present time, there is no price regulation for the Company's
services. There can be no assurance that charges for fax and other electronic
business services provided by the Company will not be regulated in the future.
COMPETITION
The Company also competes with alternative methods of document
transmission, principally overnight mail services such as Federal Express,
United Parcel Service and Express Mail by the United States Postal Service,
internet fax services and electronic mail (E-Mail). Additionally, any business
can purchase a facsimile machine and provide fax service to the public without
being a Member location of the Company.
In general, the market for public fax and information services is highly
competitive. The Company believes that the principal competitive factors in this
market include product features, ease of operation, product reliability, initial
investment costs, price and customer support services. The Company believes that
its continued operations will, in large part, be dependent on its ability to
respond to competitive pressures and technological changes by enhancing existing
products and marketing new products developed by it or others.
The Company competes with respect to its products and services with both
large established concerns and smaller companies that are developing and
offering or which may develop and offer competing products and services as well
as E-Mail, increased emphasis on the internet, and internet faxes. Many of these
competitors have financial resources far greater than those of the Company. The
intense competition in the market has adversely affected the Company as the
Company has limited financial ability to invest in new equipment, or to support
a marketing and sales effort.
EMPLOYEES
As of May 31, 1998, the Company had 2 full time employees and 1 part time
employee.
EXECUTIVE OFFICERS OF THE COMPANY
See the information contained in Part III, Item 9, which is incorporated
herein by reference.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company presently leases approximately 2,000 square feet for its
headquarters in Miami, Florida, which is used for office space, pursuant to a
lease expiring in May of 2000, at a total cost annually of approximately
$26,400. The property is owned by a partnership of which Carol Helms, the wife
of the Company's President and a Director of the corporation, and W. Edd Helms,
Jr., President of the Company, are the sole owners. The Company believes that
these facilities are sufficient to accommodate the Company's needs. The Company
believes the rent to be reasonable and competitive in price with rent for
similar facilities in the area. (See Part III, Item 12).
ITEM 3. LEGAL PROCEEDINGS.
In October 1990, the Company filed an Administrative Claim against the
United States Postal Service (USPS) alleging that the USPS had breached its
obligations under its five (5) contracts with the Company under which the
Company installed and operated facsimile machines for public use in Post Office
lobbies. Upon
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denial of the claim by the USPS, the Company filed two (2) lawsuits in the U.S.
Claims Court on February 27, 1991 (Case Nos. 91-963C and 91-964C). One lawsuit
alleged breach of contract and the second sought to overturn the administrative
termination of the contracts claiming that the USPS had breached the contracts
negating any justification for the termination action. USPS filed a counterclaim
against the Company for failure to pay operating fees under four (4) of the
contracts. The counterclaim sought an aggregate of $88,400, plus interest, from
the Company. The Company vigorously defended the counterclaim and asserted
defenses against the counterclaims. The aggregate amount of the claim by the
Company against the USPS was $8,566,112, filed July 25, 1991.
The United States Postal Service filed a Motion for Summary Judgement on
March 10, 1992. On June 2, 1991, Thomas J. Lydon, Senior Judge in the United
States Claims Court, denied the United States Postal Service's Motion for
Summary Judgement. The case was set for trial in Washington, D.C. on July 8,
1992, and concluded on July 16, 1992. Closing briefs were filed on September 10,
1992, and on November 3, 1992, the Company received an adverse decision, (United
States Claims Court Case Nos. 91-963C and 91-964C).
The Court dismissed the Company's complaints and ordered that the USPS
recover $88,400 on its counterclaim against the Company. The Company has charged
to expense and accrued a liability in the amount of $88,400. On March 10, 1993,
the Company filed its appeal in the United States Court of Appeals for the
Federal Circuit, and on August 17, 1993, the Court of Appeals affirmed the
decision of the lower court. On August 31, 1993, the Company petitioned the
United States Court of Appeals for the Federal Circuit for a rehearing and
suggestion for rehearing in banc. On October 29, 1993, the petition for
rehearing was denied and the suggestion for rehearing in banc was declined. On
November 5, 1993, a final judgement was entered against the Company in the
amount of $88,400. The Company does not have the funds to satisfy this
judgement.
The Company is, from time to time, involved in routine litigation
incidental to its business. In the opinion of the Company's management, based in
part on advice from counsel, none of the routine actions will have a material
adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matter was submitted to a vote of security holders through the
solicitation of proxies or otherwise during the year ending May 31, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock was traded on the over-the-counter market on
the National Association of Securities Dealers, Inc., under the NASDAQ symbol
"FAXMC" through December 1, 1992. On December 2, 1992, the Company's stock was
delisted from the NASDAQ Small-Cap Market. Effective December 2, 1992, the
Company's stock was traded on the OTC Bulletin Board under the symbol FAXM.
Consequently, there is currently no established public trading market for the
Company's Common Stock. In order to obtain bid quotations for the Common Stock,
it is necessary to contact certain broker/dealers, if any, that make a market in
the Common Stock.
The following tables set forth, for the periods indicated, the range of
high and low closing bid and ask prices for the Common Stock from June 1996
through May 31, 1998. These quotations represent prices between dealers, do not
include retail markups, markdowns, or commissions and do not represent actual
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transactions. In both fiscal years 1997 and 1998, there was little trading in
the Common Stock and the Company was unable to ascertain any bid quotations or
any actual prices paid for the Common Stock in any specific transactions.
Consequently, the Company is not able to state with any certainty the range of
bid and ask quotations for fiscal 1998.
YEAR ENDED YEAR ENDED
MAY 31, 1998 MAY 31, 1997
------------ ------------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter .0125 .0125 .10 .05
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter No Trading No Trading
On May 31, 1998, there were approximately 420 holders of record of the
Company's Common Stock. This number does not include any adjustment for
stockholders owning the Company's Common Stock in "Street" name.
The Company has not paid dividends since its inception, does not
anticipate paying any dividends in the foreseeable future and intends to retain
earnings, if any, to provide funds for general corporate purposes and the
expansion of the Company's business. Florida law restricts the payment of
dividends for corporations with a deficiency in assets.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS
MAY 31, 1998 COMPARED TO MAY 31, 1997
REVENUES
Total revenues decreased approximately 24% compared to the fiscal year
ended May 31, 1997. The decline in revenues is attributed to the decline in
Member locations. This decline is directly attributed to the expiration and
non-renewal of the Member locations and intense competition for this business.
