SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report under Section 13 or 15 (d) of the Securities Exchange Act of
1934
For the fiscal year ended December 31, 1997
[ ] Transition Report under Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to _________________
Commission file number 0-23054
HOSPITALITY WORLDWIDE SERVICES, INC.
(Exact name of registrant as specified in its charter)
New York 11-3096379
State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
450 PARK AVENUE, SUITE 2603, NEW YORK, NY 10022
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-223-0699
Securities registered under Section 12(b)
of the Exchange Act: Common Stock, par
value $.0l per share
Name of Exchange on which registered: American Stock Exchange
Securities registered under Section 12(g)
of the Exchange Act: NONE
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.
[ X ] YES [ ] NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock, $.0l par value per share
(the "Common Stock"), held by non-affiliates of the Registrant as of March 27,
1998 (based upon the last sale price for the Common Stock on the American Stock
Exchange) was approximately $100,600,000.
The number of shares of Common Stock outstanding as of March 27, 1998 was
11,868,022.
DOCUMENTS INCORPORATED BY REFERENCE Certain portions of the Registrant's
definitive proxy statement to be filed not later than April 30, 1998 pursuant to
Regulation 14A are incorporated by reference in Items 10 through 13 of Part III
of this Annual Report on Form 10-K.
1
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER
THE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information contained herein, this Annual
Report on Form 10-K contains forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 which involve certain risks
and uncertainties. The Company's actual results or outcomes may differ
materially from those anticipated. Important factors that the Company believes
might cause such differences are discussed in the cautionary statements
accompanying the forward-looking statements in this Annual Report on Form 10-K.
In assessing forward-looking statements contained herein, readers are urged to
carefully read those statements. When used in the Annual Report on Form 10-K,
the words "estimate," "anticipate," "expect," "believe," and similar expressions
are intended to identify forward-looking statements.
PART I
Item 1. Description of Business
General
Hospitality Worldwide Services, Inc. (the "Company"), formerly known as
Light Savers U.S.A., Inc., was formed under the laws of the State of New York in
October 1991. In January 1994, the Company consummated an initial public
offering of its common stock. At such time, the Company's principal line of
business was to design and market decorative, energy efficient lighting fixtures
for the hotel and hospitality industry. The Company's primary marketing tool was
the utilization of Con Edison's Applepower Rebate Program (the "Rebate
Program"), under which Con Edison offered rebates to those who utilized energy
saving devices, such as the Company's lighting fixtures. In 1994, Con Edison
substantially reduced the Con Edison Rebate Program, making it less advantageous
for the Company to use the Rebate Program as a marketing tool. As a result, the
Company's revenues were substantially reduced.
In August 1995, the Company acquired substantially all of the assets and
business and assumed certain liabilities of AGF Interior Services Co., a Florida
Corporation ("AGF"), a company that, through its wholly-owned subsidiary,
Hospitality Restoration & Builders, Inc., a New York Corporation ("HRB")
provided renovation services to the hospitality industry. In December 1995, the
Company's Board of Directors, in response to Con Edison's decision to reduce
substantially the Con Edison Rebate Program, determined to dispose of the
Company's lighting business and concentrate the Company's efforts on renovation
services. In February 1996, the Company, AGF, Tova Schwartz, the Company's
former President and Chief Executive Officer, and certain other parties thereto
entered into a Divestiture, Settlement and Reorganization Agreement (the
"Divestiture Agreement") pursuant to which, among other things, (i) the Company
sold its lighting business to Tova Schwartz; (ii) Ms. Schwartz resigned from her
positions as a director and officer of both the Company and HRB; (iii) the
Company repurchased 500,000 shares of Common Stock, $.01 par value of the
Company (the "Common Stock") from Ms. Schwartz for $250,000 (which shares were
subsequently sold by the Company in a private placement offering); (iv) Ms.
Schwartz granted to the Company an option to purchase an additional 1,000,000
shares of Common Stock (all of which were subsequently repurchased by the
Company and placed into treasury); and (v) the Company agreed to pay Ms.
Schwartz consulting fees for a period of three years of $100,000 per year.
In October 1996, the Company changed its name from Light Savers, U.S.A.,
Inc., to Hospitality Worldwide Services, Inc. The change of the corporate name
is more indicative of the nature of the Company's business in view of the
significant change in the character and strategic focus resulting from the
acquisition of AGF and disposal of the Company's lighting business. These
transactions were part of a strategic corporate program to refocus the Company's
business operations into areas with higher growth potential.
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Until January 1997, the Company's only line of business was to provide,
through HRB, a complete package of renovation resources to the hospitality
industry ranging from pre-planning and scope preparation of a project to
performing the renovation requirements and delivering furnished rooms. HRB
offers hospitality maintenance services to hotels and hotel chains throughout
the continental United States. For over 18 years the Company's renovation
division has provided to the hospitality industry renovation and improvements
such as vinyl, paint, wallpaper, carpet, installation of new furniture, light
carpentry, and masonry work. HRB generally provides its renovation services in
an on time, on budget manner, while causing little or no disruption to the
ongoing operation of a hotel. HRB has successfully responded to the hotel
industry's efforts to increase occupancy, room rates and market share through
cosmetic upgrades, which are generally required every four to seven years.
In January 1997, the Company completed the acquisition of The Leonard
Parker Company, ("LPC") and its subsidiary, Parker Reorder Corporation ("Parker
Reorder"). LPC, founded in 1969, is a leading purchasing company for the
hospitality industry which acts as an agent or principal for the purchase of
goods and services for its customers which include major hotel and management
companies worldwide. LPC purchases furniture, fixtures and equipment, kitchen
supplies, linens and uniforms, guestroom amenities, and other supplies to meet
its customers' requirements for new hotel openings and major renovations. In its
role as purchasing agent, LPC purchases annually approximately $250 million of
goods and services for its customers. Parker Reorder has developed and is
marketing a new proprietary software product, Parker FIRST, which allows clients
to reorder operating supplies and equipment ("OS & E") and other products
on-line and will provide such clients with access to forecasting and product
evaluation capabilities. Parker Reorder offers hotel properties the ability to
order, on an as needed basis, any and all OS & E products used by such
properties. The purchase price of LPC, after final adjustments, of approximately
$11,650,000 consisted of 1,250,000 newly issued shares of Common Stock and $5
million stated value of newly issued 6% convertible preferred stock of the
Company, convertible, on a formula basis, into not less than 1,000,000 and no
more than 4,000,000 shares of Common Stock (at the present stock price) from
January 1, 1998 to January 10, 2000. The acquisition has been accounted for as a
purchase with the results of LPC included in the consolidated financial
statements of the Company from the acquisition date.
In May 1997, the Company entered into a joint venture ("Apollo Joint
Venture") with Apollo Real Estate Advisors II, L.P. ("Apollo") and Watermark
Limited LLC ("Watermark"), an affiliate of the Company to identify, acquire,
renovate, refurbish and sell hotel properties. The Company will perform all of
the renovation and procurement services for each of the properties purchased by
the Apollo Joint Venture. In addition, the Company will receive a five percent
equity interest in each of the entities formed to purchase such properties in
exchange for its contribution of five percent of the total equity required to
acquire, renovate and sell such properties. The Apollo Joint Venture intends to
own and operate the properties only for the time necessary to upgrade and market
them for resale. As an inducement to enter into the Joint Venture Agreement, the
Company issued to Apollo a seven-year warrant to purchase 750,000 shares of
Common Stock at $8.115 per share. The warrant expires in 2004. The warrant is
currently exercisable as to 350,000 shares and becomes exercisable as to the
remaining 400,000 shares in increments of 100,000 shares for every $7,500,000 of
incremental revenue earned and to be earned by the Company from the Apollo Joint
Venture. The Apollo Joint Venture has acquired the Warwick Hotel in
Philadelphia, Pennsylvania and has entered into a letter of intent to acquire
the Historic Inn in Richmond, Virginia. The Company will fully renovate and
refurbish these properties pursuant to a contract with the Apollo Joint Venture
operating entity, which is expected to generate approximately $18 million of
revenue for the Company in 1998.
In November 1997, the Company formed a wholly owned subsidiary,
Hospitality Construction Corporation ("HCC"), to manage the renovation projects
under the Apollo Joint Venture and other properties in which the Company may
acquire an ownership interest. HCC is based in Atlanta, Georgia.
On January 6, 1998, the Company reached an agreement in principle to enter
into a master development agreement with Prime Hospitality Corp. ("Prime") to
develop 20 hotel properties over a two-year period under the AmeriSuites brand
name. Under the proposed agreement, the Company will provide
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the site identification, development, construction and purchasing services
required for each project and Prime will provide project design and management
and franchise services once each property is complete. The Company and Prime
will each have a 50% interest in the new hotels. In December 1997, the Company
formed a wholly-owned subsidiary, Hospitality Development Services Corporation
("HDS"), to manage the Prime project and any other hotel development projects in
the future. HDS is based in New York, New York.
On January 9, 1998, the Company completed the acquisition of Bekins
Distribution Services, Inc. ("Bekins"), a leading provider of transportation,
warehousing and installation services to a variety of customers worldwide.
Founded in 1969, Bekins is a logistical services company that serves clients who
are opening, renovating or relocating facilities by assuring that materials,
fixtures, furniture and merchandise are moved from multiple vendor locations to
their ultimate destinations in a controlled orderly sequence so that each item
can be installed on schedule. The purchase price of Bekins of approximately
$11,000,000 consisted of 514,117 shares of Common Stock and the assumption of
certain Bekins' debt. The acquisition will be accounted for as a purchase with
the results of Bekins included in the consolidated financial statements of the
Company from the acquisition date.
On February 9, 1998, the Company, through its wholly-owned subsidiary, HWS
Real Estate Advisory Group, Inc. ("HWS REAG") purchased the assets of
Watermark's real estate advisory business. Watermark is an international
management company that is the general partner and manages Watertone Holdings
LP, a shareholder of the Company. The purchase price for such business was
$1,500,000 and its results will be included in the consolidated financial
statements of the Company from the acquisition date.
On March 6, 1998, the Company entered into a joint venture with ING Realty
Partners ("ING Joint Venture"), to acquire the Clarion Quality Hotel in Chicago,
Illinois. HCC will fully renovate and refurbish this property pursuant to a
contract with the ING Joint Venture, which is expected to generate approximately
$17 million of revenue for the Company in 1998.
Financial information about the Company's business segments appears in
Footnote 16 to the Consolidated Financial Statements in Part II, Item 8 of this
report.
Sales and Marketing
The Company's sales and marketing strategy is to obtain and maintain
strategic alliances with hotel chains and franchises and to focus on customer
needs to upscale full service hotels with a global presence.
The Company's sales and marketing efforts are coordinated by senior
executives of the Company, together with salespersons who contact and maintain
relationships with appropriate hotel personnel. Because of the Company's
commitment to service and customer relationships, the majority of the Company's
business comes from referrals and repeat customers.
