UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended May 31, 1999.
[ ] 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 of incorporation) (I.R.S. Employer
Identification No.)
17850 N.E. 5th Avenue, Miami, Florida 33162-1008
(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 XX 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: $307,584.
The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average bid and asked prices of such stock as of July 6,
1999 - 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 July 6, 1999.
<PAGE>
HOTELECOPY, INC. AND SUBSIDIARY
FORM 10-KSB
TABLE OF CONTENTS
PART I PAGE
- ------ ----
Item 1. DESCRIPTION OF BUSINESS 2
Item 2. DESCRIPTION OF PROPERTY 7
Item 3. LEGAL PROCEEDINGS 7
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 8
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 8
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 9
Item 7. FINANCIAL STATEMENTS 13
Item 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE 13
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT 13
Item 10. EXECUTIVE COMPENSATION 14
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT 16
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 17
Item 13. EXHIBITS AND REPORTS ON FORM 8-K 17
CONSOLIDATED FINANCIAL STATEMENTS BEGINNING AT PAGE F-1 ARE INCORPORATED
BY REFERENCE F-1
1
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
FORWARD-LOOKING INFORMATION
This Form 10-KSB contains certain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995. For this purpose, any
statements contained in this Form 10-KSB that are not statements of historical
fact may be deemed forward-looking statements. Without limiting the foregoing,
words such as "may," "will," "expect," "believe," "anticipate," "estimate" or
"continue" or comparable terminology are intended to identify forward-looking
statements. These statements by their nature involve substantial risks and
uncertainties, and actual results may differ materially depending on a variety
of factors, many of which are not within the Company's control. These factors
include, but are not limited to, economic conditions generally and in the
industries in which the Company's customers participate; competition within the
Company's industry, including competition from much larger competitors;
technological advances which could render the Company's products less
competitive or obsolete; failure by the Company successfully to develop new
products or to anticipate current or prospective customers' product needs; price
increases or supply limitations for components purchased by the Company for use
in its products; and delays, reductions, or cancellations of orders previously
placed with the Company.
During the year ended May 31, 1999, the Company's operations were impacted by a
significant decrease in revenues. The Company was unable to reduce costs to
offset the revenue decrease. In an effort to increase revenues, the Company is
attempting to merge with another Company (See "Description of Business -- Recent
Developments." Unless the Company is successful in the effort to merge in the
future, the Company may be not be able to continue operations. There can be no
assurance that the Company will be able to develop additional markets for its
products or that revenue will remain at current levels or increase in the
future.
INTRODUCTION
Hotelecopy, Inc. 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.
Hotelecopy 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, 1999, there were approximately 82 revenue-producing locations, of
which 69 were self-service locations.
PRODUCTS AND SERVICES
THE SELF-SERVICE FAXMAILER
Hotelecopy has developed a number of credit card operated self-service facsimile
terminals marketed as the FaxMailer. Hotelecopy assembles and integrates
specially adapted components manufactured by others into a unique cabinet
design. Hotelecopy 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
2
<PAGE>
Hotelecopy's enhanced FaxMail services. Hotelecopy contracts directly with
various locations to provide self-service FaxMailers under a Membership
Agreement.
As of May 31, 1999, Hotelecopy operated 69 self-service FaxMailers throughout
the United States. Hotelecopy is operating self-service FaxMailers in all of
United Airlines' and Alaska Airlines', private membership airport clubrooms
nationwide. The agreement with United Airlines expires in August 1999. In
addition to private airline clubrooms, FaxMail service is available within
airports, colleges, universities, train stations and hotels.
During fiscal 1999, revenues from self-service FaxMailers contributed
approximately 94% of Hotelecopy's total revenues.
ATTENDED FAXMAIL LOCATIONS
Hotelecopy owns and operates 13 attended fax machines in hotels. Under a
Membership Agreement, Hotelecopy 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.
In most cases, the attended Member location offering Hotelecopy FaxMail service
pays Hotelecopy a commission based either on the respective terminal's revenues,
or on a fixed personnel at attended locations.
HOTELECOPY'S FAXMAIL CENTRAL
From Hotelecopy'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.
Hotelecopy'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
Hotelecopy to provide enhanced FaxMail services at all Hotelecopy public access
fax terminal locations.
YEAR 2000 ISSUES
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
directly result in a system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
customers' transactions, order supplies or engage in similar normal business
activities. Hotelecopy has conducted an initial assessment of its computer
system and software applications and Hotelecopy believes that the terminals will
be 2000 compliant. Hotelecopy is communicating with key suppliers, financial
institutions and customers during fiscal 1999 to identify and coordinate the
resolution of any year 2000 issues that might arise from these constituencies.
Based on its initial assessment, Hotelecopy believes the cost of addressing the
year 2000 issue will not have a material impact on Hotelecopy's financial
position or results of operations if not addressed and corrected.
The Securities and Exchange Commission has asked public companies to disclose
four general types of information related to year 2000 Preparedness: the
Company's state of readiness, costs, risks and contingency plans. Accordingly,
the Company has included the following discussion in this report, in addition to
the year 2000
3
<PAGE>
disclosures previously filed.