The Company anticipates continued declines as contracts expire, and this has and
will materially adversely affect revenues.
The Company does not have funds to support a marketing and sales effort to
further expand its self-service FaxMailers, nor can it aggressively pursue
expansion of the self-service FaxMailers.
PAYROLL, PAYROLL TAXES AND RELATED BENEFITS
There was a decrease of approximately 55% in payroll, payroll taxes and
related benefits compared to the fiscal year ended May 31, 1997. During the
fiscal year ended May 31, 1998, there were no officer salaries paid and there
was a reduction in personnel.
COST OF REVENUES
Cost of revenues declined approximately 32% in fiscal May 1998 as compared to
the prior fiscal year. The
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decline in these costs can be attributed to the reduction of expenses to
maintain telephone lines resulting from the loss of a major customer.
OCCUPANCY COSTS
Occupancy costs decreased approximately 15% compared to the prior fiscal
year primarily attributable to discontinuance of an accrual for storage fees.
OTHER SELLING AND ADMINISTRATIVE
There was a slight increase in other selling and administrative expenses
(approximately 4%) compared to the prior fiscal year. There were some one-time,
unusual, office equipment repairs, an increase in office supplies and an
increase in general insurance.
EXTRAORDINARY ITEM - EXTINGUISHMENT OF DEBT
In May of 1998, the Company reviewed all the liabilities it had provided
for in prior years. The Company has determined, pursuant to the Florida Statute
of Limitations, Section 95.11 of the Florida Statues, that certain liabilities
appear to be time barred, and accordingly, have been written-off.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a working capital deficit of approximately ($166,000) and
a ratio of current assets to current liabilities of approximately .22 to 1 at
May 31, 1998. This compares with a May 31, 1997, working capital deficit of
($2,278,000) and a ratio of current assets to current liabilities of .02 to 1.
Working capital deficit decreased as a direct result of the write off of
old outstanding debts that expired due to the Florida Statute of Limitations.
Early in November 1992, the Company received an adverse decision in its
litigation against the United State Postal Service (United States Claims Court
Case Nos. 91-963C and 91-964C). The Court dismissed the Company's complaints and
ordered that the United States Postal Service recover $88,400 on its
counterclaim against the Company. On March 10, 1993, the Company filed its
Appeal in the United States Court of Appeals for the Federal Circuit, and on
August 17, 1993, the Court of Appeals affirmed the decision of the lower court.
On August 31, 1993, the Company petitioned the United States Court of Appeals
for the Federal Circuit for a rehearing and suggestion for rehearing in banc. On
October 29, 1993, the petition for rehearing was denied and the suggestion for
rehearing in banc was declined. On November 5, 1993, a final judgement was
issued a judgement was entered against the Company in the amount of $88,400. The
Company does not have the funds to satisfy this judgement.
The Company is in default with its creditors and in July of 1992 suspended
all payments to these creditors due to cash flow restraints. The Company does
not have the funds to repay these creditors. The Company to date, has been able
to rely on its current creditors and suppliers to extend sufficient credit. No
assurances can be given that these suppliers and creditors will continue to
extend sufficient credit and cooperate with the Company to maintain its present
level of operations. The Company's financial statements have been prepared on a
going concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the inability to pay its creditors, such realization of
assets and liquidation of liabilities are subject to significant uncertainty.
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The Company's inability to meet its liquidity needs raises substantial
doubt about the Company's ability to continue as a going concern. The Company
has continued to reduce its total operating expenses, however, revenues continue
to decline. The Company continues to attempt to renew attended Member agreements
as they expire. However, it has not been able to equally offset these
expirations with new self-service or attended Member agreements. The Company's
limited cash flow does not allow the Company to invest in new equipment or to
support a marketing and sales effort for the self-service FaxMailer and
therefore has limited new terminal installations.
The Company has limited liquidity on a short-term basis and, absent
additional funding, will have limited liquidity on a long-term basis. At the
present, the Company does not have any additional sources of liquidity, such as
bank or credit lines. Cash currently on hand and expected to be generated by
operations during the fiscal year ending May 31, 1999 are not expected to be
sufficient to finance expected working capital and other projected cash needs
during such period. Continued operation of the Company in the normal course of
business is dependent on the Company's ability to obtain adequate funding of
ongoing operations from external or internal sources.
If the Company is unable to obtain financing or equity capital, the
ability of the Company to continue as a going concern will be in doubt. Should
the Company be unable to continue as a going concern the liquidation value of
its assets will not be sufficient to satisfy the Company's outstanding
obligations.
PLAN OF OPERATION
The objective of the Company is to bring it into reporting compliance,
resolve all creditor issues, and, if successful, try to merge the Company with
an ongoing entity. If a merger is successful, the Company plans to continue its
current operations, consider additional marketing to the extent that sales might
increase and continue its current personnel levels with the principal activities
being devoted to the merged entity's business operations until cash flow is
sufficient for the Company to consider additional research and development. No
additional expenditures are currently anticipated for property and equipment if
a successful merger is consummated. There can be no assurance the Company can
find a merger candidate or, if found, that the Company can operate profitably.
The matters discussed in "Plan of Operation" above are forward looking
statements as defined under Rule 175 of the Securities Act.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements begin on the next page.
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HOTELECOPY, INC. AND SUBSIDIARY
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CONTENTS
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INDEPENDENT AUDITOR'S REPORT FS-2
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets FS-3
Consolidated Statement of Operations FS-4
Consolidated Statements of Cash Flows FS-5
Consolidated Statements of Deficiency in Assets Attributable to Common Stock FS-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FS-7 to FS-12
</TABLE>
FS-1
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DOHAN AND COMPANY 7700 NORTH KENDALL DRIVE, #204
CERTIFIED PUBLIC ACCOUNTANTS MIAMI, FLORIDA 33156-7564
A PROFESSIONAL ASSOCIATION TELEPHONE: (305) 274-1366
FACSIMILE: (305) 274-1368
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of Hotelecopy, Inc.