Competition
Servicing the hospitality industry is a highly competitive business, with
competition based largely on price and quality of service. In its renovation
business, the Company primarily competes with small, closely held or family
owned businesses. In its purchasing and reorder businesses, the Company competes
with other independent procurement companies, hotel purchasing companies and
food service distribution companies. With respect to Parker FIRST, the Company
expects competition from a number of hotel management companies, hotel
companies, franchise operators and other entities who are pursuing the
development of software systems that attempt to provide on-line procurement
services. There is no single competitor or small number of competitors that is
or are dominant in the Company's business areas. However, some of the Company's
competitors and potential competitors possess substantially greater financial,
personnel, marketing and other resources than the Company.
Regulation
The Company's renovation business is subject to various federal, state and
local laws and regulations, pursuant to which it is required to, among other
things, obtain licenses and general liability insurance, workers compensation
insurance and surety bonds. The Company believes that it is currently in
compliance
4
with these laws and regulations in those states in which it currently operates.
There are a number of states in which the Company operates where a license is
not required. The Company's renovation business currently operates in 27 states
and has applications pending in an additional 9 states and the District of
Columbia.
The Company's procurement business is subject to regulation by various
state laws and regulations and international customs, duties, taxing and other
authorities that regulate the import and distribution of goods. Domestically,
the freight carrier provides bills of lading and other documentation that record
the pick-up, shipping and delivery of merchandise purchased by the Company on
behalf of its clients. Internationally, the Company must comply with the
individual county's requirements as they relate to commercial documentation. The
Company believes that it is currently in compliance with the laws and
regulations in those states and countries in which it currently operates.
Dependence on Customers
Most of the Company's customers are in the hospitality industry with few
of them accounting for a substantial portion of the Company's annual revenues.
During the year ended December 31, 1997, one customer accounted for 14% of the
Company's net revenues. During the year ended December 31, 1996, two customers
accounted for 49% and 31% of the Company's net revenues. In 1995, four customers
accounted for 23%, 19%, 18% and 14% of net revenues. As the Company continues to
grow and expand its renovation business and diversify its offerings through
acquisitions, the Company believes its dependence on significant customers will
decrease. There are no assurances that either continued growth or decreased
dependence on significant customers will occur.
Employees
As of December 31, 1997, the Company employed 257 employees. A typical
renovation project is staffed by a field supervisor, who hires subcontractors
and laborers specifically for the particular project. Each project is staffed by
trade subcontractors that may or may not be unionized. The Company purchases
workman's compensation insurance for each of its projects. Every contractor and
subcontractor is required to sign the Company's standard contract before working
on a project. None of the Company's employees are represented by labor unions
and the Company believes that its relationship with its employees is good.
Item 2. Description of Properties
The Company maintains its executive office at 450 Park Avenue, Suite 2603,
New York, New York 10022, where it occupies approximately 6,000 square feet in a
multi-story office complex. The Company has entered into a ten-year lease, which
expires in January 2007, with an unaffiliated lessor pursuant to which it
currently pays an annual fixed rental of $278,000.
HRB maintains offices at 1840 Century Park East, 10th Floor, Los Angeles,
California, 90067, where it occupies approximately 7,400 square feet in a
multi-story office complex. HRB has entered into a five-year lease, which
expires in March 2003, with an unaffiliated lessor pursuant to which it
currently pays an annual fixed rental of approximately $208,000. HRB also
maintains a satellite office in Coral Springs, Florida.
LPC and Parker Reorder maintain their executive offices at 550 Biltmore
Way, Coral Gables, Florida, 33134. LPC occupies approximately 18,400 square feet
under a lease which expires in August 2002 at an annual fixed rental of $412,000
(exclusive of rent adjustments). LPC also maintains satellite offices in Los
Angeles, California, Singapore and South Africa. Parker Reorder occupies
approximately 7,300 square feet under a lease which expires in September 2001 at
an annual fixed rental of $199,500.
HCC maintains its executive offices at 1780 Riverwood, 3350 Cumberland
Circle, Atlanta, Georgia where it occupies approximately 3000 square feet in a
multi-story office complex. HCC has entered into a five-year lease with an
unaffiliated lessor that expires in October 2002 at an annual fixed rental of
approximately $78,000.
5
HDS maintains its executive offices at 711 Third Avenue, New York, New
York where it occupies approximately 4,600 square feet under a five-year lease
which expires in December 2002 at an annual fixed rental of approximately
$145,000.
Bekins maintains its executive offices at 7711 Bonhomme Avenue, St. Louis,
Missouri 63105 and warehouse locations in Las Vegas, Nevada and Orlando,
Florida. HWS REAG maintains its executive offices at 225 West Washington Street,
Chicago, Illinois 60606 with satellite offices in Denver, Colorado and Stamford,
Connecticut.
Item 3. Legal Proceedings
The Company is a defendant in various litigation in the normal course of
business. Although the outcome of litigation cannot be predicted with certainty,
in the opinion of management based on the facts known at this time, the
resolution of such litigation is not anticipated to have a material adverse
effect on the financial position or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
NONE
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters
(a) Market Information. The Common Stock has traded on the American Stock
Exchange under the symbol "HWS" since September 18, 1997 and prior thereto
traded on the NASDAQ SmallCap Market under the symbol "ROOM." The
following table sets forth, for the periods indicated, the range of high
and low bid prices of the Common Stock for the fiscal periods specified.
High Low
---- ----
Fiscal 1996
- ---------
First Quarter.......................... $ 1-11/16 $ 5/8
Second Quarter......................... 2-1/8 1-9/16
Third Quarter.......................... 3-3/16 1-5/8
Fourth Quarter......................... 6-7/8 2-5/8
Fiscal 1997
- ---------
First Quarter.......................... $ 8-11/16 $ 5-15/16
Second Quarter......................... 9-3/8 5-3/8
Third Quarter.......................... 14-3/16 7-3/8
Fourth Quarter......................... 13-15/16 8-1/2
On March 27, 1998, the last reported sales price of the Common Stock on
the American Stock Exchange was $10.00 per share.
(b) Holders. As of March 27, 1998, there were approximately 95 record
holders and approximately 1,877 beneficial holders of the Common Stock.
(c) Dividends. The Company has not paid or declared any dividends upon its
Common Stock since its inception and does not intend to pay any dividends
upon its Common Stock in the foreseeable future.
6
The payment by the Company of dividends, if any, in the future rests
within the discretion of its Board of Directors and will depend, among
other things, upon the Company's earnings, its capital requirements and
its financial condition, as well as, other relevant factors.
Item 6. Selected Financial Data (a)
Years Ended December 31,
(in thousands)
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Net Revenues $2,354 $524 $4,980 $24,367 $85,442
Income (loss) from continuing operations 526 (1,285) (380) 1,907 (844)
Basic earnings (loss) from continuing operations .17 (.28) (.07) .27 (.13)
per common share
Diluted earnings (loss) from continuing operations .17 (b) (b) .27 (b)
per common share
Total assets 2,565 4,492 10,031 12,750 84,268
Long-term debt 450 -- -- -- --
(a) No cash dividends were declared during the five-year period presented
above. See Item 1. Description of Business for a description of all
acquisitions during the five-year period. All amounts presented in
thousands except for earnings (loss) per common share.
(b) Antidilutive.
Item 7. Management Discussion and Analysis of Financial Condition and Results
of Operations Overview
From its inception in 1991 to August 1995, the Company's only source of
revenues was its decorative energy-efficient lighting fixture design,
manufacturing and installation business. The Company acquired its renovation
business in August 1995 and disposed of its lighting business in February 1996.
As part of its strategy to further its position as one of the leading providers
of renovation and procurement services for the hospitality industry on a global
basis, the Company acquired its procurement and reorder businesses in January
1997. As a result of this significant change in the company's business focus,
period to period historical comparisons are not considered meaningful.
Additionally, historical comparisons are not considered meaningful because
revenue recognition methodologies vary across the Company's businesses. The
Company recognizes all revenues associated with a renovation project on a
percentage of completion basis, as if the Company were a general contractor. As
part of this process, the Company develops a complete scope of work to be
performed and invoices its clients on a monthly or bi-monthly basis as work is
performed. The Company's cost of renovation services has been relatively stable
over the past two years. In contrast to the Company's recognition of renovation
revenues, the Company recognizes procurement revenues in three ways: (i) when
the Company is a principal, during which it functions as a purchaser and
reseller of products, the Company recognizes all revenues associated with the
products it purchases at the time of shipment of the respective product, (ii)
when the Company acts as an agent only, service fee income is recognized as
revenue at the time the service is provided, and (iii) when the Company provides
these services under long-term contracts, earnings are recognized under the
percentage of completion method, based on efforts expended over the life of the
contract. In each case, the Company charges its clients a procurement fee based
upon the amount of time and effort it expects to spend on a project. The Company
intends to continue to expand its role as a purchaser and reseller because the
Company believes that it can enter into more advantageous arrangements with its
vendors when acting as principal rather than agent. Under each method of
procurement revenue recognition, profits primarily include only procurement
service fees. The Company realizes reorder revenue based on the fees it charges
its clients for services rendered.
7
Results of Operations: Fiscal 1997 Compared to Fiscal 1996.
Revenues for the year ended December 31, 1997 were $85,441,712, compared
to $24,367,112 for 1996. The increase in revenue resulted primarily from the
acquisition of LPC and Parker Reorder in January 1997.
Gross profit for the year ended December 31, 1997 was $13,960,717, or
16.3% of revenues, compared to $6,077,188, or 24.9% of revenues, for 1996. The
decrease in gross profit as a percent of revenues in 1997 was due to the
addition of LPC and Parker Reorder, whose purchasing operations operate at a
lower gross profit percentage than the Company's renovation business. A
significant portion of its purchasing revenues and costs included the resale of
furniture and fixtures at little or no markup. The Company's purchasing income
is the result of fees charged to its clients based upon the amount of time and
effort it expects to spend on projects.
Selling, general and administrative ("SG&A") expenses for the year ended
December 31, 1997 were $13,776,081, or 16.1% of revenues, compared to
$3,218,520, or 13.2% of revenues, for 1996. Included in SG&A expenses for the
years ended December 31, 1997 and 1996 were $778,825 and $383,922, respectively,
of amortization of goodwill on acquisitions. The increase in SG&A expenses in
1997 was due to the addition of LPC and Parker Reorder as well as the
development of an administrative infrastructure to control future growth.
Income from operations for the year ended December 31, 1997 was $184,636,
compared to $2,858,668, for 1996. Operating profits decreased in 1997 due to an
increase in SG&A expenses and a decrease in gross profit percentage.