STATE OF READINESS
All equipment and computer systems currently utilized by the Company in-house
are believed to be year 2000 compliant. Most vendors used by the Company are
large companies and the Company expects that these companies will be year 2000
compliant. However, the Company has not received written notification from all
vendors affirming their year 2000 compliance. Therefore, there can be no
assurance that the systems of other companies with which the Company does
business will be year 2000 compliant. None of the Company's systems interfaces
directly with any third-party vendors, except for credit card authorization and
billing, and the Company has been informed that those systems are year 2000
compliant. None of the Company's services is subject to year 2000 compliance
(except for the date printed at the top of the fax transmission, which is not
believed to be mission critical) so the Company does not expect to incur any
liability in this area. The failure on the part of merchandise vendors, or other
companies with whom the Company transacts or may transact business, to be year
2000 compliant on a timely basis may have an adverse impact on the operations of
the Company.
COSTS
The total cost to the Company of year 2000 activities has not been, and is not
anticipated to be, material to its financial position or results of operations
in any given year. Management estimates the total costs of addressing the year
2000 issue to be less than $10,000. These total costs are based on management's
best estimates. There are no guarantees that these estimates will be achieved
and actual results could differ from those estimates. The Company plans to
inventory sufficient quantities of supplies from outside suppliers to be capable
of operating for several months should third parties incur year 2000 problems.
The cost of increasing the inventory levels is not expected to exceed $5,000,
and any excess purchases will be paid for from available cash, or simply not
purchased. Any costs associated with the year 2000 issue will be expensed as
incurred. The amount expensed to date has been immaterial.
RISKS
The Company utilizes computers and software in various aspects of its business,
principally billing and accounting. The Company believes that its computers and
equipment comply with the year 2000 issue. The Company does not expect any
material adverse impact on its operations relative to the year 2000 issue.
However, as discussed above, the Company is also exposed to the risk that one or
more of its customers, suppliers or vendors could experience year 2000 problems
that could impact the ability of such customers to transact business or such
suppliers or vendors to provide goods and services. Although this risk is
lessened by the availability of alternative suppliers, the disruption of certain
services, such as utilities, could, depending upon the extent of the disruption,
potentially have a material adverse impact on the Company's operations.
CONTINGENCY PLANS
The Company is in the process of identifying and developing contingency plans
for any problems that might be experienced by the Company's suppliers, customers
or vendors. This includes identifying alternate suppliers.
HOTELETICKET INSTANT AIRLINE TICKETING
Hotelecopy 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
4
<PAGE>
of 1993. Hoteleticket has not operated profitably since inception. Presently
because of severe cash limitations, Hoteleticket discontinued operations.
Hoteleticket remains 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.
Hoteleticket does not expect any expansion until it can generate sufficient
capital.
FAXMAIL REVENUES
GENERAL
Hotelecopy 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 Hotelecopy 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. Hotelecopy offers attended and self-service
location membership agreements.
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 Hotelecopy or a fixed monthly fee.
While most original attended Member locations elected to pay Hotelecopy a
percentage of receipts, most new and renewed attended Member locations elected
to pay Hotelecopy on a fixed monthly fee.
Hotelecopy's revenues from attended Member locations have declined. Hotelecopy
attributes the decline in revenues from attended Member locations primarily to
maturation of the public fax marketplace, and expiration and non-renewal of the
attended Member locations. Revenues were higher in previous years from attended
locations primarily because of supply and demand factors (supply of public fax
machines, and non-public machines, was less extensive) prior to market
maturation, and because Hotelecopy had more locations, which it has since lost
due to non-renewals. Hotelecopy's revenues from its attended Member locations
continue to decline and this will materially adversely affect revenues. Because
of these factors, and the lack of funds to market this service, Hotelecopy now
directs it limited 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 Hotelecopy by major
credit card. Hotelecopy 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, Hotelecopy 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
Hotelecopy's equipment used at its Member locations consists principally of
products sold by AT&T and Ricoh. Hotelecopy's self-service units integrate
certain designed components, which are manufactured by others and are
5
<PAGE>
readily available from any one of many suppliers. Hotelecopy believes its
present suppliers can adequately meet Hotelecopy's needs for the near future.
CYCLICALITY OF THE INDUSTRY
Hotelecopy's revenues are derived primarily from business travelers.
Consequently, during periods of lessened business travel, such as holiday
seasons, Hotelecopy's revenues decline.
ECONOMIC DEPENDENCE
Each Member location contracts with Hotelecopy for FaxMail services. The
majority of Hotelecopy's attended Member location agreements are for single
locations. Hotelecopy does have master contracts for some multiple self-service
Member locations, has an agreement with United that expires in August 1999, and
an annually renewable agreement Alaska Airlines, to offer self-service
FaxMailers in all of their private membership airport clubrooms nationwide.
Although Hotelecopy is not dependent upon a single customer, the loss of any
individual master contract could have a material adverse effect on continuing
operations.
GOVERNMENT REGULATION
At the present time, there is no price regulation for Hotelelcopy's services.
There can be no assurance that charges for fax and other electronic business
services provided by Hotelecopy will not be regulated in the future.
SETTLEMENT OF CERTAIN CLAIMS AGAINST HOTELECOPY
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. Hotelecopy 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 Hotelecopy by dismissing Hotelecopy's complaints and ordered
that the United States Postal Service recover $88,400 on its counterclaim from
Hotelecopy. Hotelecopy settled this claim for $25,000 in March 1999.