Miami, Florida
We have audited the accompanying consolidated balance sheets of Hotelecopy, Inc.
and subsidiary as of May 31, 1998 and 1997, and the related consolidated
statements of operations, cash flows and deficiency in assets attributable to
common stock for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Hotelecopy, Inc. and subsidiary as of May 31, 1998 and 1997, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 8 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, and has a deficiency in assets that raise substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 8. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ DOHAN AND COMPANY, PA
----------------------------
Dohan and Company, PA
Certified Public Accountants
Miami, Florida
August 5, 1998
FS-2
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HOTELECOPY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MAY 31,
- --------------------------------------------------------------------------------
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<CAPTION>
1998 1997
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ASSETS
CURRENT ASSETS
Cash and equivalents $ 23,934 $ 20,995
Restricted cash - certificate of deposit 10,000 10,000
Accounts receivable, less allowance for
doubtful accounts of $500 and $7,700 3,966 5,671
Inventory 2,855 15,800
Other 5,856 4,433
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TOTAL CURRENT ASSETS 46,611 56,899
PROPERTY AND EQUIPMENT (NOTE 2) - -
DEPOSITS 2,565 2,565
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TOTAL ASSETS $ 49,176 $ 59,464
============= =============
LIABILITIES AND DEFICIENCY IN ASSETS ATTRIBUTABLE TO COMMON STOCK
CURRENT LIABILITIES (NOTE 6)
Accounts payable (Notes 5 and 6) $ 88,400 $ 1,114,510
Notes payable in default (Note 6) - 1,057,197
Note payable affiliate, in default (Note 6) - 25,250
Accrued liabilities (Note 6) 124,528 138,033
------------- -------------
TOTAL CURRENT LIABILITIES 212,928 2,334,990
------------- -------------
COMMITMENTS AND CONTINGENCIES (NOTES 3, 5, 6 and 8)
DEFICIENCY IN ASSETS ATTRIBUTABLE TO COMMON STOCK
Common stock, $.01 par value, 10,000,000 shares
authorized: 1,933,318 shares issued and outstanding (Note 4) 19,333 19,333
Additional paid-in capital 6,213,341 6,213,341
Accumulated deficit (6,396,426) (8,508,200)
------------- -------------
TOTAL DEFICIENCY IN ASSETS ATTRIBUTABLE TO COMMON STOCK (163,752) (2,275,526)
------------- -------------
TOTAL LIABILITIES AND DEFICIENCY IN ASSETS
ATTRIBUTABLE TO COMMON STOCK $ 49,176 $ 59,464
============= =============
</TABLE>
See accompanying notes.
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HOTELECOPY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED MAY 31,
<TABLE>
<CAPTION>
1998 1997
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REVENUES (NOTE 9) $ 434,306 $ 572,581
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COSTS AND EXPENSES
Cost of revenues 216,900 320,062
Payroll, payroll taxes and related benefits 97,796 219,453
Occupancy costs (Note 3) 61,984 72,543
Other selling and administrative 107,616 103,952
Abandonment loss (Note 2) - 60,290
------------ -----------
TOTAL COSTS AND EXPENSES 484,296 776,300
------------ -----------
LOSS BEFORE EXTRAORDINARY ITEMS (49,990) (203,719)
------------ -----------
EXTRAORDINARY ITEMS
Gain on extinguishment of debt, net of
income taxes of $778,235 and $51,559 (Note 6) 1,383,529 91,661
Tax benefit from utilization of net
operating loss carryforwards (Note 7) 778,235 51,559
------------ -----------
TOTAL EXTRAORDINARY ITEMS 2,161,764 143,220
------------ -----------
NET INCOME (LOSS) $ 2,111,774 $ (60,499)
============ ===========
PER SHARE OF COMMON STOCK (BASIC AND DILUTED)
Loss per common share before extraordinary items $ (0.03) $ (0.11)
------------ -----------
Extraordinary items $ 1.12 $ 0.07
------------ -----------
NET INCOME (LOSS) PER COMMON SHARE $ 1.09 $ (0.03)
============ ===========
WEIGHTED AVERAGE SHARES OUTSTANDING 1,933,318 1,933,318
============ ===========
</TABLE>
See accompanying notes.
FS-4
<PAGE>
HOTELECOPY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31,
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) $ 2,111,774 $ (60,499)
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision for bad debts (7,200) -
Impairment of assets - 61,040
Extinguishment of debt (2,161,764) (143,220)
Changes in operating assets and liabilities:
Decrease in accounts receivable 8,905 12,223
Decrease in inventory 12,945 8,922
(Increase) decrease in other current assets (1,423) 1,829
Increase in accounts payable, other than extinguishment 42,613 126,057
Decrease in accrued liabilities, other than extinguishment (2,911) (13,502)
------------- -------------
CASH PROVIDED (USED) BY OPERATING ACTIVITIES AND
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 2,939 (7,150)
CASH AND EQUIVALENTS, BEGINNING 20,995 28,145
------------- -------------
CASH AND EQUIVALENTS, ENDING $ 23,934 $ 20,995
============= =============
</TABLE>
See accompanying notes.
FS-5
<PAGE>
HOTELECOPY, INC. & SUBSIDIARY
CONSOLIDATED STATEMENTS OF DEFICIENCY IN ASSETS
ATTRIBUTABLE TO COMMON STOCK
FOR THE YEARS ENDED MAY 31, 1998 AND MAY 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONAL
COMMON STOCK PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
-------------------- ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
BALANCE, MAY 31, 1996 1,933,318 $19,333 $6,213,341 $(8,447,701) $(2,215,027)
NET LOSS (60,499) (60,499)
--------- ------- ---------- ----------- -----------
BALANCE, MAY 31, 1997 1,933,318 19,333 6,213,341 (8,508,200) (2,275,526)
NET INCOME 2,111,774 2,111,774
--------- ------- ---------- ----------- -----------
BALANCE, MAY 31, 1998 1,933,318 $19,333 $6,213,341 $(6,396,426) $ (163,752)
========= ======= ========== ============ ============
</TABLE>
See accompanying notes.
FS-6
<PAGE>
HOTELECOPY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1998 AND 1997
- --------------------------------------------------------------------------------
NOTE 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS ACTIVITY
Hotelecopy, Inc. (the "Company") is a Florida corporation formed in July
1985, primarily to provide a worldwide facsimile transmission network
with facsimile equipment located in various commercial and public
locations throughout the United States and other countries.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its subsidiary, Hoteleticket, Inc. ("Hoteleticket").