As an inducement to enter into the Apollo Joint Venture, the Company
issued to Apollo a warrant to purchase 750,000 shares of common stock, of which
250,000 shares were exercisable upon entering into the agreement in May 1997 and
the remaining shares become exercisable based on incremental revenue to the
Company. The fair value of the warrants for the 250,000 shares were recognized
as warrant expense in 1997 in the amount of $1,287,500.
The provision for income taxes for the year ended December 31, 1997 was
$227,988, compared to $926,325 for the same period last year. The decrease in
the provision for income taxes was primarily due to decrease in income (loss)
before income taxes. For 1997, although the Company had a loss from continuing
operations before income taxes, an income tax provision was recorded primarily
due to the non-deductibility of goodwill amortization and state and local taxes
payable.
The net loss for the year ended December 31, 1997 was $843,649, compared
to net income of $1,842,678, for 1996.
Results of Operations: Fiscal 1996 Compared to Fiscal 1995
(Period from August 1, 1995 to December 31, 1995).
Revenues for the year ended December 31, 1996 were $24,367,112, compared
to $4,980,291, for 1995. Revenues for the Company increased significantly due to
the growth in the Company's renovation business from increased sales and
marketing efforts and the establishment of the Company's name in the hospitality
industry. The 1995 revenues were for the five months ended December 31, 1995,
the period for which the Company owned the HRB business.
Gross profit for the year ended December 31, 1996 was $6,077,188, or 24.9%
of revenues, compared to $1,156,512, or 23.2% of revenues, for 1995.
SG&A expenses for the year ended December 31, 1996 were $3,218,520, or
13.2% of revenues, compared to $1,619,189, or 32.5% of revenues, for 1995.
Included in the SG&A expenses for the years ended December 31, 1996 and December
31, 1995 was $383,922 and $166,048, respectively, of amortization of goodwill
for the acquisition of HRB. The Company believes that these costs will continue
to increase as its business grows and as it develops a larger infrastructure to
handle future growth.
8
However, due to rapidly increasing revenues, and a majority of the Company's
resources dedicated to operations, these costs should continue to decline as a
percentage of revenues.
Income (loss) from operations for the year ended December 31, 1996 was
$2,858,668, compared to ($462,677) for the same period in 1995. Operating
profits increased in 1996 due to larger revenues and the ability of the Company
to maintain low SG&A expenses as a percentage of sales. The loss from operations
for 1995 is the result of increased overhead in an unsuccessful attempt to grow
the lighting business that was subsequently discontinued.
Income tax expense for the year ended December 31, 1996 was $926,325,
compared to $25,000 for the same period in 1995. The 1996 expense is below the
federal and state statutory tax rates due mainly to a reduction in the valuation
allowance.
Net income for the year ended December 31, 1996 was $1,842,678, compared
to a net loss of $1,115,969 for the period ended December 31, 1995.
Liquidity and Capital Resources
The Company's short-term and long-term liquidity requirements generally
consist of operating capital for its purchasing and renovation businesses and
SG&A expenses. The Company continues to satisfy its short-term and long-term
liquidity requirements with cash generated from operations and funds from a
public offering of its Common Stock in September 1997. Due to the nature of the
Company's businesses, with a majority of its resources allocated to personnel
for performance of its services, capital requirements are insignificant.
Net cash provided by operating activities was $3,279,325 for the year
ended December 31, 1997, compared to net cash used of $1,120,028 for the same
period last year. During the year ended December 31, 1997, the Company's
accounts receivable and costs in excess of billing increased by $13,543,701.
This increase was partially offset by an increase of accounts payable and
accrued liabilities of $10,896,395. Due to the Company's rapid growth,
acquisitions, and the additional work performed on numerous projects, accounts
receivable increased significantly at December 31, 1997 when compared to
December 31, 1996. The Company expects to collect these receivables fully in
1997.
Net cash used by investing activities for the year ended December 31, 1997
was $21,131,147, compared to net cash provided of $649,318 for the same period
last year. The change is primarily the result of the purchase of marketable
securities with the proceeds of the public offering in September, 1997 and the
purchase of software for the Parker FIRST system.
Net cash provided by financing activities increased to $29,539,760 in 1997
primarily as a result of the Company's public offering in September, 1997.
In September 1997, the Company repaid all outstanding borrowings under its
secured line of credit with Marine Midland Bank of New York ("Bank"). In March
1998, the Company obtained a $7,000,000 unsecured line of credit.
In January 1997, the Company acquired 100% of the outstanding capital
stock of LPC. The purchase price for LPC, after final adjustments, of
approximately $11.65 million consisted of 1,250,000 newly issued shares of
Common Stock and 200,000 shares of 6% redeemable convertible preferred, $25
stated value per share, which are convertible, on a formula basis, into
1,000,000 shares of Common Stock (subject to upward adjustment to a maximum of
4,000,000 shares in the event that the market price of the Common Stock is below
$5.00 at the time of conversion) during the period from January 10, 1998 to
January 10, 2000.
In May 1997, the Company borrowed $2.2 million from Findim Investments
S.A. at an interest rate of
9
12% per annum in order to exercise its option to purchase 500,000 shares of
Common Stock from Tova Schwartz, the Company's former President and Chief
Executive Officer. This note was paid in full in September 1997.
Since January 1, 1996, the Company has issued 940,750 shares of Common
Stock in private placements and through the exercise of options and warrants,
raising an aggregate of 1,587,755. During such time, the Company repurchased an
aggregate of 1,500,000 shares of Common Stock from Tova Schwartz for an
aggregate purchase price of $3,362,500.
As the Company grows and continues to explore opportunities for strategic
alliances and acquisitions, investment in additional support systems, including
infrastructure and personnel, will be required. The Company expects to increase
its costs and expenses in 1998 as it continues to invest in the development of
its businesses. Although these increases may result in a short-term reduction in
operating margin as a percentage of revenues, the Company anticipates that its
investments will have a positive impact on its net revenues on a long-term
basis. The Company anticipates making substantial expenditures as it continues
to explore expansion though strategic alliances and acquisitions. The Apollo
Joint Venture has acquired the Warwick Hotel in Philadelphia, Pennsylvania, and
has entered into a letter of intent to purchase a hotel property in Richmond,
Virginia. The ING Joint Venture has acquired the Clarion Hotel in Chicago,
Illinois.
To support the Company's growth, as well as to support potential
acquisitions of hospitality-related businesses and the formation of strategic
alliances, the Company completed a public offering in September 1997 of
3,450,000 shares of Common Stock. The net proceeds of the offering, after
deducting applicable issuance costs and expenses were $32,126,630. A portion of
the proceeds was used to repay short-term indebtedness with the remainder
available for general corporate purposes, including the financing of working
capital needs and business development. In conjunction with the public offering,
the underwriter was granted a warrant to purchase 356,723 shares of Common Stock
at an exercise price of $12.00 per share. The warrant is exercisable in full
after one year (September 17, 1998) and expires on September 17, 2002. The
number of shares issuable under this warrant are subject to change upon certain
events, among them, the declaration of dividends, stock splits or reverse stock
splits.
The Company believes its present cash position, including increasing
revenues and cash on hand, and its ability to obtain additional financing as
necessary, will allow the Company to meet its short-term operating needs for at
least the next twelve months.
Inflation
Inflation and changing prices during the current fiscal year did not
significantly affect the major markets in which the Company conducts its
business. In view of the moderate rate of inflation, its impact on the Company's
business has not been significant.
Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 130
"Reporting Comprehensive Income" and Statement No. 131 "Disclosures about
Segments of an Enterprise and Related Information", both of which the Company
will adopt in 1998 and require restatement of prior periods presented.
Statement No. 130 establishes standards for reporting and display of
comprehensive income and its components in a separate financial statement.
Comprehensive income generally includes net income as reported by the Company
adjusted for foreign currency translation adjustments and unrealized gains and
losses on marketable securities that are "available for sale," which are
currently reported in the stockholders equity section of the balance sheet.
Statement No. 131 requires that the company report financial and
descriptive information about its reportable operating segments in financial
statements issued to shareholders for interim and annual periods. The Statement
also establishes standards for related disclosures about products and services,
geographic
10
areas and major customers. Under this Statement, operating segments are
components of an enterprise about which separate financial information is
available that is regularly evaluated by the enterprise's chief operational
decision-maker in deciding how to allocate resources and in assessing
performance. While the Company continues to evaluate the adoption of the new
standard, it is likely that its currently reported business segments of
Renovation, Purchasing and General Corporate will be maintained with additions
for any acquisitions.
Management has evaluated the impact of Year 2000 issues on the Company's
business and operations. The Company believes, based upon its internal reviews
and other factors, that future external and internal costs to be incurred
relating to the modification of internal-use software for the year 2000 will not
have a material adverse effect on the Company's results of operations or
financial position.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
NONE
Item 8. Financial Statements
See Index to Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
On March 14, 1996, the Company dismissed Arthur Andersen LLP ("Andersen")
as its independent accountants. The Company's Board of Directors approved such
dismissal. Andersen's accountant's report on the financial statements of the
Company for the two prior years did not contain an adverse opinion or a
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope, or accounting principles. There were no other reportable events or
disagreements with Andersen to report in response to Item 304 of Regulation S-K.
On March 15, 1996, BDO Seidman, LLP ("BDO") was engaged as new independent
accountants to the Company. On November 19, 1997, the Company dismissed BDO as
its independent accountants. The Company's Board of Directors approved such
dismissal. BDO's accountant's report on the financial statements of the Company
for the past two years did not contain an adverse opinion or a disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope, or
accounting principles. There were no other reportable events or disagreements
with BDO to report in response to Item 304 of Regulation S-K.
On November 20, 1997, Andersen was engaged as independent accountants to
the Company.
11
PART IV
Item 14. Exhibits and Reports on Form 8-K.
(a) Financial Statements:
0 Hospitality Worldwide Services, Inc. and Subsidiaries
0 Report of Independent Public Accountants
0 Consolidated Financial Statements
(b) Exhibits
Exhibit
Number Exhibits
- ------- --------
* 3.1 Certificate of Incorporation, as amended, of the Company.
3.2 Amended and Restated By-laws of the Company (Incorporated
by reference to the Company's Registration Statement on
Form SB-2, No. 333-31765).
4.1 Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form SB-2, No. 33-7094-NY).
4.2 Rights Agreement dated as of November 24, 1997, by and
between the Company and Continental Stock Transfer &
Trust Company, as rights agent (the "Rights Agreement")
(Incorporated by reference to the Company's Registration
Statement on Form 8-A filed with the Commission on
December 2, 1997).
* 4.3 Amendment to Rights Agreement dated January 7, 1998.
10.1 Asset Purchase Agreement dated as of April 1, 1995, by
and among AGF Interior Services Co., Watermark
Investments Limited (Bahamas), Watermark Investments
Limited (Delaware), HRB, the Company and Tova Schwartz
(Incorporated by reference to the Company's Current
Report on Form 8-K dated August 22, 1995).