In November 1998, Hotelecopy settled for $10,000 an outstanding claim of
Chrysler Capital Corporation against it.
COMPETITION
Hotelecopy 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 main (E-Mail). Additionally, any business can purchase a
facsimile machine and provide fax service to the public without being a Member
location of Hotelecopy.
In general, the market for public fax and information services is highly
competitive. Hotelecopy 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. Hotelecopy 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.
Hotelecopy 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 Hotelecopy. The
intense competition in the market has adversely affected Hotelecopy as
Hotelecopy has limited financial ability to invest in new equipment, or to
support a marketing and sales effort.
6
<PAGE>
EMPLOYEES
As of May 31, 1999, Hotelecopy had one full time employee.
EXECUTIVE OFFICERS OF THE COMPANY
See the information contained in Part III, Item 9, which is incorporated herein
by reference.
RECENT DEVELOPMENTS
On March 26, 1999, the Company entered into an Agreement and Plan of Merger
providing for the merger of Edd Helms, Incorporated, a privately held Florida
corporation (EHI), with and into the Company (Merger). EHI engages in the
business of providing electrical and air conditioning services to residential
and business customers, primarily in Miami-Dade, Broward and southern Palm Beach
Counties, Florida, and is controlled by persons who are shareholders, officers
and directors of the Company. The proposed Merger is subject to the approval of
the Company's shareholders. If the shareholders approve the Merger, and the
Merger is effected, the Company will be the surviving corporation and will
change its name to "Edd Helms Group, Inc." The Company expects to call a meeting
of its shareholders, sometime in the foreseeable future, to vote on the Merger,
the name change, and a proposal to increase the number of shares of the
Company's authorized common stock. On April 1, 1999, the Company filed a
preliminary proxy statement with the United States Securities and Exchange
Commission, in connection with its anticipated solicitation of shareholder
proxies for this meeting. The Company filed amendments to its preliminary proxy
statement on May 14, and June 18, 1999. The Company's proxy statement is not yet
definitive, and the Company is not now soliciting, and will not solicit, any
shareholder proxies until it is able to deliver a definitive proxy statement to
its shareholders. The Company can make no assurances that the Merger will be
approved or effected.
ITEM 2. DESCRIPTION OF PROPERTY.
Hotelecopy 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 Hotelecopy's
President and a Director of the Corporation, and W. Edd Helms, Jr., President of
the Company, are the sole owners. Hotelecopy believes that these facilities are
sufficient to accommodate the Hotelecopy's needs. Hotelecopy 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.
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. Hotelecopy 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 Hotelecopy by dismissing Hotelecopy's complaints and ordered
the United States Postal Service recover $88,400 on its counterclaim from
Hotelecopy. Hotelecopy settled this claim for $25,000 in March of 1999. 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.
7
<PAGE>
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, 1999.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Hotelecopy'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, Hotelecopy's stock was
delisted from the NASDAQ Small-Cap Market. Effective December 2, 1992,
Hotelecopy's common stock was traded on the OTC Bulletin Board under the symbol
FAXM. Consequently, there is currently no established public trading market for
Hotelecopy's common stock. In order to obtain bid quotations for Hotelecopy's
common stock, it is necessary to contact certain broker/dealers, if any, which
make a market in the Hotelecopy common stock. Hotelecopy is not aware of any
broker/dealers.
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 1997 through May
31, 1999. These quotations represent prices between dealers, do not include
retail markups, markdowns, or commissions and do not represent actual
transactions. In both years 1998 and fiscal 1999, there was little trading in
the Hotelecopy common stock and Hotelecopy was unable to ascertain any bid
quotations or any actual prices paid for the Hotelecopy common stock in any
specific transactions. Consequently, Hotelecopy is not able to state with any
certainty the range of bid and ask quotations for fiscal 1999.
Year Ended Year Ended
May 31,1999 May 31, 1998
High Low High Low
----------- ------------
First Quarter No Trading .0125 .0125
Second Quarter No Trading No Trading
Third Quarter No Trading No Trading
Fourth Quarter No Trading No Trading
On May 31, 1999, there were approximately 440 holders of record of Hotelecopy's
common stock. This number does not include any adjustment for stockholders
owning Hotelecopy's common Stock in "Street" name.
Hotelecopy 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
Hotelecopy's business. Florida law restricts the payment of dividends for
corporations with a deficiency in assets.
8
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS
MAY 31, 1999 COMPARED TO MAY 31, 1998
REVENUES
Revenues declined approximately 29% for the fiscal year ended May 31, 1999,
compared to the fiscal year ended May 31, 1998. The decline in revenues is
attributable to the loss of an exclusive agreement with a major airline carrier.
The Company does not have the revenues to support a marketing and sales effort
to further expand its services.
COST OF REVENUES
These costs declined approximately 30% in the year ended May 31, 1999, as
compared to the prior fiscal year end. The decline in costs can be attributed to
the loss of a major airline carrier and the reduction in expenses that were
incurred to support the airline. There also was a general reduction in overall
costs attributed more efficient use of equipment.
PAYROLL, PAYROLL TAXES AND RELATED BENEFITS
These costs decreased approximately 14% for the fiscal year ended May 31, 1999,
compared to the fiscal year ended May 31, 1998. The Company reduced its
personnel to one person the beginning of the fourth quarter, has no part-time
marketing or sales employees and there are no executive salaries paid.