Hoteleticket is a Florida corporation formed in 1988 to provide airline
and other travel reservation services through automated ticket
printers., Hoteleticket has discontinued its operating activities,
however, it is still in compliance with relevant regulatory authorities,
and its only expenses are those that are required in order to comply
with those authorities. All significant intercompany accounts and
transactions for the periods presented have been eliminated in
consolidation.
REVENUE RECOGNITION
The Company recognizes its facsimile transmission usage revenue on the
date of the transmission. Membership revenues are recognized ratably
over the respective terms of the members' contracts.
INVENTORY
Inventory consists of facsimile equipment and supplies and is valued at
the lower of cost (using the first-in, first-out method) or market.
INCOME TAXES
Income taxes are computed under the provisions of the Financial
Accounting Standards Board (FASB) Statement No. 109, (SFAS No. 109)
"Accounting for Income Taxes". Current and deferred taxes are allocated
to members of the consolidated group by applying SFAS No. 109 to each
member as if it were a separate taxpayer.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of furnishings and facsimile
equipment is stated at cost, less accumulated depreciation, while
equipment not yet placed in service is carried at cost. Depreciation is
begun when the assets are placed in service and computed using the
straight-line method over the estimated useful lives of the assets,
which range from five to ten years.
FS-7
<PAGE>
ADVERTISING
Advertising costs are expensed as incurred.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
CONCENTRATIONS OF CREDIT RISK
The Company places equipment in hotels and extends credit based on an
evaluation of the hotel's financial condition, without requiring
collateral. Exposure to losses on receivables is principally dependent
on the financial condition of each hotel. The Company monitors its
exposure for credit losses and maintains allowances for anticipated
losses.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
IMPAIRMENT OF LONG-LIVED ASSETS
During fiscal 1997, the Company adopted FASB Statement No. 121 (SFAS No.
121), "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". SFAS No. 121 requires that
impairment losses are to be recorded when long-lived assets to be held
and used are reviewed for impairment whenever events or changes in
circumstances indicate that the related carrying amount may not be
recoverable. When required, impairment losses on assets to be held and
used are recognized based on the fair value of the asset. Long-lived
assets to be disposed of, if any, are reported at the lower of carrying
amount or fair value less cost to sell. The Company's adoption of SFAS
No. 121 resulted in a material impact on its financial position and
results of operations for the year ended May 31, 1997 (see Note 2).
NET INCOME (LOSS) PER COMMON SHARE
Effective December 31, 1997, the Company adopted the provisions of FASB
Statement No. 128 (SFAS No. 128), "Earnings Per Share". SFAS No. 128
requires companies to present basic earnings per share (EPS) and diluted
EPS, instead of primary and fully diluted EPS presentations that were
formerly required by Accounting Principles Board Opinion No. 15,
"Earnings Per Share". Basic EPS is computed by dividing net income or
loss by the weighted average number of common shares outstanding during
each year. For the Company, diluted EPS does not include the effect of
potential stock option exercises which would have an anti-dilutive
effect, therefore EPS amounts for all periods reflect the provisions of
SFAS No. 128.
CASH AND EQUIVALENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents.
RESTRICTED CASH
The Company has a certificate of deposit that collateralizes a $10,000
irrevocable letter of credit. The letter of credit may be terminated
annually at the Company's option.
FS-8
<PAGE>
FAIR VALUE OF FINANCIAL INSTRUMENTS
Cash, receivables, accounts payable, debt, accrued expenses and other
liabilities are carried at amounts which reasonably approximate their
fair value due to the short-term nature of these amounts or due to
variable rates of interest which are consistent with current market
rates.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and
display of comprehensive income and its components (revenue, expenses,
gains and losses) in a separate full set of general-purpose financial
statements. The provisions of this statement are effective for fiscal
years beginning after December 15, 1997. Management believes that the
Company does not have items of a material nature that would require
presentation in a separate statement of comprehensive income.
In June 1997, the FASB also issued Statement No. 131, "Disclosures About
Segments of and Enterprise and Related Information", which establishes
standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires those enterprises to report selected information about
operating segments in interim financial reports issued to shareholders.
The provisions of this statement are effective for fiscal years
beginning after December 15, 1997. Management believes that the Company
currently does not have items of a material nature which would require
segment disclosure.
NOTE 2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at May 31:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Facsimile equipment $ 449,645 $ 512,291
Office and other equipment 46,821 46,821
------------- ------------
496,466 559,112
Less accumulated depreciation 496,466 559,112
------------- ------------
Property and equipment, net book value $ - $ -
============= ============
</TABLE>
During the year ended May 31, 1997, the Company charged-off and
abandoned impaired assets with a net value of $60,290. There was no
depreciation expense in either year.
NOTE 3. RELATED PARTY TRANSACTIONS AND COMMITMENT
The Company on June 1997 and its subsidiary leased their operating
facilities from a Partnership controlled by its President pursuant to a
non-cancelable lease expiring May of 1998. Rent expense was
approximately $61,900 and $72,500 for the years ended May 31, 1998 and
1997. The Company on June 1, 1998 renewed the lease for two years at the
rate of $26,400 per year exclusive of sales tax.
The Company is affiliated with various other entities through common
ownership and control with its President who is also a shareholder.
FS-9
<PAGE>
NOTE 4. INCENTIVE STOCK OPTION PLAN
On May 31, 1989, the Company's Board of Directors adopted its 1989
Incentive Stock Option Plan (ISOP) in order to attract, retain and
motivate employees who contribute materially to the success of the
Company. Employees of the Company and its subsidiary are covered by the
ISOP. Under the terms of the ISOP, the Company is authorized to grant
incentive stock options to purchase up to an aggregate of 100,800 shares
of its common stock. The option price under the ISOP will be the fair
market value of the common stock at the date of grant or if granted to
individuals who own 10% or more of the Company's common stock at 110% of
fair market value. No option is excersizable after ten years from the
date of grant (five years for holders of greater than 10% of the stock).