10.2 Divestiture, Settlement and Reorganization Agreement
dated as of February 26, 1996, by and among the Company,
HRB, Watermark Investments Limited (Bahamas), Watermark
Investments Limited (Delaware), AGF Interior Services
Co., Tova Schwartz, Alan G. Friedberg and Guillermo
Montero (Incorporated by reference to Exhibit 10.2 of the
Company's Form 10-KSB for the year ended December 31,
1995).
10.3 Memorandum Agreement dated April 12, 1996, by and between
the Company and Watermark (Incorporated by reference to
Exhibit 10.3 of the Company's Form 10-KSB for the year
ended December 31, 1995).
10.4 Bill of Sale and Assumption Agreement dated February 26,
1996, by and between the Company and Tova Schwartz
(Incorporated by reference to Exhibit 10.4 of the
Company's Form 10-KSB for the year ended December 31,
1995).
12
10.5 Consulting Agreement dated February 28, 1996, by and
between to Company and Resource Holdings Associates
(Incorporated by reference to Exhibit 10.6 of the
Company's Form 10-KSB for the year ended December 31,
1995).
10.6 Employment Agreement dated April 1, 1996, by and between
the Company and Howard G. Anders (Incorporated by
reference to Exhibit 10.7 of the Company's Form 10-KSB
for the year ended December 31, 1995).
10.7 1996 Stock Option Plan (Incorporated by reference to
Exhibit 4(a) to the Company's Registration Statement on
Form S-8 filed on February 12, 1997, File No. 333-21689).
10.8 Form of Option Agreement for the 1996 Plan (Incorporated
by reference to Exhibit 4(b) to the Company's
Registration Statement on Form S-8 filed on February 12,
1997, File No. 333-21689).
10.9 Form of Stock Agreement for the Outside Directors' Plan
(Incorporated by reference to Exhibit 4(c) to the
Company's Registration Statement on Form S-8 filed on
February 12, 1997, File No. 333-21689).
10.10 Form of Option Granted to Officers (Incorporated by
reference to Exhibit 4(d) to the Company's Registration
Statement on Form S-8 filed on February 12, 1997, File
No. 333-21689).
10.11 Agreement and plan of Merger dated as of January 9, 1997,
by and among Leonard Parker Company, LPC Acquisition
Corp., and the Company (incorporated by reference to
Exhibit 2.1 of the Company's Current Report on Form 8-K
filed January 24, 1997).
10.12 Employment Agreement, dated as of January 9, 1997, by and
among The Leonard Parker Company, the Company and Leonard
Parker (Incorporated by reference to the Company's
Registration Statement on Form SB-2, No. 333-31765).
10.13 Employment Agreement, dated as of January 9, 1997, by and
among The Leonard Parker Company, the Company and Douglas
Parker (Incorporated by reference to the Registration
Statement on Form SB-2, No. 333-31765).
10.14 Registration Rights Agreement, date as of January 9,
1997, by and among the Company, Leonard Parker, Douglas
Parker, Bradley Parker, Philip Parker, Gregg Parker and
Mitchell Parker (Incorporated by reference to the
Company's Registration Statement on Form SB-2, No.
333-31765).
10.15 Agreement to Joint Venture, dated as of May 12, 1997, by
and among Apollo Real Estate Advisors II, L.P., the
Registrant and Watermark Investments Limited, LLC.
(Incorporated by reference to the Company's Registration
Statement on Form SB-2, No. 333-31765).
13
10.16 Warrant dated May 12, 1997 issued to Apollo Real Estate
Advisors II, L.P. (Incorporated by reference to the
Company's Registration Statement on Form SB-2, No.
333-31765).
10.17 Agreement and Plan of Merger, dated as of January 1,
1998, by and among the Company, HWS Acquisition Corp., a
Delaware corporation, Bekins Distribution Services Co.,
Inc. and the Sellers named therein (Incorporated by
reference to the Company's Current Report on Form 8-K
dated January 9, 1998).
10.18 Registration Rights Agreement dated as of January 1,
1998, by and among the Company and the Shareholders named
therein.
10.19 Financial Advisory Agreement dated April 10, 1997, by and
between the Company and Resource Holdings Associates
(Incorporated by reference to the Company's Registration
Statement on Form SB-2, No. 333-31765).
11 Computation of earnings per share (Incorporated herein by
reference to Note 15 to the Company's Consolidated
Financial Statements).
16.1 Letter from Arthur Andersen LLP dated March 19, 1996
(Incorporated by reference to the Company's Current
Report on Form 8-K/A filed March 25, 1996).
16.2 Letter from BDO Seidman, LLP dated November 19, 1997
(Incorporated by reference to the company's Current
Report on Form 8-K dated November 12, 1997).
* 21 Subsidiaries of the Company
* 23.1 Consent of Arthur Andersen LLP dated March 31, 1998
* 23.2 Consent of BDO Seidman, LLP dated March 31, 1998
* 27 Financial Data Schedule
- ----------
*Filed herewith.
(c) Reports on Form 8-K
Form 8-K dated November 11, 1997, filed with the Commission on December 2, 1997,
reporting Item 5, Other Events.
Form 8-K dated November 12, 1997, filed with the Commission on December 19,
1997, reporting Item 4, Changes in Registrant's Certifying Accountant.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
HOSPITALITY WORLDWIDE SERVICES, INC.
Dated: March 31, 1998 By: /S/ ROBERT A. BERMAN
-------------------------
Robert A. Berman, Chairman of the Board, Chief
Executive Officer, (principal executive officer)
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
/S/ Robert A. Berman Chairman of the Board, March 31, 1998
- ---------------------------
Robert A. Berman Chief Executive Officer
(principal executive officer)
and Director
Chairman Emeritus of the Board
- ---------------------------
Leonard F. Parker and Director
/S/ Douglas Parker President and Director March 31, 1998
- ---------------------------
Douglas Parker
/S/ Howard G. Anders Executive Vice President, March 31, 1998
- ---------------------------
Howard G. Anders Chief Financial Officer,
(principal financial officer,
principal accounting officer)
and Secretary
/S/ Scott A. Kaniewski Director March 31, 1998
- ---------------------------
Scott A. Kaniewski
/S/ Louis K. Adler Director March 31, 1998
- ---------------------------
Louis K. Adler
/S/ George Asch Director March 31, 1998
- ---------------------------
George Asch
/S/ Richard A. Bartlett Director March 31, 1998
- ---------------------------
Richard A. Bartlett
15
Item 8. Financial Statements
Index to Financial Statements
Page No.
--------
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2, F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-4
Statements of operations F-5
Statement of stockholders' equity F-6
Statements of cash flows F-7, F-8
Notes to consolidated financial statements F-9-F-21
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Hospitality Worldwide Services, Inc.
We have audited the accompanying consolidated balance sheet of Hospitality
Worldwide Services, Inc. (a New York Corporation) and subsidiaries as of
December 31, 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year 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 audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hospitality Worldwide Services,
Inc. and subsidiaries as of December 31, 1997, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
/s/ Arthur Andersen LLP
New York, New York
March 30, 1998
F-2
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
Hospitality Worldwide Services, Inc.
New York, New York
We have audited the accompanying consolidated balance sheet of Hospitality
Worldwide Services, Inc. (formerly Light Savers U.S.A., Inc.) and subsidiaries
as of December 31, 1996, and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the two years in the period
ended December 31, 1996. 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 financial position of Hospitality
Worldwide Services, Inc. and subsidiary as of December 31, 1996, and the results
of its operations and its cash flows for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
/s BDO Seidman, LLP
BDO Seidman, LLP
New York, New York
March 21, 1997
F-3
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1997 1996
---- ----
CURRENT ASSETS:
Cash and cash equivalents $11,964,129 $ 276,191
Marketable securities 18,915,686 --
Accounts receivable, net of allowance for
doubtful accounts of $267,595 and $50,000 (Notes 5 and 10) 21,932,667 3,134,841
Current portion of note receivable (Note 3) 342,144 70,000
Costs and estimated earnings in excess of billings (Note 6) 3,420,829 2,176,907
Advances to vendors 4,255,181 --
Prepaid and other current assets 1,037,480 421,303
---------- ----------
Total current assets 61,868,116 6,079,242
Note receivable, less current portion (Note 3) -- 280,000
Property and equipment,
less accumulated depreciation of $337,873 and $61,711 (Note 7) 3,547,712 142,877
Goodwill and other intangibles,
less accumulated amortization of $1,489,855 and $549,970 (Note 3) 17,078,180 6,049,669
Deferred taxes (Note 9) 739,088 65,280
Other assets 1,034,595 133,022
---------- ----------
$84,267,691 $12,750,090
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable (Note 5) $16,374,426 $1,175,068
Accrued and other liabilities 2,540,222 1,897,389
Billings in excess of costs and estimated earnings (Note 6) 295,967 200,802
Customer deposits 13,323,571 --
Loan payable (Note 8) -- 1,400,000
Income taxes payable 7,669 297,860
---------- ----------
Total current liabilities 32,541,855 4,971,119
Commitments and contingencies (Note 11)
STOCKHOLDERS' EQUITY (Notes 13, 14 and 17)
Convertible preferred stock, $.01 par value,
$25 stated value, 3,000,000 shares authorized,
200,000 issued and outstanding in 1997, $5,000,000
liquidation preference 5,000,000 --
Common stock, $.01 par value, 20,000,000 shares authorized,
11,345,572 and 7,225,655 issued 113,456 72,257
Additional paid-in capital 47,519,725 8,185,410
Treasury stock, 500,000 common shares in 1996 -- (715,000)
Retained earnings (deficit) (907,345) 236,304
---------- ----------
Total stockholders' equity 51,725,836 7,778,971
---------- ----------
$84,267,691 $12,750,090
---------- ----------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-4
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1997 1996 1995
------------ ------------ ------------
Net revenues (Note 12) 85,441,712 $ 24,367,112 $ 4,980,291
Cost of revenues (Notes 10 and 12) 71,480,995 18,289,924 3,823,779
------------ ------------ ------------
Gross profit 13,960,717 6,077,188 1,156,512
Selling, general and administrative expenses 13,776,081 3,218,520 1,619,189
------------ ------------ ------------
Income (loss) from operations 184,636 2,858,668 (462,677)
------------ ------------ ------------
Other income (expense):
Interest expense (287,633) (26,101) (13,007)
Interest income 774,836 1,141 120,257
Warrant expense (1,287,500) -- --
------------ ------------ ------------
Total other income (expense) (800,297) (24,960) 107,250
------------ ------------ ------------
Income (loss) before income taxes (615,661) 2,833,708 (355,427)
Provision for income taxes (Note 9) 227,988 926,325 25,000
------------ ------------ ------------
Income (loss) from continuing operations (843,649) 1,907,383 (380,427)
------------ ------------ ------------
Discontinued operations: (Note 4)
Loss from discontinued operations -- (64,705) (336,736)
Loss on disposal of discontinued operations,
including provision of $46,000 for operating
losses during the phase out period -- -- (398,806)
------------ ------------ ------------
Loss from discontinued operations -- (64,705) (735,542)
------------ ------------ ------------
Net income (loss) $ (843,649) $ 1,842,678 $ (1,115,969)
------------ ------------ ------------
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ (0.13) $ 0.27 $ (0.07)
------------ ------------ ------------
Discontinued operations:
Loss from operations -- (0.01) (0.06)
Loss on disposal -- -- (0.07)