OCCUPANCY COSTS
Occupancy costs declined approximately 55% for the fiscal year ended May 31,
1999, compared to the prior year. This significant reduction is attributed to a
discontinuance of an accrual for storage fees and warehousing.
OTHER SELLING AND ADMINISTRATIVE
For the fiscal year ended May 31, 1999, as compared to the fiscal year ended May
31, 1998, these expenses increased approximately 22%.
Other salary and administrative expenses overall decreased for the current
fiscal year, however, the increase in expenses is attributed to the settlement
of outstanding obligations and the professional fees related to the merger with
a related company.
EFFECTS OF INFLATION
The Company believes that its revenues and results of operations have not been
significantly affected by inflation during the three years ended May 31, 1999.
LIQUIDITY AND CAPITAL RESOURCES
Hotelecopy had a working capital deficit of approximately $121,000 and a ratio
of current assets to current liabilities of approximately .15 to 1 at May 31,
1999. This compares with the May 31, 1998, working capital deficit of
approximately 166,000 and a ratio of current assets to current liabilities of
.22 to 1. Hotelecopy has a negative net worth and cash flow that is not
sufficient to cover its greatly reduced overhead. On November 5, 1993, a final
judgment was issued and a judgment was entered against Hotelecopy by the United
States Postal Service in the amount of $88,400. In the later part of February
1999, Hotelecopy entered into an agreement with the United States Postal Service
and paid $25,000 to settle this claim.
9
<PAGE>
For the year ended May 31, 1999, the Company's liquidity decreased by $15,000 as
cash decreased to $8,900 as compared to an increase in cash of $3,000 for the
year ended May 31, 1998. The decrease in cash reserves for the year ended May
31, 1999, was attributable to the payments made to liquidate the old outstanding
debt, particularly the payment to the United States Postal Service.
Hotelecopy'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.
Hotelecopy's inability to meet its liquidity needs raises substantial doubt
about Hotelecopy's ability to continue as a going concern. Hotelecopy has
continued to reduce its total operating expenses, however, revenues continue to
decline. Hotelecopy's limited cash flow does not allow Hotelecopy to invest in
new equipment or to support a marketing and sales effort for the self-service
FaxMailer.
Hotelecopy has limited liquidity on a short-term basis and, absent additional
funding, will have limited liquidity on a long-term basis. Cash currently on
hand and expected to be generated by operations during the fiscal year ended May
31, 2000, is not expected to be sufficient to finance expected working capital
and other projected cash needs during such period. The Company's negative cash
flow from operations should approximate about $2,000 per month. Continued
operation of Hotelecopy in the normal course of business is dependent on
Hotelecopy's ability to obtain adequate funding of ongoing operations from
external or internal sources. On April 1, 1999, Hotelecopy filed a preliminary
proxy with the Securities and Exchange Commission in connection with an
anticipated solicitation of its shareholders' proxies to approve an agreement
and plan of merger with a related company, EHI, which is more fully described in
the notes to the financial statements and in the text of this Annual Report Form
10-KSB. See "Description of Business - Recent Developments."
The Company believes that the carrying value of the assets and liabilities on
the balance sheet at May 31, 1999, approximates their liquidation values,
therefore, no adjustment to carrying values has been made.
Hotelecopy's plan to resolve its financial difficulties has been to pursue the
acquisition of an operating entity. Unrelated third party merger candidates have
not been sought because EHI presented itself as a suitable partner, and
management believed that a merger could be effected with EHI at significantly
less expense than with an outside candidate, due primarily to the expectation
that legal, accounting, and administrative expenses associated with the merger
would be less than they would be in a transaction with a third party requiring
extensive due diligence, negotiation, structuring, drafting, etc. However, even
if the EHI merger were not consummated, a merger with an operating business
would still be the primary solution that management has for Hotelecopy's
financial difficulties. There is no assurance that Hotelecopy would be able to
find a suitable acquisition candidate if the merger of EHI is not consummated,
and in such case, Hotelecopy would continue to operate its business, relying on
reducing expenses, extensions of credit and its own operating revenues, as it
has in the past. However, there is no assurance that Hotelecopy will be able to
reduce expenses, obtain credit and generate operating revenue sufficient to
enable Hotelecopy to continue as a going concern. Should Hotelecopy be unable to
continue as a going concern, the liquidation value of its assets will not be
sufficient to satisfy Hotelecopy's outstanding obligations.
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.
10
<PAGE>
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 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 expense.
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, which 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 judgment was issued
a judgment was entered against the Company in the amount of $88,400. The Company
does not have the funds to satisfy this judgment.
11
<PAGE>
The Company was in default with its creditors and in July 1992, suspended all
payments to these creditors due to cash flow restraints. The Company did not
have the funds to repay these creditors. To date, the Company 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, because of the inability to pay its creditors, such realization of
assets and liquidation of liabilities are subject to significant uncertainty.
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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS 130
"Reporting Comprehensive Income" effective for fiscal years beginning after
December 15, 1997, with earlier application permitted. SFAS 130 establishes
standards for reporting and display of comprehensive income and its components
(revenues, expenses, gains, losses) in a full set of general-purpose financial
statements and requires that all items required to be recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS 130 requires an enterprise to classify items of other
comprehensive income by their nature in a financial statement and to display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS 130 is effective for the Company in fiscal 1999, but is
not expected to have a significant effect on the Company's present financial
statement disclosures.