The ISOP is administered by the Compensation Committee of the Company's
Board of Directors. Options to acquire 12,000 shares expired during the
year ended May 31, 1997, and there was no activity during the year ended
May 31, 1998. At May 31, 1998, there are options to purchase 39,577
shares of common stock pursuant to ISOP grants. (plus 4,000 options
issued to non-employee directors)
NOTE 5. UNITED STATES POSTAL SERVICE (USPS) JUDGEMENT
During 1989, the Company entered into joint venture agreements with the
USPS to provide and maintain facsimile equipment in 265 post office
locations in the USPS's five regions. During the contract period, a
dispute arose relating to these agreements and, in October 1990, the
Company filed an administrative claim for $5,251,000 ($8,566,000 as
amended) against the USPS alleging that the USPS breached its
obligations under these contracts. On January 31, 1991, the USPS denied
the Company's administrative claim. The contracts for three of the USPS
regions were terminated by the USPS in January 1991 and the contracts
for the other two regions were terminated in February and May 1991,
respectively. In February 1991, the Company filed two lawsuits against
the USPS relating to these contracts. One lawsuit alleged breach of
contract and the second was to overturn the administrative termination
of the contracts. Subsequently, the USPS filed a counterclaim against
the Company totaling $88,400 for failure to pay operating fees under
four of the contracts. The trial was completed on July 16, 1992 and on
November 3, 1992 the Company received an adverse decision (United States
Claims Court Case Nos.91-963C and 91-964C).
The Court dismissed the Company's complaints and ordered that the USPS
recover $88,400 on its counterclaim against the Company. The Company has
charged to expense and accrued for the liability for the counterclaim
against it for $88,400, which is included in accounts payable in the
accompanying balance sheets. On March 10, 1993, the Company filed its
appeal in the United States Court of Appeals for the Federal Circuit and
on August 17, 1993 the Court of Appeals affirmed the decision of the
lower court. On August 31, 1993, the Company petitioned the United
States Court of Appeals for the Federal Circuit for a rehearing and
suggestion for rehearing in banc. On October 29, 1993, the petition for
rehearing was denied and the suggestion for rehearing in banc was
declined. On November 5, 1993, a final judgement was entered against the
Company for $88,400. The Company does not have the funds to satisfy this
judgement.
NOTE 6. EXTRAORDINARY ITEM - EXTINGUISHMENT OF DEBT
In May of 1998, the Company reviewed its liabilities, especially those
in default, to determine if the debts it had incurred in prior years was
subject to the Florida Statute of Limitations, Section 95.11 of the
Florida Statutes. As part of that review, the Company also contacted its
two largest creditors, one of which responded that the debt had been
charged-off. In summary, that statute provides that where there is no
collection activity within a five-year period, the creditor is barred
from further collection. The statute further provides that any action
contemplated or action on a judgement decree of any court, not of
record, of the State of Florida or any court of the United States, any
other state or territory in the United States shall be commenced within
five (5) years.
FS-10
<PAGE>
NOTE 6. EXTRAORDINARY ITEM - EXTINGUISHMENT OF DEBT (CONTINUED)
In addition, the statute states that a legal or equitable action on a
contract, obligation, or liability founded on a written instrument shall
be commenced within five (5) years from the occurrence of the last
element constituting the cause of action. Whereas, a legal or equitable
action on a contract, obligation, or liability not founded on a written
instrument shall be commenced within four (4) years from the occurrence
of the last element constituting the cause of action.
Accordingly, the Company has written-off all debts, as extinguished,
that fall within the parameters of the statute and has accrued a
liability for potential litigation or settlement in the event its
write-offs are legally challenged.
NOTE 7. INCOME TAXES
The Company and its subsidiary file consolidated income tax returns. For
the year ended May 31, 1997, the Company generated for U.S. income tax
purposes a net operating loss of approximately $60,000.
At May 31, 1998, the Company had net operating loss carryforwards of
approximately $6,150,000 for income tax purposes, of which $628,000
expires in the year ending 2006, $2,278,000 expires in the year ending
2007, $1,536,000 expires in the year ending 2008, $777,000 expires in
the year ending 2009, $200,000 expires in the year ending 2010, $525,000
expires in the year 2011, and the balance expires in 2012. However, if
subsequently there are ownership changes in the Company, as defined in
Section 382 of the Internal Revenue Code, as a result of those changes,
the Company's ability to utilize net operating losses and capital losses
available before the ownership change may be restricted to a percentage
of the market value of the Company at the time of the ownership change.
Therefore, substantial net operating loss carryforwards could, in all
likelihood, be limited or eliminated in future years due to a change in
ownership as defined in the Code. The utilization of the remaining
carryforwards is dependent on the Company's ability to generate
sufficient taxable income during the carryforward periods and no further
significant changes in ownership.
The Company computes deferred income taxes under the provisions of FASB
Statement No. 109 (SFAS 109), which requires the use of an asset and
liability method of accounting for income taxes. SFAS No. 109 provides
for the recognition and measurement of deferred income tax benefits
based on the likelihood of their realization in future years. A
valuation allowance must be established to reduce deferred income tax
benefits if it is more likely than not that a portion of the deferred
income tax benefits will not be realized. It is Management's opinion
that the entire deferred tax benefit may not be recognized in future
years. Therefore, a valuation allowance equal to the deferred tax
benefit has been established, resulting in no deferred tax benefits as
of the consolidated balance sheet dates.
The Company may be required to file income tax returns in some states in
which it has facsimile equipment. As a result of its liquidity problems,
the Company has been unable to fund the cost of such filings, however,
Management believes that due to the recurring losses experienced no
substantial penalties will be incurred if, and when, the Company is
financially able to file these overdue returns.
FS-11
<PAGE>
NOTE 8. OPERATING AND ECONOMIC CONDITIONS AND MANAGEMENT'S PLANS
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern basis, which contemplates
the realization of assets and the settlement of liabilities and
commitments in the normal course of business. The Company has suffered
recurring losses from operations (before extinguishment of debt),
consequently there is a deficiency in assets attributable to common
stock of $163,752 at May 31, 1998, as well as a working capital
deficiency. Furthermore, liquidity conditions have limited the ability
of the Company to market its products and services at amounts sufficient
to recover its operating and administrative costs. Consequently, the
Company has incurred losses before extraordinary items of $49,990 and
$203,719 for the years ending May 31, 1998 and 1997, respectively. Cash
currently on hand and expected to be generated by operations during
fiscal 1999 is not expected to be sufficient to finance expected working
capital and other projected cash needs during such period. Continued
operation of the Company in the normal course of business is dependent
on the Company's ability to obtain adequate funding of ongoing
operations from external or internal sources. This condition, together
with the Company's recurring losses from operations and net capital
deficiency, raise substantial doubt about its ability to continue as a
going concern. Should the Company be unable to continue as a going
concern, the liquidation value of its assets will not be sufficient to
satisfy the Company's outstanding obligations. The financial statements
do not include any adjustments that might result from the outcome of
this uncertainty.