------------ ------------ ------------
-- (0.01) (0.13)
------------ ------------ ------------
Net income (loss) $ (0.13) $ 0.26 $ (0.20)
------------ ------------ ------------
Diluted earnings (loss) per common share:
Income (loss) from continuing operations (a) $ 0.27 (a)
------------ ------------ ------------
Discontinued operations:
Loss from operations -- (0.01) (a)
Loss on disposal -- -- (a)
------------ ------------ ------------
-- (0.01) (a)
------------ ------------ ------------
Net income (loss) (a) $ 0.26 (a)
------------ ------------ ------------
Weighted average common shares
outstanding 8,885,570 6,983,333 5,673,600
------------ ------------ ------------
Weighted average common and
common equivalent shares outstanding 9,876,802 7,131,915 5,700,324
------------ ------------ ------------
(a) Antidilutive
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-5
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Preferred Stock Common Stock
---------------- ----------------
Number Number Additional
of Stated of Par Treasury Paid in
Shares Value Shares Value Stock Capital
- ------------------------------------------------------------------------------------------------------------------------
BALANCE,
JANUARY 1, 1995 -- $ -- 4,625,655 $ 46,257 $ -- $ 4,590,285
Issuance of 2.5 million
shares in connection
with acquisition -- -- 2,500,000 25,000 -- 3,275,000
Sale of available-for-sale
securities -- -- -- -- -- --
Net loss
- ------------------------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1995 -- -- 7,125,655 71,257 -- 7,865,285
Purchase of
treasury stock -- -- (1,000,000) -- (1,152,500) --
Sale of treasury stock -- -- 500,000 -- 437,500 62,500
Stock issued in
settlement of
service agreements -- -- 75,000 750 -- 149,250
Stock options issued
for services -- -- -- -- -- 44,000
Exercise of stock
options and warrants -- -- 25,000 250 -- 64,375
Net income -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1996 -- -- 6,725,655 72,257 (715,000) 8,185,410
Purchase of
treasury stock -- -- (500,000) -- (2,210,000) --
Exercise of stock
options and warrants -- -- 419,917 4,199 -- 1,018,931
Issuance of shares in
connection with
acquisition 200,000 5,000,000 1,250,000 12,500 -- 6,940,000
Stock issued in
connection with
offering, net of expenses -- -- 3,450,000 24,500 2,925,000 27,379,246
Income tax benefit from
warrants exercised -- -- -- -- -- 360,349
Warrants issued
for services -- -- -- -- -- 3,635,789
Net income -- -- -- -- -- --
Preferred dividends -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1997 200,000 $5,000,000 11,345,572 $113,456 $ -- $47,519,725
- ------------------------------------------------------------------------------------------------------------------------
Unrealized
Loss on Retained Total
Marketable Earnings Stockholders'
securities
(Deficit) Equity
- ------------------------------------------------------------------------------
BALANCE,
JANUARY 1, 1995 $ (52,938) $(490,405) $ 4,093,199
Issuance of 2.5 million
shares in connection
with acquisition -- -- 3,300,000
Sale of available-for-sale
securities 52,938 -- 52,938
Net loss (1,115,969) (1,115,969)
- ------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1995 -- (1,606,374) 6,330,168
Purchase of
treasury stock -- -- (1,152,500)
Sale of treasury stock -- -- 500,000
Stock issued in
settlement of
service agreements -- -- 150,000
Stock options issued
for services -- -- 44,000
Exercise of stock
options and warrants -- -- 64,625
Net income 1,842,678 1,842,678
- ------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1996 -- 236,304 7,778,971
Purchase of
treasury stock -- -- (2,210,000)
Exercise of stock
options and warrants -- -- 1,023,130
Issuance of shares in
connection with
acquisition -- -- 11,952,500
Stock issued in
connection with
offering, net of expense -- -- 30,328,746
Income tax benefit from
warrants exercised -- -- 360,349
Warrants issued
for services -- -- 3,635,789
Net loss -- (843,649) (843,649)
Preferred dividends -- (300,000) (300,000)
- ------------------------------------------------------------------------------
BALANCE,
DECEMBER 31, 1997 $ -- $ (907,345) $51,725,836
- ------------------------------------------------------------------------------
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-6
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
-------- -------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (843,649) $ 1,842,678 $ (1,115,969)
Adjustments to reconcile net income (loss) to net cash
provided by (used in ) operating activities:
Depreciation and amortization 1,114,001 404,114 178,801
Provision for losses on accounts receivable -- -- 125,366
Loss on disposal of discontinued operations -- -- 398,806
Realized loss on sale of securities -- -- 52,938
Stock based compensation charge 1,593,420 44,000 --
Deferred income tax provision (668,422) (65,280) --
(Increase) decrease in current assets:
Accounts receivable (12,299,779) (1,548,005) (539,439)
Current assets of discontinued operations -- 145,317 (145,317)
Costs in excess of billings (1,243,922) (2,047,173) (129,734)
Advances to vendors (4,255,181) -- --
Prepaid and other current assets 36,528 (290,632) 182,029
Increase in other assets (901,573) (81,014) (9,632)
Increase (decrease) in current liabilities:
Accounts payable 10,579,593 134,481 495,158
Accrued and other liabilities 316,802 862,204 360,172
Billings in excess of costs 95,165 (419,772) (640,175)
Customer deposits 10,046,533 -- --
Accrued loss on disposal of discontinued operations -- (398,806) --
Income taxes payable (290,191) 297,860 --
------------ ------------ ------------
Net cash provided by (used in) operating activities 3,279,325 (1,120,028) (786,996)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities -- -- 3,047,243
(Purchase) sale of short term marketable securities (18,915,686) 715,000 (715,000)
Cash acquired upon acquisition, net of acquisition costs 479,061 -- 125,966
Purchase of property and equipment (2,694,522) (65,682) (40,819)
------------ ------------ ------------
Net cash provided by (used in) investing activities (21,131,147) 649,318 2,417,390
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on loan payable 3,180,000 1,400,000 455,926
Repayment of loan payable (4,580,000) (455,926) --
Purchase of treasury stock (2,210,000) (1,152,500) --
Proceeds from sale of treasury stock -- 500,000 --
Note receivable -- -- (2,574,521)
Proceeds from stock offering 32,126,630 -- --
Proceeds from exercise of stock options and warrants 1,023,130 64,625 --
------------ ------------ ------------
Net cash provided by (used in) financing activities 29,539,760 356,199 (2,118,595)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,687,938 (114,511) (488,201)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 276,191 390,702 878,903
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,964,129 $ 276,191 $ 390,702
------------ ------------ ------------
F-7
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
--------- --------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 178,113 $ 26,101 $ 12,486
Income taxes 785,127 696,324 --
NON-CASH INVESTING & FINANCING ACTIVITIES:
Fair value (including goodwill) of net assets acquired 11,166,229 -- 5,450,000
Stock issued for assets acquired 11,952,500 -- (3,300,000)
Note payable for assets acquired -- -- (2,150,000)
Issuance of stock for repayment of debt -- 150,000 --
Repayment of debt from issuance of stock -- (150,000) --
Preferred stock dividends not paid in lieu of
purchase price reduction for LPC acquisition 300,000 -- --
Warrants granted and exercisable by Apollo 1,837,527 -- --
Warrants granted to underwriters for stock offering 1,798,262 -- --
The accompanying notes to consolidated financial statements are an integral part
of these statements.
F-8
HOSPITALITY WORLDWIDE SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Hospitality Worldwide Services, Inc., formerly known as Light Savers
U.S.A., Inc. (the "Company"), was incorporated in the State of New York on
October 10, 1991. Through its wholly owned operating subsidiaries, the Company
provides interior and exterior cosmetic renovations and maintenance and acts as
a purchasing agent and principal for leading hotel and hospitality customers
nationwide.
2. Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. The Company also has an investment in a real
estate joint venture, which is accounted for under the cost method. All
significant intercompany balances and transactions have been eliminated. Certain
prior year balances have been reclassified in the consolidated financial
statements in order to provide a presentation consistent with the current year.
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
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Management believes that the estimates utilized in preparing
the Company's financial statements are reasonable and prudent, however, actual
results could differ from those estimates.
Revenue Recognition
Renovation
The Company determines renovation earnings under the percentage of
completion method. Under this method, the Company recognizes as earnings that
portion of the total earnings anticipated from a contract which the cost of the
work completed bears to the estimated total cost of the work covered by the
contract. To the extent that contracts extend over more than one year, revisions
in costs and earnings estimates during the course of the work are reflected in
the year in which the facts which require the revision become known. Due to
uncertainties inherent in the estimation process, it is reasonably possible that
such estimates will be revised over the next year. When a loss is forecasted for
a contract, the full amount of the anticipated loss is recognized in the period
in which it is determined that a loss will occur. Claims are included in
earnings from renovation contracts at an amount based on the related contract
costs when realization is probable and the amount can be reliably estimated
The Company continuously reviews estimated earnings from renovation
contracts and makes necessary adjustments based on current evaluations of the
indicated outcome.
Cost of renovation contracts include all direct material, labor and
subcontracting costs, and those indirect costs related to contract performance
that are identifiable with or allocable to the contracts.
Procurement
Revenues are recognized three ways: (i) when the Company is a principal,
during which it functions as a purchaser and reseller of products, the Company
recognizes all revenues associated with the products it purchases at the time of
shipment of the respective product, (ii) when the Company acts as an agent,
revenue is recognized as service fee income at the time the service is provided,
and (iii) when the Company provides these services under long-term contracts,
earnings are recognized under the percentage of completion method based on
efforts expended over the life of the contract. Revenues from procurement
F-9
contracts include both resale of product and service fee income.
Customer deposits consist of amounts remitted to the Company by customers
as deposits on specific contracts. Advances to vendors consist of amounts paid
by the Company to vendors on specific contracts.
Depreciation and Amortization
The Company calculates depreciation on property and equipment on the
straight-line method. Estimated useful lives are as follows: office equipment, 5
years; software, 5 years; and furniture and fixtures, 10 years. Leasehold
improvements to property used in the Company's operations are amortized on a
straight-line basis over the lease terms. Maintenance and repairs are expensed
currently, while expenditures for betterments are capitalized.