In addition, in June 1997 the FASB issued SFAS 131 "Disclosures about Segments
of an Enterprise and Related Information", effective for financial statements
issued for periods beginning after December 15, 1997. SFAS 131 establishes
standards for the way that public business enterprises report information about
operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. In general, SFAS 131 requires
financial information to be reported on the basis that is used internally for
evaluating performance and deciding how to allocate resources. Adoption of SFAS
131 in fiscal 1999 is not expected to result in significant changes to the
operating activities presently disclosed.
12
<PAGE>
IMPACT OF THE YEAR 2000 ON THE COMPANY'S INFORMATION TECHNOLOGY SYSTEMS
The Company's products are not impacted by the year 2000 issue since the Company
only provides facsimile services.
The Company's business systems; consisting of accounting systems (accounts
receivable, accounts payable, general ledger) are not year 2000 compliant. To
comply with the year 2000 issue, the Company has plans to replace the existing
business system with one used by the company in which it has agreed to merge.
The current systems implementation plan has a planning buffer of 7 months. The
Company can continue to operate on the existing system through December 31,
1999. At that time, it is believed the business systems would not function in
their intended manner. The Company feels that the buffer period of 6 months is
sufficient to address unplanned issues and/or greater complexity with respect to
the Company in the event the merger is not approved.
ITEM 7. FINANCIAL STATEMENTS.
The consolidated financial statements of the Company (with an index listing all
such statements) in response to this item begin at page F-1 in a separate
financial section at the end of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
During the fiscal years covered by this report, the Company did not have a
change in or a disagreement with its accountants. The Company appointed Dohan
and Company as its auditors in 1997.
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:
Director
Name Since Age Position
- ---- ----- --- --------
W. Edd Helms, Jr.* 1985 53 Chairman of the Board of
Directors, President and
Chief Executive Officer
L. Wade Helms 1986 42 Executive Vice President and
Director
Carol Helms 1985 50 Secretary and Director
Philip H. Kabot N/A 64 Vice President Finance/Chief
Financial Officer
* 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.
13
<PAGE>
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.
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.
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
$100,000.
14
<PAGE>
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
----------------------------------------------
Awards Payouts
- ----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name Other Restricted
and Annual Stock Options/ LTIP All Other
Principal Compensation Award(s) SARs Payouts Compensation
Position Year Salary Bonus(A) ($) ($) (#) ($) ($)
- --------- ---- ------ -------- ------------ ---------- -------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Edd Helms, Jr. 1999 $0
President & Chief 1998 $0
Executive Officer 1997 $15,605
L. Wade Helms 1999 $0
Executive 1998 $0
Vice-President 1997 $16,773
Philip Kabot 1999 $0
Vice President of 1998 $0
Finance & Chief 1997 $0
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
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 July 6, 1999, the following table shows all
of the options granted to and presently outstanding and the amount of options
exercised:
15
<PAGE>
<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 July 6, 1999, 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.
At the close of business on May 31, 1999, Hotelecopy had outstanding 1,933,318
shares of Hotelecopy common stock, each of which entitles the holder to one
vote. Voting is not cumulative.
The following table sets forth, as of July 6,1999, information with respect to
(a) any person known to Hotelecopy to be the beneficial owner of five percent or
more of the outstanding shares of Hotelecopy common stock, (b) each Director and
certain executive officers of Hotelecopy, and (c) all Directors and executive
officers as a group.
For the purpose of computing the percentage of the shares of Hotelecopy common
stock owned by each person or group listed in this table, any shares not
outstanding which are subject to options or warrants exercisable within 60 days
have been deemed to be outstanding for the purpose of computing the percentage
of the shares of Hotelecopy common stock owned by any other person. Except as
otherwise indicated below, each of the persons named below is believed by
Hotelecopy to possess sole voting and investment power with respect to the
shares of Hotelecopy common stock beneficially owned by such person.
16
<PAGE>
Amt. Of Beneficially
Name Owned Common Stock Percent
- ---- ------------------ -------
W. Edd Helms, Jr. 850,567 (1) 44.0%
L. Wade Helms 2,147 (2) **
Carol Helms -- (3) **
All Officers and Directors 852,714 (1) (5) 44.1%
- ----------
** Less than 1%
(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
by EHI, and which 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 Hotelecopy common stock or interests beneficially owned
post-merger through participation in EHI's ESOP.
(3) Carol Helms, a Director of Hotelecopy, is the wife of W. Edd Helms, Jr.,
and the mother of two daughters who own 10,890 shares of Hotelecopy
common stock. She disclaims any interest in the shares beneficially
owned by her husband and her daughters. Does not include an option to
purchase 1,000 shares of Hotelecopy 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 $26,400 and $61,900 for the years ended May
31, 1999, and 1998, 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. Consolidated Financial Statements
For complete list of the Financial Statements filed with this Annual Report on
Form 10-KSB, see the Index to Financial Statements.
2. Exhibits required to be filed by Item 601 of Regulation S-K.
No Form 8-K was filed during the year.