In addition, the Company has used substantial working capital in its
operations. As of May 31, 1998, current liabilities exceed current
assets by $166,317. Cash provided (used) by operations of the Company
for the years ended May 31, 1998 and 1997 amounted to $2,939, and
($7,150), respectively. The consolidated financial statements do not
include any adjustments relating to the recoverability and
classification of recorded assets, or the amounts or classifications of
liabilities that might be necessary in the event the Company cannot
continue in existence.
Management's plan for dealing with the conditions described above is
pursuing the acquisition of an operating entity. This prospective
acquisition and changes in the Company's business may significantly
affect the Company's deficiency in assets.
NOTE 9. SIGNIFICANT CUSTOMERS
Two customers comprised 71% of the total May 31, 1998, sales of the
Company (27% and 44% respectively). Those same two customers accounted
for 21% and 38% of May 31, 1997 sales, while a third customer accounted
for 22% of that year's sales. In total, those three customers comprised
81% of the sales for the year ended May 31, 1997.
FS-12
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During fiscal years covered by this report, the Company did not have a
change in or a disagreement with its accountants. However, the Company did
appoint Dohan and Company as its auditors. The Company has not had auditors
since the fiscal year ended May 31, 1992.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.
The Directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME SINCE AGE POSITION
- ---- ----- --- --------
<S> <C> <C> <C>
W. Edd Helms, Jr.* 1985 52 Chairman of the Board of Directors, President and
Chief Executive Officer
L. Wade Helms 1986 41 Executive Vice President and Director
Carol Helms 1985 49 Secretary and Director
Philip H. Kabot N/A 63 Vice President Finance/Chief Financial Officer
</TABLE>
* Designates Member of the audit and compensation committees of the Board of
Directors.
W. Edd Helms, Jr. is the Chairman of the Board of Directors, President,
and Chief Executive Officer of the Company and has served in these capacities
since the inception of the Company in 1985. Mr. Helms is also the
Secretary/Treasurer and a Director of Edd Helms, Incorporated ("EHI") and a
Secretary/Treasurer of its subsidiaries, a heavy industrial electrical
contracting, air conditioning and service organization. In February, 1989, W.
Edd Helms, Jr. resigned as President and Chairman of EHI in order to devote a
majority of his time to the affairs of the Company. He had served as President
and Chairman of EHI since 1975. In January of 1994, Mr. Helms significantly
reduced the time he devoted to the Company, devoting more time to EHI. W. Edd
Helms, Jr. is the brother of L. Wade Helms and the husband of Carol Helms.
L. Wade Helms has served in the capacity of Executive Vice President and
a Director of the Company since February, 1986. From 1983 to 1986 he was the
Chief Financial Officer and Vice President of EHI and served as a Director of
that company from 1984 until 1990. From 1982 to 1986, he served as Property
Manager of National Industrial Park, and as General Manager of Helms Leasing,
both of which were partnerships controlled by W. Edd Helms, Jr. and Carol Helms,
his wife. In January of 1994, Mr. Helms reduced his time spent with the Company,
reassociating himself with EHI.
Philip H. Kabot was engaged by the Company in December 1990 as a
consultant. On June 1, 1991, Mr. Kabot joined the Company on a full-time basis
as Vice President of Finance and Chief Financial Officer. Mr. Kabot resigned in
March of 1995. In August of 1997, Mr. Kabot joined EHI on a full-time basis and
Hotelecopy on a consulting basis without compensation.
Carol Helms has been a Director and the Secretary of the Company since
its inception in 1985. She does not devote full time to the affairs of the
Company and receives no compensation. She is also the Secretary and a Director
of EHI.
10
<PAGE>
Each Director is elected to hold office until the next Annual Meeting of
Shareholders and until their successor is elected and qualified. Officers of the
Company are elected by the Board of Directors at the Annual Meeting to hold
office for the term of one year and until their successors are elected and
qualified.
The Company's by-laws contain provisions that permit indemnification,
including legal fees, of the Company's directors, officers, employees and agents
to the fullest extent permitted by Florida law.
Based solely on review of Forms 3, 4 and 5 and amendments thereto
furnished to the Company, the Company believes that all persons required to
comply with Section 16(a) of the Securities Exchange Act of 1934 filed the
required Forms 3, 4 and 5 during the most recent fiscal year, except for one
late filed Form 4 by one director.
ITEM 10. EXECUTIVE COMPENSATION.
I. SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding
compensation paid during each of the Company's last three fiscal years to the
Company's Executive Officers. None of the executive officers total annual salary
or bonuses exceeded $100,000.
<TABLE>
<CAPTION>
==========================================================================================================================
ANNUAL COMPENSATION LONG TERM COMPENSATION
AWARDS PAYOUTS
==========================================================================================================================
(1) (b) (c) (d) (e) (f) (g) (h) (i)
NAME OTHER RESTRICTED
AND ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL SALARY BONUS(A) COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) (#) ($) ($)
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
W. Edd Helms, Jr. 1998 $0
President & Chief 1997 $15,605
Executive Officer
- --------------------------------------------------------------------------------------------------------------------------
L. Wade Helms 1998 $0
Executive 1997 $16,773
Vice-President
- --------------------------------------------------------------------------------------------------------------------------
Philip Kabot 1998 $0
Vice President of 1997 $0
Finance & Chief
Financial Officer
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
II. COMPENSATION PURSUANT TO PLANS
INCENTIVE STOCK OPTION PLAN
On May 31, 1989, the Board of Directors of the Company adopted its 1989
Incentive Stock Option Plan (the "ISOP") in order to attract, retain and
motivate employees who contribute materially to the success of the Company.
Under the terms of the ISOP, the Company is authorized to grant incentive stock
options to purchase up to an aggregate of 100,800 shares of its Common Stock.