Goodwill
Goodwill is amortized on a straight-line basis over its estimated useful
life of 17-30 years. Goodwill represents the costs of acquisition in excess of
the fair value of net assets acquired at the date of acquisition.
Earnings Per Share of Common Stock
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share are very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for prior periods have been restated to conform to the new requirements.
Basic earnings per common share are based on net income less preferred
stock dividends divided by the weighted average number of common shares
outstanding. Diluted earnings per common share are adjusted to reflect the
assumed conversion of convertible preferred stock and the elimination of the
preferred stock dividends, if such conversion is dilutive, and the weighted
average number of common share equivalents from stock options and warrants.
Income Taxes
Deferred income tax assets or liabilities are computed based on the
difference between the financial reporting and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax expenses or
benefits are based on the changes in the asset or liability from period to
period.
Cash Equivalents
The Company considers all highly liquid investments purchased with
maturities of 90 days or less to be cash equivalents.
Marketable Securities
Marketable securities which consist of commercial paper and treasury notes
maturing in six months or less are classified as available-for-sale or as
held-to-maturity, based on the Company's intended holding period.
Available-for-sale investments are reported at fair value with unrealized gains
or losses, if any, reported as a separate component of stockholder's equity.
Held-to-maturity investments are reported at amortized cost. The cost basis of
securities is determined on a specific identification basis in calculating gains
and losses.
Long-Lived Assets
In 1996, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement requires that long-lived
assets to be held and used be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If
F-10
such review indicates that the asset is impaired, given that the
carrying amount of an asset exceeds the sum of its expected future cash flows,
on an undiscounted basis, the asset's carrying amount should be written down to
fair value. In addition, SFAS No. 121 requires that long-lived assets to be
disposed of be reported at the lower of carrying amount or fair value less cost
to sell. The effect of the adoption of this standard was not material to the
consolidated financial statements.
Stock -Based Compensation
The Company accounts for its stock-based employee compensation plans using
the intrinsic value based method, under which compensation cost is measured as
the excess of the stock's market price at the grant date over the amount an
employee must pay to acquire the stock. Expenses related to stock options and
warrants issued to non-employees are accounted for using the fair value of the
security at the date of grant based on option-pricing models.
Comprehensive Income
In July 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a separate
financial statement. Comprehensive income generally includes net income as
reported by the Company adjusted for cumulative foreign translation adjustments
and unrealized gains and losses on marketable securities that are
available-for-sale, which are currently reported in the stockholders' equity
section of the balance sheet. The statement is effective for fiscal years
beginning after December 15, 1997. The Company will adopt the standard at the
beginning of 1998, and will restate prior periods presented.
3. Acquisition of Businesses
On August 1, 1995, the Company acquired substantially all of the assets
and business and assumed certain liabilities of AGF Interior Services Co.
("AGF") through its wholly owned subsidiary, Hospitality Restoration & Builders
("HRB"). HRB provides interior and exterior cosmetic renovations and maintenance
for leading hotel and hospitality customers nationwide. The aggregate
consideration for the acquisition was $5,450,000. The purchase price consisted
of a $2,150,000 promissory note payable to AGF over five years, bearing interest
at 8% per annum and 2,500,000 shares of the Company's common stock issued in the
name of AGF's sole stockholder, Watermark Investments Limited ("Watermark"). The
acquisition resulted in goodwill of approximately $6,600,000, which is being
amortized on a straight-line basis over its estimated useful life of 17 years.
The acquisition was accounted for as a purchase with the results of HRB included
in the consolidated financial statements from the acquisition date. On May 23,
1995, the Company loaned AGF $2,500,000, secured by a promissory note, payable
over five years and bearing interest at 8% per annum. On April 12, 1996, the
Company and Watermark agreed to offset the $2,150,000 note payable and the
$2,500,000 note receivable, with a net balance of $350,000 receivable in 60
equal monthly installments at 7% per annum with payments commencing January
1997. This note was paid in full in February 1998.
In January 1997, the Company completed the acquisition of Leonard Parker
Company ("LPC") and Parker Reorder Corporation ("Parker Reorder"). LPC, a
leading purchasing company for the hospitality industry, acts as an agent or
principal for the purchase of goods and services for its customers which include
major hotel and management companies worldwide. Parker Reorder has developed and
is marketing a new proprietary software product, Parker FIRST, which allows
clients to reorder operating supplies and equipment ("OS&E") and other products
on-line and will provide such clients with access to forecasting and product
evaluation capabilities. The purchase price of LPC and Parker Reorder, after
final adjustments, was approximately $11,650,000 which consisted primarily of
1,250,000 newly issued shares of Common Stock and $5 million stated value of
newly issued 6% convertible preferred stock of the Company, convertible, on a
formula basis, into not less than 1,000,000 shares and no more than 4,000,000
shares of Common Stock (at the present stock price) from January 1, 1998 to
January 10, 2000. The acquisition resulted in goodwill of approximately
$11,400,000, which is being amortized on a straight-
F-11
line basis over its estimated useful life of 30 years. The acquisition was
accounted for as a purchase with the results of LPC and Parker Reorder included
in the consolidated financial statements of the Company from the acquisition
date.
The following pro forma consolidated financial information has been
prepared to reflect the acquisition of the assets and business of AGF, LPC and
Parker Reorder. The pro forma financial information is based on the historical
financial statements of the Company and AGF, LPC and Parker Reorder, and should
be read in conjunction with the accompanying footnotes. The accompanying pro
forma operating statements are presented as if the acquisitions occurred on
January 1, 1995. The pro forma financial information is unaudited and is not
necessarily indicative of what the actual results of operations of the Company
would have been assuming the transactions had been completed as of January 1,
1995, and neither is it necessarily indicative of the results of operations for
future periods.
Year Ended December 31 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
(unaudited)
Net sales $83,067,724 $ 52,302,744
Net income (loss) from continuing operations applicable to common shares 1,435,165 (1,537,048)
Diluted loss per share from continuing operations 0.17 (0.15)
- ----------------------------------------------------------------------------------------------------------------------------------
The above unaudited pro forma statements have been adjusted to reflect the
amortization of goodwill as generated by the acquisitions over 17 and 30 year
periods, interest income on the $350,000 Watermark note receivable, elimination
of the interest income on the $2,500,000 loan to AGF, dividends of 6% on
$5,000,000 preferred shares in the LPC transaction, LPC's officers compensation
based on employment agreements entered into at the date of acquisition,
additional income taxes on pro forma income and the 3,750,000 common shares and
$5,000,000 preferred shares issued as consideration in the transactions.
4. Discontinued Operations
In December 1995, the Company determined to focus its resources on its
hospitality and restoration business and discontinue its lighting business. On
February 26, 1996, the Company entered into a divestiture agreement with its
former President. In accordance with the agreement, the Company disposed of the
lighting business, together with its accounts receivable, inventory and fixed
assets to the former President, who also assumed certain liabilities.
Additionally, in accordance with the agreement, the following occurred: (i) the
Company repurchased 500,000 shares of common stock from the former President for
$250,000 with a market value of $437,500; (ii) the Company retained the former
President as a consultant for a three year period at an annual salary of
$100,000, (iii) the former President granted to the Company the option to
purchase an additional 1,000,000 shares of common stock over a two year period
at a 33% discount from the average trading price for the 20 trading days prior
to purchase, but not below certain minimum set prices. The Company repurchased
500,000 of the optioned shares in October 1996 for $715,000 and repurchased the
remaining 500,000 shares in May 1997 for $2,210,000.
In 1995, the Company incurred a loss on disposal of discontinued
operations of $398,806, which primarily includes the present value of the
consulting fees payable to the former President and a provision of $46,000 for
operating losses during the phase out period. Revenues of the lighting business
segment for 1995 was $530,000. In 1996, the Company incurred additional losses
from discontinued operations of $64,705.
5. Accounts Receivable/Accounts Payable
Accounts receivable include retainages of $636,577 at December 31, 1997
and $585,149 at December 31, 1996, on contracts which are collectible upon the
acceptance by the owner. All amounts at December 31, 1996 were collected in 1997
and amounts at December 31, 1997 are anticipated to be collected in their
entirety in 1998.
F-12
The Company withholds a portion of payments due subcontractors as
retainages, which amounted to $212,278 at December 31, 1997 and $181,528 at
December 31, 1996. The subcontractor balances are paid when the Company collects
its retainages receivable.
6. Costs and Estimated Earnings on Uncompleted Contracts
Costs and estimated earnings in excess of billings on uncompleted
contracts represent unbilled receivables. Billings on uncompleted contracts in
excess of costs and estimated earnings represent deferred revenue, and consist
of:
December 31,
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $15,629,620 $ 19,962,133
Estimated earnings 7,333,524 7,027,729
Billings to date (19,838,282) (25,013,757)
- -----------------------------------------------------------------------------------------------------------------------------------=
Costs and estimated earnings on uncompleted
contracts in excess of billings $3,124,862 $ 1,976,105
- ------------------------------------------------------------------------------------------------------------------------------------
Included in the accompanying consolidated balance sheet under the
following captions:
Costs and estimated earnings in excess of billings $3,420,829 $ 2,176,907
Billings in excess of costs and estimated earnings (295,967) (200,802)
- ------------------------------------------------------------------------------------------------------------------------------------
$3,124,862 $1,976,105
- ------------------------------------------------------------------------------------------------------------------------------------
7. Property and Equipment
Property and equipment consist of the following:
December 31
1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Furniture and fixtures $347,769 $ 52,048
Office equipment 1,068,352 134,153
Leasehold improvements 245,297 18,387
Software 2,224,167 --
- ------------------------------------------------------------------------------------------------------------------------------------
3,885,585 204,588
Less: Accumulated depreciation and amortization (337,873) (61,711)
- ------------------------------------------------------------------------------------------------------------------------------------
$3,547,712 $ 142,877
- ------------------------------------------------------------------------------------------------------------------------------------
8. Loan Payable
In 1996, the Company secured a line of credit with a bank. The line
provided for borrowings of up to $2.5 million, with interest at prime plus 1/2%
(8.75% at December 31, 1996) and was collateralized by all Company assets and
was guaranteed by HRB. At December 31, 1996 the Company had an outstanding
balance of $1.4 million on the line. In September 1997, the Company repaid all
outstanding borrowings under the line. The weighted average interest for 1997
was 8.92%.
In May 1997, the Company borrowed $2.2 million at an annual interest rate
of 12%. The proceeds of the borrowing were used to repurchase 500,000 shares
from the Company's former President (Note 4). The note was paid in full in
September 1997.