17
<PAGE>
<TABLE>
<CAPTION>
REG. S-K ITEM
NO. DOCUMENT LOCATION IN THIS REPORT OR INCORPORATED BY REFERENCE 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
10.0 Hoteleticket Acquisition Agreement Exhibit 10.0 of S-18 Registration Statement #33-30649A which became effective
on September 28, 1989
10.1 AT&T Lease Financing Agreement Exhibit 10.1 of S-18 Registration Statement #33-30649A 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
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 which became effective
No. 1421460 on September 28, 1989
10.6 Trademark Registration Exhibit 10.6 of S-18 Registration Statement #33-30649A which became effective
No. 1449098 on September 28, 1989
10.7 Trademark Registration Exhibit 10.7 of S-18 Registration Statement #33-30649A which became effective
No. 1458720 on September 28, 1989
10.8 Contract with United States Exhibit 10.8 of S-18 Registration Statement #33-30649A which became effective
Postal Service on September 28, 1989
10.9 Contract with Federal Express Exhibit 10.9 of S-18 Registration Statement #33-30649A which became effective
Corporation 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 Filed as Exhibit 10.13 to May 31, 1990 Form 10-K
Postal Service (other than the
N.E. Region)
10.14 Contract with TouchFax
Information Systems, Inc. Filed as Exhibit 10.14 to May 31, 1990 Form 10-K
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
10.15 Contract with MCI Filed as Exhibit 10.15 to May 31, 1990 Form 10-K
Telecommunications Corporation
10.16 Contract with MCI
Telecommunications Corporation Filed as Exhibit 10.16 to May 31, 1990 Form 10-K
10.17 Lease for Premises Filed as Exhibit 10.17 to May 31, 1990 Form 10-K
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 Judgment
10.26 Opinion of the Court in the Filed as Exhibit 10.26 to November 6, 1992 8K
United 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 Filed as Exhibit 10.28 to August 19, 1993 Form 8K
Court of Appeals in the Federal
Circuit
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
10.29 Order of the United States Court Filed as Exhibit 10.29 to November 3, 1993 Form 8K
of Appeals for the Federal Circuit
22.1 Hoteleticket, Inc., a Florida Exhibit 22.1 of S-18 Registration Statement #33-30649A which became effective
Corporation on September 28, 1989
22.2 FaxMail, Inc., a Florida Exhibit 22.2 of S-18 Registration Statement #33-30649A which became effective
Corporation (inactive) on September 28, 1989
22.3 Hotelefax, Inc., a Florida Exhibit 22.3 of S-18 Registration Statement #33-30649A which became effective
Corporation (inactive) on September 28, 1989
27 Financial Data Schedule Attached
99 Additional Exhibits None
</TABLE>
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.
20
<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.
Registrant
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 and on the dates indicated.
By: /s/ W. Edd Helms, Jr.
--------------------------
W. Edd Helms, Jr., Chairman of the Board, President, Chief Executive Officer
(Principal Executive Officer)
Date: July 6, 1999
By: /s/ L. Wade Helms
--------------------------
Wade Helms, Executive Vice President, Director
(Principal Executive Officer)
Date: July 6, 1999
By: /s/ Carol Helms
--------------------------
Carol Helms, Secretary and Director
Date: July 6, 1999
By: /s/ Philip H. Kabot
--------------------------
Philip Kabot, Vice President of Finance, Chief Financial Officer
(Principal Accounting Officer)
Date: July 6, 1999
21
<PAGE>
C O N T E N T S
Page
----
INDEPENDENT AUDITOR'S REPORT F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statements of Cash Flows F-4
Consolidated Statements of Deficiency in Assets Attributable to
Common Stock F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-6 to F-10
F-0
<PAGE>
Dohan and Company 7700 North Kendall Drive, #204
Certified Public Accountants Miami, Florida 33156-7564
A Professional Telephone: (305) 274-1366
Association Facsimile: (305) 274-1368
INDEPENDENT AUDITORS' 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, 1999 and 1998, 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, 1999 and 1998, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
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, CPA's
Miami, Florida
July 2, 1999
Member:
Florida Institute of Certified Public Accountants American Institute of
Certified Public Accounts - Private Companies and SEC Practice Sections
SC International - Offices in Principal Cities World-Wide
F-1
<PAGE>
<TABLE>
<CAPTION>
HOTELECOPY, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
MAY 31, 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 8,890 $ 23,934
Restricted cash - certificate of deposit 10,000 10,000
Accounts receivable, less allowance for
doubtful accounts of $500 2,011 3,966
Inventory -- 2,855
Other 539 5,856
----------- -----------
Total current assets 21,440 46,611
PROPERTY AND EQUIPMENT -- --
DEPOSITS 2,265 2,565
----------- -----------
TOTAL ASSETS $ 23,705 $ 49,176
----------- -----------
LIABILITIES AND DEFICIENCY IN ASSETS ATTRIBUTABLE TO COMMON STOCK
CURRENT LIABILITIES
Accounts payable $ 51,529 --
Judgment payable -- 88,400
Due to affiliate 76,042 --
Accrued liabilities 14,709 124,528
----------- -----------
Total current liabilities 142,280 212,928
----------- -----------
COMMITMENTS AND CONTINGENCIES (NOTES 3, 6, 8, 9 10 AND 11)
DEFICIENCY IN ASSETS ATTRIBUTABLE TO COMMON STOCK
Common stock, $.01 par value, 10,000,000 shares
authorized; 1,933,318 shares issued and
outstanding 19,333 19,333
Additional paid-in capital 6,213,341 6,213,341
Accumulated deficit (6,351,249) (6,396,426)
----------- -----------
Total deficiency in assets attributable to
common stock (118,575) (163,752)
----------- -----------
TOTAL LIABILITIES AND DEFICIENCY IN ASSETS
ATTRIBUTABLE TO COMMON STOCK $ 23,705 $ 49,176