The ISOP is administered by the Compensation Committee of the Company's Board of
Directors.
The Compensation Committee is authorized to interpret the ISOP and to
select the employees who will receive options under the ISOP. The Compensation
Committee also determines, within the parameters established by law, the time at
which, and the number of shares for which, an option may be granted and the
period in which the option may be exercised. The Compensation Committee's
determinations are based on, among other things, the value of the services
rendered by the employee. The option price for the purchase of the Company's
Common Stock pursuant to an incentive stock option is the average of the closing
bid and ask
11
<PAGE>
quotation for the Common Stock on NASDAQ on the date of grant, except that the
grant to W. Edd Helms, Jr. has an exercise price of 110% of that average price.
These options expire at the earlier of the stated expiration, which shall not
exceed ten years from the date of grant (five years for greater than 10%
shareholders). Stock options are granted with an exercise price at least equal
to the fair market value at the date of grant. Options to purchase 34,923 shares
of Common Stock at $6.50 per share were granted. During the year ended May 31,
1991, options to purchase 21,846 shares expired. On September 9, 1991, options
to purchase 46,000 shares of Common Stock were granted. Of these 46,000 options
to purchase shares of Common Stock, 34,000 are at $1.10 per share, and 12,000
are at $1.21. 5,000 of these options expired on July 19, 1992, 2,500 expired
during fiscal 1994, and 12,000 expired in fiscal 1997. In November 1991, an
additional 4,000 options under a non-qualified stock plan were issued to the
then non-employee directors. As of August 24, 1998, the following table shows
all of the options granted to and presently outstanding and the amount of
options exercised:
<TABLE>
<CAPTION>
% OF GRANT OPTIONS EXERCISE OPTIONS EXPIRATION
FOR THE YEAR GRANTED PRICE EXERCISED DATE
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
L. Wade Helms 100 % 13,077 6.50 None January 9, 2000
L. Wade Helms 24 % 12,000 1.10 None September 9, 2001
Philip Kabot 24 % 12,000 1.10 None September 9, 2001
Robert Schuler 5 % 2,500 1.10 None September 9, 2001
Non Employee Directors 8 % 4,000(1) .875 None November 4, 2001
</TABLE>
(1) Includes 1,000 options granted to Carol Helms
As of August 24, 1998, the following table shows all of the options
granted to and the amount of options exercised by executive officers of the
Company:
OPTIONS OPTIONS
GRANTED EXERCISED
-----------------------------
L. Wade Helms 25,077 None
Carol Helms 1,000 None
Philip Kabot 12,000 None
There are no employment agreements with any officers or employees.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of August 18, 1998, information with
respect to the beneficial ownership of Common Stock of the Company by: (i) each
person (including any "group") who is known by the Company to be the beneficial
owner of more than five percent of the Company's outstanding voting securities;
(ii) each director and nominee to become a director of the Company; and (iii)
all officers and directors as a group:
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
NAME BENEFICIALLY OWNED PERCENT
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
W. Edd Helms, Jr. 850,567 (1) 44%
L. Wade Helms 2,147 (2) *
Carol Helms (3) *
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
All Officers and Directors 876,758 (1)(5) 45.4%
</TABLE>
* Less than 1 percent
(1) Includes 10,890 shares owned by his daughters, 2,500 shares owned
beneficially with his wife and 204,800 shares which were previously owned
beneficially, and, during the year May 31, 1998, were transferred on April
30, 1998 from EHI to W. Edd Helms, Jr.
(2) L. Wade Helms shares voting and investment power of 887 shares with his
wife, Vicki, and has sole voting and investment power with respect to 1,260
shares. Does not include an Incentive Stock Option to purchase 25,077
shares of the Company's Common Stock.
(3) Carol Helms, a Director of the Company, is the mother of two daughters who
own a total of 10,890 shares of Common Stock of the Company. She disclaims
any interest in the shares beneficially owned by W. Edd Helms, Jr., her
husband, and her daughters. Does not include an option to purchase 1,000
shares of the Company's Common Stock.
(4) The address of W. Edd Helms, Jr., L. Wade Helms and Carol Helms is 17850
N.E. 5th Avenue, Miami, Florida 33162.
(5) See notes (1) through (3) for details with respect to the three current
directors and officers.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company leases its Miami, Florida office and warehouse facilities
from a partnership owned by W. Edd Helms, Jr. and Carol Helms. Rent expense paid
to this partnership was approximately $61,900 and $72,500 for the years ended
May 31, 1998 and 1997, respectively.
The Company believes that the above transaction is on terms and
conditions at least as favorable to the Company as those that would have been
available from non-affiliated third parties. Any future transactions between the
Company and its Officers, Directors or principal shareholders or any affiliates
thereof will be made for bona fide business purposes on terms no less favorable
than could be obtained from unaffiliated third parties, and will be approved by
a majority of the board of directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
The following documents are filed with, and as a part of, this Annual Report on
Form 10-KSB:
1. Financial Statements (included in Part II, Item 7.)
2. Exhibits required to be filed by Item 601 of Regulation S-K.
No Form 8-K was filed during the year.