F-13
9. Income Taxes
The provision for income taxes consists of the following:
Year ended December 31,
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 360,349 $ 620,929 $ 25,000
State and Local 536,061 370,676 --
- ------------------------------------------------------------------------------------------------------------------------------------
896,410 991,605 25,000
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (465,547) (65,280) --
State and Local (202,875) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
(668,422) (65,280) --
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 227,988 $ 926,325 $ 25,000
- ------------------------------------------------------------------------------------------------------------------------------------
The following is a reconciliation of the Company's income taxes based on
the statutory rate and the actual provision for income taxes:
Year ended December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
Statutory federal income tax at 34% $ (209,325) $ 963,640 $(120,845)
Increase (decrease) resulting from:
Reduction (increase) of valuation allowance -- (339,120) 101,345
State and local taxes, net of federal tax benefit 219,903 239,027 16,500
Nondeductible goodwill amortization and expenses 217,410 62,778 28,000
- ---------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 227,988 $ 926,325 $ 25,000
- ---------------------------------------------------------------------------------------------------------------------
Deferred income taxes result from temporary differences between the
financial reporting carrying amounts and the tax bases of assets and
liabilities. The source of these differences and tax effect of each at December
31, 1997 and 1996 are as follows:
Deferred Income Tax Liability (Asset) 1997 1996
- ------------------------------------------------------------------------
Warrant expense $(735,016) $ --
Rent expense (52,800) --
Goodwill amortization 50,017 22,000
Allowance for doubtful accounts (64,881) --
Other 63,592 (87,280)
---------
--------- ---------
$(739,088) $ (65,280)
========= =========
The Company has recorded net deferred tax assets at December 31, 1997 and
1996 primarily representing expenses recognized for financial reporting purposes
that will be deductible in future years for tax purposes. Management believes
that no valuation allowance is required for these assets due to future reversals
of existing taxable temporary differences and the expectation that the Company
will generate taxable income in future years.
10. Related Party Transactions
(a) The Company hired Interstate Interior Services ("Interstate") as a
subcontractor on certain of its projects. The President of
Interstate is the sister of one of the Company's officers. During
1997, 1996 and from August 1, 1995 through December 31, 1995, the
Company paid fees of $0, $172,786 and $712,137, respectively, to
Interstate.
F-14
(b) During 1997 and 1996, the Company performed renovation services for
Watermark LLC. Watermark LLC is the general partner of Watertone
Holdings LP, which is a shareholder of Company common stock. In
addition, the Chief Executive Officer of the Company was a director
of Watermark LLC. During 1997, the Company and Watermark LLC
renegotiated the renovation contract to provide for fees more
consistent with a project of similar scope and complexity. As a
result of the renegotiations, the Company recognized additional
revenues for the year ended December 31, 1997 of $780,183 without an
accompanying increase in costs. As of December 31, 1997 and December
31, 1996 the Company had a receivable balance of $0 and $492,124,
respectively, from Watermark.
The following revenues and gross profit have been reflected in the
consolidated financial statements:
Year Ended Year Ended
December 31, 1997 December 31, 1996
--------------------------------------------------------------------
Net revenues $ 780,183 $ 526,743
Cost of revenues -- 492,283
--------------------------------------------------------------------
Gross profit $ 780,183 $ 34,460
--------------------------------------------------------------------
(c) In connection with the Apollo Joint Venture (see Note 13), on April
10, 1997, the Company and Resource Holdings entered into a financial
advisory agreement pursuant to which Resource Holdings agreed to
assist the Company in connection with negotiations relating to the
Apollo Joint Venture and to provide general financial advisory,
strategic planning and acquisition advice to the Company. In
consideration for those services, the Company agreed to pay Resource
Holdings 16 1/2% of certain distributions received by the Company
from the Apollo Joint Venture (after certain distributions to the
joint venture parties and returns on capital invested in each
project in which the Apollo Joint Venture participates) and such
additional fees to be mutually agreed upon between Resource Holdings
and the Company. No distributions were received by the Company from
Apollo in 1997.
11. Commitments and Contingencies
(A) Lease Commitments
The Company leases office space in New York, California, Atlanta and
Florida which expire at various dates through 2007. In conjunction with the
acquisition of Bekins in January, 1998 (see Note 17), the Company assumed a
ground lease on a building in Orlando, Florida which expires in 2085, with a
minimum annual payment of $6,489.
The aggregate future minimum lease payments due under operating leases are
as follows:
December 31
- --------------------------------------------------------------------------------
1998 $1,729,608
1999 1,626,705
2000 1,354,771
2001 1,107,004
2002 797,168
Thereafter 1,733,129
---------
$8,348,385
=========
Rent expense for 1997, 1996 and 1995 was $1,093,686, $120,534 and $88,000,
respectively.
F-15
(B) Employment Agreements
The Company currently has employment agreements with twelve members of
management personnel that expire from April 1998 to December 2000 at an
aggregate annual compensation of $2,025,000.
(C) Litigation
The Company is a defendant in various litigation in the normal course of
business. Although the outcome of litigation cannot be predicted with certainty,
in the opinion of management, based on the facts known at this time, the
resolution of such litigation is not anticipated to have a material adverse
effect on the financial position or results of operations of the Company.
12. Major Customers and Subcontractor
Most of the Company's customers are in the hospitality industry with a few
of them accounting for a substantial portion of annual revenues. As a result,
the trade accounts receivable and costs and estimated earnings in excess of
billings subject the Company to concentration of credit risk. As of December 31,
1996, two customers accounted for approximately 80% and 65% of accounts
receivable and costs and estimated earnings in excess of billings, respectively.
The largest customer of the Company for 1997 accounted for 14% of net
revenues. The two largest customers of the Company for 1996 accounted for 49%
and 31% of net revenues, and the four largest customers for 1995 accounted for
23%, 19%, 18%, and 14% of net revenues.
During 1997, no subcontractors accounted for over 10% of the Company's
cost revenues. During 1996, 35% of the Company's cost of revenues were costs
charged by one subcontractor.
13. Stockholders' Equity
In January 1997, in connection with the acquisition of LPC and Parker
Reorder, the Company issued 200,000 shares of 6% Convertible Preferred Stock
("LPC Preferred"). The holders of LPC Preferred are entitled to receive cash
dividends at the rate of six percent (or $1.50) per annum per share of LPC
Preferred (the "Preferred Dividend"), accruing from the date of issuance and
payable commencing March 31, 1998. If the Company is legally capable of paying
the Preferred Dividend and elects to accrue such amount, such accrued dividends
shall bear interest at the rate of 13 1/2% per annum until paid. The holders of
the LPC Preferred are also entitled to receive out of the cumulative net profits
of Parker Reorder (the "Cumulative Net Profits"), an annual cash payment (the
"Participating Dividend") equal to 20% of (i) the Cumulative Net Profits of
Parker Reorder measured from January 1, 1997, less (ii) all Participating
Dividends previously made to the holders of the LPC Preferred. The holders of
the LPC Preferred are also entitled to a liquidation preference of $5,000,000.
The LPC Preferred is convertible, at any one time during the period from
January 10, 1998 to January 10, 2000, into (i) 1,000,000 shares of Common Stock,
subject to upward adjustment to a maximum of 4,000,000 shares in the event that
the market price of the Common Stock is below $5.00 at the time of conversion,
or (ii) 9.80% of the outstanding capital stock of Parker Reorder. At any time
after January 10, 2000, the Company shall have the option to redeem the LPC
Preferred at a redemption price equal to the Stated Value for each such share of
LPC Preferred, plus an amount equal to all accrued and unpaid Preferred
Dividends and interest thereon, if any.
The holders of LPC Preferred are entitled to vote on all matters submitted
to the holders of the Common Stock and each share of LPC Preferred is entitled
to 4.17 votes. The holders of record of the LPC Preferred, voting as a class,
are entitled to elect two directors to the Company's Board of Directors at any
time that any of the LPC Preferred is outstanding.
In May 1997, the Company entered into an Agreement to Joint Venture
("Apollo Joint Venture") with Apollo Real Estate Advisors II, L.P. ("Apollo")
and Watermark Limited LLC to identify, acquire,
F-16
renovate, refurbish and sell hotel properties. The Company will perform all of
the renovation and procurement services for each of the properties purchased by
the Apollo Joint Venture. In addition, the Company will receive a five percent
equity interest in each of the joint venture entities formed to purchase such
properties in exchange for its contribution of five percent of the total equity
required to acquire, renovate and sell such properties. The joint venture
intends to own and operate the properties only for the time necessary to upgrade
and market them for resale. As an inducement to enter into the Apollo Joint
Venture, the Company issued to Apollo a seven-year warrant to purchase 750,000
shares of Common Stock at $8.115 per share. The warrant expires in 2004. The
warrant is currently exercisable as to 350,000 shares and becomes exercisable as
to the remaining 400,000 shares in increments of 100,000 shares for every
$7,500,000 of incremental revenue earned and to be earned by the Company from
the joint venture. The fair value of the warrant for 250,000 shares was $5.15,
and for the 100,000 shares was $5.50. In 1997, the Company recognized an expense
of $1,448,560 on the 350,000 shares that became exercisable.
The Company completed a secondary public offering in September 1997 of
3,450,000 shares of Common Stock (inclusive of 1,000,000 shares held in
treasury) at $10.25 per share. The net proceeds of the offering, net of issuance
costs and expenses, were $32,126,630. A portion of the proceeds was used to
repay short-term indebtedness with the remainder available for general corporate
purposes, including the financing of working capital needs and business
development. In conjunction with the offering, the underwriter was granted a
warrant to purchase 356,723 shares of the Company's common stock at an exercise
price of $12.00 per share. The fair value of the warrants was $5.04. The warrant
is exercisable in full after one year (September 17, 1998) and expires on
September 17, 2002. The number of shares issuable under this warrant is subject
to change upon certain events, among them, the declaration of dividends, stock
splits or reverse stock splits.
14. Stock Option Plan
At December 31, 1997, the Company has three stock option plans. As
permitted by Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
when the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation cost
is recognized.
During 1994, the Company's Board of Directors adopted a non-statutory
stock option plan for purposes of issuance of shares of the Company's common
stock to certain key employees or consultants. With respect thereto, options to
purchase a total of 160,000 shares were granted. The stock option plan has been
retired, and there are no shares available for grant.
On September 26, 1996, the Company's Board of Directors adopted the 1996
Stock Option Plan (the "Plan") for the purpose of providing incentive to the
officers and employees of the Company who are primarily responsible for the
management and growth of the Company. Each option granted pursuant to the Plan
shall be designated at the time of grant as either an "incentive stock option"
or as a "non-qualified stock option". The term for each option granted is
determined by the Stock Option Committee, which is composed of two or more
members of the Board of Directors, provided the maximum length of the term of
each option granted will be no more than ten years. Options granted vest over
two years.
On September 26, 1996, the Company's Board of Directors adopted, and the
shareholders approved, the 1996 Outside Directors Stock Option Plan (the
"Outside Directors' Plan") for the purpose of securing for the Company and its
shareholders the benefits arising from stock ownership by its outside directors.