----------- -----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
HOTELECOPY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MAY 31, 1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $ 307,584 $ 434,306
----------- -----------
COSTS AND EXPENSES
Cost of revenues 151,941 216,900
Payroll, payroll taxes and related benefits 84,081 97,796
Occupancy costs 28,116 61,984
Other selling and administrative 131,669 107,616
----------- -----------
Total costs and expenses 395,807 484,296
----------- -----------
Loss before extraordinary items (88,223) (49,990)
----------- -----------
EXTRAORDINARY ITEMS
Gain on extinguishment of debt, net of
income taxes of $48,024 and $778,235 85,376 1,383,529
Tax benefit from utilization of net
operating loss carryforwards 48,024 778,235
----------- -----------
Total extraordinary items 133,400 2,161,764
----------- -----------
NET INCOME $ 45,177 $ 2,111,774
----------- -----------
PER SHARE OF COMMON STOCK (BASIC AND DILUTED)
Loss per common share before extraordinary items $ (0.05) $ (0.03)
Extraordinary items 0.07 1.12
----------- -----------
NET INCOME PER COMMON SHARE $ 0.02 $ 1.09
----------- -----------
WEIGHTED AVERAGE SHARES OUTSTANDING
(BASIC AND DILUTED) 1,933,318 1,933,318
----------- -----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
HOTELECOPY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1999 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 45,177 $ 2,111,774
Adjustments to reconcile net income (loss) to net cash
provided (used) by operating activities:
Provision for bad debts -- (7,200)
Extinguishment of debt (133,400) (2,161,764)
Changes in operating assets and liabilities:
Decrease in accounts receivable 1,955 8,905
Decrease in inventory 2,855 12,945
Decrease (Increase) in other current assets 5,617 (1,423)
Increase in accounts payable 51,529 42,613
Decrease in judgment payable (25,000) --
Decrease in accrued liabilities, other than extinguishment (39,819) (2,911)
----------- -----------
NET CASH (USED) PROVIDED BY OPERATING ACTIVITIES (91,086) 2,939
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Due to Affiliate, Borrowings 125,178 --
Due to Affiliate, Repayments (49,136) --
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 76,042 --
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (15,044) 2,939
CASH AND CASH EQUIVALENTS, BEGINNING 23,934 20,995
----------- -----------
CASH AND CASH EQUIVALENTS, ENDING $ 8,890 $ 23,934
----------- -----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
HOTELECOPY, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF DEFICIENCY IN ASSETS ATTRIBUTABLE TO COMMON STOCK
FOR THE YEARS ENDED MAY 31, 1998 AND MAY 31, 1997
Additional
Common Stock Paid-in Accumulated
Shares Amount Capital Deficit Total
--------------------------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
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)
NET INCOME 45,177 45,177
--------- ----------- ----------- ----------- -----------
BALANCE, MAY 31, 1999 1,933,318 $ 19,333 $ 6,213,341 $(6,351,249) $ (118,575)
--------- ----------- ----------- ----------- -----------
</TABLE>
See the accompanying notes to the consolidated financial statements.
F-5
<PAGE>
HOTELECOPY, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 1999 AND 1998
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 complies
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.
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.
INVENTORIES Inventories consists principally of supplies, components and
accessories, and are valued at the lower of cost or market using the first-in,
first-out (FIFO) method to determine cost and net realizable value to determine
market.
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 airport, hotels
and other public places and extends credit based on an evaluation of the
customer's financial condition, without requiring collateral. Certain usage is
also billed immediately to the sender's credit card account. Exposure to losses
on receivables is principally dependent on the financial condition of each
customer. 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
F-6
<PAGE>
1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
IMPAIRMENT OF LONG-LIVED ASSETS (CONTINUED)
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.
NET INCOME 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 that would
have an anti-dilutive effect; therefore, EPS amounts for all periods reflect the
provisions of SFAS No. 128.
CASH AND CASH 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.
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 an 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 that would require
segment disclosure.
RECLASSIFICATIONS Certain items in the prior year financial statements have been
reclassified to conform to the current year's presentation.
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at May 31:
1999 1998
---- ----
Facsimile equipment $361,665 $449,645
Office and other equipment 46,821 46,821
408,486 496,466
Less accumulated depreciation 408,486 496,466
-------- --------
Property and equipment, net book value $ - $ -
-------- --------
F-7
<PAGE>
3. RELATED PARTY TRANSACTIONS AND COMMITMENT
The Company and its subsidiary leased their operating facilities from a
Partnership controlled by its President pursuant to a non-cancelable lease
expiring May of 2000. Future minimum payments remaining on this non-cancelable
operating lease are $26,400 for the next year. Rent expense was approximately
$26,400 and $61,900 for the years ended May 31, 1999 and 1998.
The Company is affiliated with various other entities through common ownership
and control with its President who is also a shareholder.
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 exercisable 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.