<PAGE>
<TABLE>
<CAPTION>
REG. S-K LOCATION IN THIS REPORT OR INCORPORATED BY REFERENCE
ITEM NO. DOCUMENT TO PRIOR FILING
- -------- -------- ----------------------------------------------------
<S> <C> <C>
3.0 Articles of Incorporation Exhibit 3.0 of S-18 Registration Statement #33-30649A
which became effective on September 28, 1989
3.1 By-Laws Exhibit 3.1 of S-18 Registration Statement #33-30649A
which became effective on September 28, 1989
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C>
10.0 Hoteleticket Acquisition Exhibit 10.0 of S-18 Registration Statement #33-30649A
Agreement which became effective on September 28, 1989
10.1 AT&T Lease Financing Exhibit 10.1 of S-18 Registration Statement #33-30649A
Agreement which became effective on September 28, 1989
10.2 Lease for Premises Exhibit 10.2 of S-18 Registration Statement #33-30649A
which became effective on September 28, 1989
10.3 Incentive Stock Option Plan Exhibit 10.3 of S-18 Registration Statement #33-30649A
which became effective on September 28, 1989
10.4 System One Agreement Exhibit 10.4 of S-18 Registration Statement #33-30649A
which became effective on September 28, 1989
10.5 Trademark Registration Exhibit 10.5 of S-18 Registration Statement #33-30649A
No. 1421460 which became effective on September 28, 1989
10.6 Trademark Registration Exhibit 10.6 of S-18 Registration Statement #33-30649A
No. 1449098 which became effective on September 28, 1989
10.7 Trademark Registration Exhibit 10.7 of S-18 Registration Statement #33-30649A
No. 1458720 which became effective on September 28, 1989
10.8 Contract with United States Exhibit 10.8 of S-18 Registration Statement #33-30649A
Postal Service which became effective on September 28, 1989
10.9 Contract with Federal Express Exhibit 10.9 of S-18 Registration Statement #33-30649A which
Corporation became effective on September 28, 1989
10.10 Lease for premises Filed as Exhibit 10.10 to May 31, 1990 Form 10-K
10.11 Lease for premises Filed as Exhibit 10.11 to May 31, 1990 Form 10-K
10.12 Lease for Premises Filed as Exhibit 10.12 to May 31, 1990 Form 10-K
10.13 Contract with United States Postal Filed as Exhibit 10.13 to May 31, 1990 Form 10-K
Service (other than the N.E. Region)
10.14 Contract with TouchFax Information Filed as Exhibit 10.14 to May 31, 1990 Form 10-K
Systems, Inc.
10.15 Contract with MCI Filed as Exhibit 10.15 to May 31, 1990 Form 10-K
Telecommunications Corporation
10.16 Contract with MCI Filed as Exhibit 10.16 to May 31, 1990 Form 10-K
Telecommunications Corporation
10.17 Lease for Premises Filed as Exhibit 10.17 to May 31, 1990 Form 10-K
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
10.18 Loan Modification Agreement Filed as Exhibit 10.18 to May 31, 1990 Form 10-K
10.19 Amendment to Security Agreement Filed as Exhibit 10.19 to May 31, 1990 Form 10-K
10.20 Amendment to Security Agreement Filed as Exhibit 10.20 to May 31, 1990 Form 10-K
10.21 Promissory Note Filed as Exhibit 10.21 to May 31, 1990 Form 10-K
10.22 Amendment to Security Agreement Filed as Exhibit 10.22 to February 29, 1992 10Q
10.23 Amendment to Security Agreement Filed as Exhibit 10.23 to February 29, 1992 10Q
10.24 Extinguishment of debt Filed as Exhibit 10.24 to February 29, 1992 10Q
10.24 A) Termination Agreement Filed as Exhibit 10.24A to February 29, 1992 10Q
10.24 B) Bill of Sale Filed as Exhibit 10.24B to February 29, 1992 10Q
10.24 C) Stock Option Filed as Exhibit 10.24C to February 29, 1992 10Q
10.25 Opinion of the Court-Motion for Filed as Exhibit 10.25 to June 5, 1992 8K
Summary Judgement
10.26 Opinion of the Court in the United Filed as Exhibit 10.26 to November 6, 1992 8K
States Claims Court Case Nos.
91-963C and 91-964C, Hotelecopy,
Inc. (Plaintiff) vs. The United
States, (Defendant)
10.27 NASDAQ Hearing Review Opinion Filed as Exhibit 10.27 to December 2, 1992 8K
10.28 Opinion of the United States Court Filed as Exhibit 10.28 to August 19, 1993 Form 8K
of Appeals in the Federal Circuit
10.29 Order of the United States Court of Filed as Exhibit 10.29 to November 3, 1993 Form 8K
Appeals for the Federal Circuit
22.1 Hoteleticket, Inc., a Florida Exhibit 22.1 of S-18 Registration Statement #33-30649A which
Corporation became effective on September 28, 1989
22.2 FaxMail, Inc., a Florida Exhibit 22.2 of S-18 Registration Statement #33-30649A which
Corporation (inactive) became effective on September 28, 1989
22.3 Hotelefax, Inc., a Florida Exhibit 22.3 of S-18 Registration Statement #33-30649A which
Corporation (inactive) became effective on September 28, 1989
</TABLE>
15
<PAGE>
27 Financial Data Schedule Attached
99 Additional Exhibits None
No reports on Form 8-K (or amendments to previously filed Form 8-K) were filed
during the fourth quarter of the current fiscal year.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
HOTELECOPY, INC.
By: /S/ W. EDD HELMS, JR.
-----------------------------------
W. Edd Helms, Jr.
Chairman of the Board, President,
Chief Executive Officer
(Principal Executive Officer)
In accordance with the requirements of the Exchange Act, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities indicated.
By: /S/ W. EDD HELMS, JR.
-----------------------------------
W. Edd Helms, Jr., Chairman of the Board, President, Chief Executive Officer
(Principal Executive Officer)
Date: August 28, 1998
By: /S/ L. WADE HELMS
-----------------------------------
Wade Helms, Executive Vice President, Director
(Principal Executive Officer)
Date: August 28, 1998
By: /S/ CAROL HELMS
-----------------------------------
Carol Helms, Secretary and Director
Date: August 28, 1998
By: /S/ PHILIP H. KABOT
-----------------------------------
Philip Kabot, Vice President of Finance, Chief Financial Officer
(Principal Accounting Officer)
Date: August 28, 1998
17
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> MAY-31-1998
<CASH> 33,934
<SECURITIES> 0
<RECEIVABLES> 4,466
<ALLOWANCES> (500)
<INVENTORY> 2,855
<CURRENT-ASSETS> 46,611
<PP&E> 496,466
<DEPRECIATION> (496,466)
<TOTAL-ASSETS> 49,176
<CURRENT-LIABILITIES> 212,928
<BONDS> 0
0
0
<COMMON> 19,333
<OTHER-SE> (183,085)
<TOTAL-LIABILITY-AND-EQUITY> 49,176
<SALES> 0
<TOTAL-REVENUES> 434,306
<CGS> 0
<TOTAL-COSTS> 484,295
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (49,989)
<INCOME-TAX> 0
<INCOME-CONTINUING> (49,989)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,383,529)
<CHANGES> 0
<NET-INCOME> 2,111,775
<EPS-PRIMARY> 1.09
<EPS-DILUTED> 1.09
</TABLE>