Subject to shareholder approval, each outside director who becomes an outside
director after March 1, 1996 shall receive the grant of an option to purchase
15,000 shares of common stock. To the extent that shares of common stock remain
available for the grant of options under the Outside Directors Plan on April 1
of each year, beginning on April 1, 1997, each outside director shall be granted
an option to purchase 10,000 shares of common stock. Options granted under the
Outside Directors Plan vest over two years and shall be exercisable in three
equal installments beginning on the first anniversary of the grant date.
F-17
SFAS 123 requires the Company to provide pro forma information regarding
net income and earnings per share as if compensation cost for the Company's
stock option plans had been determined in accordance with the fair value-based
method prescribed in SFAS 123. The Company estimates the fair value of each
stock option at the grant date by using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants in 1997, 1996
and 1995, respectively: no dividends paid for all years; expected volatility of
49%, 40% and 40%; risk-free interest rate of 6%, 6.41% and 6.41%; and expected
lives of 5.3 years, 2 years and 2 years.
Under the accounting provisions of SFAS 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below.
1997 1996 1995
- ------------------------------------------------------------------------
Net income (loss) (in thousands)
As reported $ (844) $ 1,843 $ (1,116)
Pro forma $ (2,031) $ 1,583 $ (1,182)
Basic earnings per share
As reported $ (0.13) $ 0.26 $ (0.20)
Pro forma $ (0.23) $ 0.23 $ (0.21)
Diluted earnings per share
As reported (a) $ 0.26 (a)
Pro forma (a) $ 0.22 (a)
(a) Antidilutive
The following table contains information on stock options for the three
year period ended December 31, 1997.
Weighted
Option average
shares exercise price
- ----------------------------------------------------------------------------
Outstanding, December 31, 1994 85,000 $ 1.275
Granted 75,000 1.275
Exercised -- --
Canceled -- --
- ----------------------------------------------------------------------------
Outstanding, December 31, 1995 160,000 1.275
Granted 984,000 2.500
Exercised (12,500) 1.570
Canceled --
- ----------------------------------------------------------------------------
Outstanding, December 31, 1996 1,131,500 2.38
Granted 738,000 9.29
Exercised (122,250) 2.15
Canceled (19,250) 3.27
- ----------------------------------------------------------------------------
Outstanding, December 31, 1997 1,728,000 $ 5.58
- ----------------------------------------------------------------------------
Exercise price Exercise price Total
less than market equal to market options
- --------------------------------------------------------------------------------
Weighted-average fair value of:
Options granted in 1995 -- $0.60 $0.60
Options granted in 1996 -- $0.82 $0.82
Options granted in 1997 -- $4.88 $4.88
F-18
The following table summarizes information about stock options outstanding at
December 31, 1997.
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------
Amount Weighted Average Range of Exercise Weighted Average Amount Weighted
Outstanding Remaining Contractual Price Exercise Price Exercisable Average Exercise
life (years) Price
- ---------------------------------------------------------------------------------------------------------------------
992,500 1.80 $ 1.275-2.75 $ 2.80 759,875 $2.73
300,000 2.87 6.125-6.75 6.67 -- --
435,500 5.87 10.25-12.00 11.15 -- --
- ---------------------------------------------------------------------------------------------------------------------
1,728,000 3.01 $ 1.275-12.00 $ 5.58 759,875 $2.73
15. Earnings Per Share
The following table reconciles the components of basic and diluted
earnings per share for income (loss) from continuing operations for the years
ended December 31, 1997, 1996 and 1995.
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Numerator:
Income (loss) from continuing operations $ (843,649) $ 1,907,383 $ (380,427)
Preferred stock dividends (300,000) -- --
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share -
Income (loss) available to common
stockholders from continuing operations (1,143,649) 1, 907,383 (380,427)
- ---------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities (a)
Preferred stock dividends -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share -
Income (loss) available to common
stockholders from continuing operations $(1,143,649) $ 1,907,383 $ (380,427)
- ---------------------------------------------------------------------------------------------------------------------------
Denominator:
Basic earnings per common share -
weighted average common shares outstanding 8,885,570 6,983,333 5,673,600
- ---------------------------------------------------------------------------------------------------------------------------
Effect of dilutive securities (a):
Stock-based compensation plans -- 148,582 --
Preferred stock -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per common share -
weighted average common and common
equivalent shares outstanding 8,885,570 7,131,915 5,673,600
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per common share
from continuing operations $ (0.13) $ 0.27 $ (0.07)
Diluted earnings (loss) per common share
from continuing operations (a) $ 0.27 (a)
(a) The common stock equivalent shares for the years ended December 31, 1997 and
1995 were 991,232 and 26,724 for the Stock-based compensation plans; and
1,000,000 shares for the convertible preferred stock in 1997. The common stock
equivalents for these shares were not included in the calculation of diluted
earnings (loss) per common share because the effect would be antidilutive.
F-19
16. Business Segments
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
Sales to Unaffiliated Customers
Renovation $ 19,394,593 $ 24,367,112 $ 4,980,291
Purchasing 64,886,119 -- --
General Corporate 1,161,000 -- --
- ---------------------------------------------------------------------------------------------------------------------------
$ 85,441,712 $ 24,367,112 $ 4,980,291
- ---------------------------------------------------------------------------------------------------------------------------
Inter-segment Sales
Renovation $ -- $ -- $ --
Purchasing 165,000 -- --
General Corporate -- 115,980 --
- ---------------------------------------------------------------------------------------------------------------------------
$ 165,000 $ 115,980 $ --
- ---------------------------------------------------------------------------------------------------------------------------
Operating Profit (Loss)
Renovation $ 842,539 $ 3,309,399 $ (160,688)
Purchasing 190,314 -- --
General Corporate (848,217) (450,731) (301,989)
- ---------------------------------------------------------------------------------------------------------------------------
$ 184,636 $ 2,858,668 $ (462,677)
- ---------------------------------------------------------------------------------------------------------------------------
Identifiable Assets at Year End
Renovation $ 10,287,288 $ 12,636,374 $ 9,651,800
Purchasing 39,437,337 -- --
General Corporate 34,543,066 113,716 379,446
- ---------------------------------------------------------------------------------------------------------------------------
$ 84,267,691 $ 12,750,090 $ 10,031,246
- ---------------------------------------------------------------------------------------------------------------------------
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." This
statement requires that the Company report financial and descriptive information
about its reportable operating segments in financial statements issued to
shareholders for interim and annual reports. The Statement also establishes
standards for related disclosures about products and services, geographic areas
and major customers. Under this Statement, operating segments are components of
an enterprise about which separate financial information is available that is
regularly evaluated by the enterprise's chief operational decision-maker in
deciding how to allocate resources and in assessing performance. While the
Company continues to evaluate the adoption of the new standard, it is likely
that its current reported business segments of Renovation, Purchasing and
General Corporate will be maintained with additions for any acquisitions. The
Statement is effective for fiscal years beginning after December 15, 1997. The
Company will adopt the standard at the beginning of 1998.
17. Subsequent Events
On January 6, 1998, the Company reached an agreement in principle to enter
into a master development agreement with Prime Hospitality Corp. ("Prime") to
develop twenty hotel properties over a two-year period under the AmeriSuites
brand name. Under the proposed agreement, the Company will provide the site
identification, development, construction and purchasing services required for
each project and Prime will provide project design and management and franchise
services once each property is complete. The Company and Prime will be equally
responsible for the financing requirements (up to $30 million each) and will
each have a 50% interest in the new hotels.
On January 9, 1998, the Company completed the acquisition of Bekins
Distribution Services, Inc. ("Bekins"), a leading provider of transportation,
warehousing and installation services to a variety of customers worldwide.
Founded in 1969, Bekins is a logistical services company that serves clients who
are opening, renovating or relocating facilities by assuring that materials,
fixtures, furniture and merchandise are moved from multiple vendor locations to
their ultimate destinations in a controlled orderly sequence so
F-20
that each item can be installed on schedule. The purchase price of Bekins of
approximately $11,000,000 consisted of 514,117 shares of Common Stock and the
assumption of certain Bekins' debt. The purchase agreement contains a make-whole
adjustment whereby, on a formula-basis, additional shares will be transferred if
the price of the Company's common stock for the 20 days prior to the one year
anniversary date is less than 85% of the share price on the date of acquisition.
The acquisition will be accounted for as a purchase with the results of Bekins
included in the consolidated financial statements of the Company from the
acquisition date.
On February 9, 1998, the Company purchased the assets of the real estate
advisory business from Watermark Limited, LLC, an international management
company that is the general partner and manages Watertone Holdings LP, a
shareholder of the Company. The resulting wholly owned subsidiary of the Company
will be named HWS Real Estate Advisory Group, Inc. ("HWS REAG"). The purchase
price of HWS REAG was $1,500,000 and their results will be included in the
consolidated financial statements of the Company from the acquisition date.
In March 1998, the Company obtained a $7,000,000 unsecured line of credit
with a bank at an interest rate of prime. The Company drew down on the line of
credit for $3,500,000 in March 1998.
On March 6, 1998, in conjunction with a joint venture formed with ING
Realty Partners ("ING Joint Venture"), the Company acquired the Clarion Quality
Hotel in Chicago, Illinois. A wholly-owned subsidiary of the Company will fully
renovate and refurbish this property pursuant to a contract with the ING Joint
Venture, which is expected to generate approximately $17 million of revenue for
the Company in 1998.
18. Quarterly Financial Information (unaudited) (a)
1997 Quarter Ended March 31 June 30 September 30 December 31
- --------------------------------------------------------------------------------------------------------------------------------
Net revenues $18,196 $19,513 $16,532 $31,201
Gross profit 3,459 4,555 4,656 1,291
Income (loss) from operations 815 938 1,308 (2,876) (d)
Net income (loss) 397 430 719 (2,390)
Basic earnings per common share (b) .04 .04 .08 (.22)
Diluted earnings per common share (b) .04 .04 .07 (c)
1996 Quarter Ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------------------
Net revenues $1,993 $7,423 $8,240 $6,711
Gross profit 316 2,110 1,988 1,663
Income (loss) from operations (124) 1,131 1,126 726
Net income (loss) (121) 827 831 306
Basic earnings per share: (b)
Income from continuing operations (.02) .12 .12 .06
Net income (loss) (.02) .12 .12 .05
Diluted earnings per share: (b)
Income from continuing operations (c) .12 .11 .05
Net income (loss) (c) .12 .11 .04
(a) All amounts except per share data presented in thousands.
(b) The quarterly per share amounts are computed independently of annual
amounts.
(c) Antidilutive
(d) The fourth quarter includes a non cash charge of $1,434 related to the
recognition of warrants issued in connection with the Apollo Joint
Ventue.
F-21