There was no activity during the year ended May 31, 1998, and May 31, 1999. At
May 31, 1999, there are options to purchase 39,577 shares of common stock
pursuant to ISOP grants.
5. UNITED STATES POSTAL SERVICE (USPS) JUDGEMENT
During 1989, the Company entered into a joint venture agreement with the United
States Postal Service (USPS) 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 settled this claim for $25,000 in
March 1999.
6. EXTRAORDINARY ITEM - EXTINGUISHMENT OF DEBT
In May of 1998, the Company reviewed its liabilities, especially those in
default, to determine if debts it had incurred in prior years were subject to
the Florida Statute of Limitations, Section 95.11 of the Florida Statute. 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 judgment 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.
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. The
Company had accrued $60,000 for costs associated with the United States Postal
Service judgment as well as $10,000 for the settlement with a creditor. Both of
these accruals were liquidated as a result of the settlements and are shown as
extinguishment of debt in these financial statements.
F-8
<PAGE>
7. INCOME TAXES
The Company and its subsidiary file consolidated income tax returns. For the
year ended May 31, 1999, the Company generated for U.S. income tax purposes a
net operating loss carryforward of approximately $88,200, and reduced the loss
carryforward by approximately $133,400 resulting from the gain on extinguishment
of debt.
At May 31, 1999, the Company had net operating loss carryforwards of
approximately $3,847,500 for income tax purposes, of which:
$ 636,100 expires in the year ending 2007
$1,536,300 expires in the year ending 2008
$ 776,700 expires in the year ending 2009
$ 199,800 expires in the year ending 2010
$ 525,200 expires in the year ending 2011
$ 173,400 expires between 2012 and 2019
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. Because 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.
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 $118,575 at May 31, 1999, 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 $88,223 and $49,990 for the years
ending May 31, 1999 and 1998, 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.
F-9
<PAGE>
8. OPERATING AND ECONOMIC CONDITIONS AND MANAGEMENT'S PLANS (Continued)
In addition, the Company has used substantial working capital in its operations.
As of May 31, 1999, current liabilities exceed current assets by $120,840. Cash
provided (used) by operations of the Company for the years ended May 31, 1999
and 1998, amounted to ($15,044), and $2,939, 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.
9. SIGNIFICANT CUSTOMERS
One customer comprised 85% of the total May 31, 1999, sales of the Company. Two
customers comprised approximately 71% of the total May 31, 1998 sales (27% and
44%).
10. YEAR 2000
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 a"00" as the year 1900, instead of the intended year 2000, which could
directly result in a system failure or miscalculations causing disruption of
operations, including, among other things, a temporary inability to process
customers' transactions, order supplies or engage in similar normal business
activities. Hotelecopy has conducted an initial assessment of its computer
system and software applications and Hotelecopy believes that its facsimile
terminals will be 2000 compliant. Hotelecopy is communicating with key
suppliers, financial institutions and customers during fiscal 1999 to identify
and coordinate the resolution of any year 2000 issues that might arise from
these constituencies. Based on its initial assessment, Hotelecopy believes the
cost of addressing the year 2000 issue will not have a material impact on
Hotelecopy's financial position or results of operations if not addressed and
corrected.
The Company's business systems; consisting of accounting systems (accounts
receivable, accounts payable, general ledger) are not year 2000 compliant. To
comply with the year 2000 issue, the Company has plans to replace the existing
business system with one used by the company in which it has agreed to merge.
11. SUBSEQUENT EVENTS
In early July 1999, the Company received verbal approval concerning a
preliminary proxy statement filed with the Securities and Exchange Commission in
connection with an anticipated solicitation of its shareholders' proxies to
approve an agreement and plan of merger with a related company, Edd Helms,
Incorporated, a Florida corporation (EHI) pursuant an Agreement and Plan of
Merger, dated as of March 26, 1999, between the Company and EHI, whereby EHI
will be merged with and into the Company. The shareholders of EHI each will
receive 2178.6363 shares of the Company's common stock in exchange for each
outstanding share of EHI's common stock owned by them. The proxy statement also
provides for the consideration and vote upon the change of the Company's name to
Edd Helms Group, Inc. as well as consideration and vote upon an amendment to the
Company's Articles of Incorporation to increase the number of authorized shares
of its common stock, par value $.01 per share, to 20,000,000 shares.
F-10
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- ------------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 8,890
<SECURITIES> 0
<RECEIVABLES> 2,511
<ALLOWANCES> (500)
<INVENTORY> 0
<CURRENT-ASSETS> 21,440
<PP&E> 408,486
<DEPRECIATION> (408,486)
<TOTAL-ASSETS> 23,705
<CURRENT-LIABILITIES> 142,280
<BONDS> 0
0
0
<COMMON> 19,333
<OTHER-SE> (118,575)
<TOTAL-LIABILITY-AND-EQUITY> 23,705
<SALES> 307,584
<TOTAL-REVENUES> 307,584
<CGS> 151,941
<TOTAL-COSTS> 395,807
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 88,223
<INCOME-TAX> 0
<INCOME-CONTINUING> (88,223)
<DISCONTINUED> 0
<EXTRAORDINARY> 133,400
<CHANGES> 0
<NET-INCOME> 45,177
<EPS-BASIC> 0.02
<EPS-DILUTED> 0.02
</TABLE>
