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, 1998
[ ] Transition Report under Section 13 or 15 (d) of the Securities Exchange Act
of 1934
For the transition period from _______________ to _________________
Commission file number 1-13381
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 $.01 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, $.01 par value per
share (the "Common Stock"), held by non-affiliates of the Registrant as of March
26, 1999 (based upon the last sale price for the Common Stock on the American
Stock Exchange) was approximately $42,052,084.
The number of shares of Common Stock outstanding as of March 26,
1999 was 13,354,164.
DOCUMENTS INCORPORATED BY REFERENCE. Certain portions of the Registrant's
definitive proxy statement to be filed not later than April 30, 1999 pursuant to
Regulation 14A are incorporated by reference in Items 10 through 13 of Part III
of this Annual Report on Form 10-K.
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 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 later sold by the Company); 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.
Until January 1997, the Company's only line of business was to
provide, through HRB, a complete package of renovation services to the
hospitality industry ranging from pre-planning and scope preparation of a
project to
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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 19 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 Online
("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. LPC
purchases annually approximately $350 million of goods and services for its
customers. Parker Reorder has developed and is marketing a new proprietary
software product, Parker Fully Integrated Reorder Systems Tracking ("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. Parker Reorder does not plan to sell or lease
its Parker FIRST software to customers. Instead, commencing in 1998, Parker
Reorder has installed the Parker FIRST software at hotel properties and charges
the hotel properties a service fee based on the volume of transactions. The
purchase price of LPC and Parker Reorder, including acquisition costs and after
final adjustments, was approximately $12,140,000 which consisted primarily of
1,250,000 newly issued shares of Common Stock and $5 million stated value of
200,000 newly issued shares of 6% convertible preferred stock of the Company
(the "LPC Preferred"). In October 1998, 80,000 shares of LPC Preferred were
converted into an aggregate of 584,800 shares of Common Stock. The remaining LPC
Preferred is convertible until January 10, 2000, into (i) 600,000 shares of the
Company's common stock, subject to an upward adjustment in the event that the
market price of the Company's common stock is below $5.00 at the time of
conversion, based on a defined conversion formula, up to a maximum of 2,400,000
shares, or (ii) 5.88% of the outstanding capital stock of Parker Reorder. The
conversion formula related to the conversion into the Company's common stock is
defined as the number of shares of common stock equal to the product of 25
(which represents the stated value per share of the LPC Preferred) and the
number of shares of LPC Preferred, divided by the average closing sale price for
the common stock for the 20 trading days immediately prior to the date written
notice of the intention to exercise the conversion option is given, provided,
however, that in no case shall the number of shares of common stock into which
each share of LPC Preferred may be converted be less than 5 or greater than 20.
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 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. With the consent of the
Company, Watermark Investments Limited, LLC ("Watermark"), an affiliate of
Robert Berman, Chairman and Chief Executive Officer of the Company, has entered
into a Stock Purchase Agreement dated March 30, 1999 to purchase the LPC
Preferred no later than April 26, 1999.
In May 1997, the Company entered into a joint venture ("Apollo Joint
Venture") with Apollo Real Estate Advisors II, L.P. ("Apollo") and Watermark 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 an equity interest in each of the entities formed to purchase such
properties equal to its contribution to 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 average closing price of the Common Stock
for the 20 trading days prior to issuance). 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 renovation revenue and purchasing fees earned and to
be earned by the Company from the Apollo Joint Venture. In September 1997, the
Apollo Joint Venture acquired the Warwick Hotel in Philadelphia, Pennsylvania.
As of March 30, 1999, the Company
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contributed approximately $875,000 to the joint venture operating entity that
was formed to purchase the property. There are no additional material capital
commitments to be made by the Company with respect to this project. The joint
venture operating entity is owned 95% by the general partner, which is owned by
Apollo and Watermark, and 5% by the Company as a limited partner. The Company is
accounting for this investment on the cost method as all decisions are made by
the general partner. In addition, in March 1998 the Apollo Joint Venture
acquired the Historic Inn in Richmond, Virginia. As of March 30, 1999, the
Company has made capital contributions totaling $275,000 to the joint venture
operating entity that was formed in connection with the purchase of the
property. There are no additional material capital commitments to be made by the
Company with respect to this project. The joint venture operating entity is
owned 57% by Apollo, 3% by the Company and 40% by the former sole owner. The
Company is accounting for this investment on the cost method. The Company is
fully renovating and refurbishing these properties pursuant to contracts with
the Apollo Joint Venture operating entity.
In November 1997, the Company formed a wholly owned subsidiary,
Hospitality Construction Corporation ("HCC"). HCC specialized in projects such
as new construction or "footprint" moving (re-designation of walls and related
remodeling). Operations under this subsidiary were transferred to HRB in August
1998.
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 up to 20 hotel properties over a two-year period under the
AmeriSuites brand name. In June 1998, the Company and Prime executed the master
development agreement. Under the agreement, the Company was responsible for
identification of target markets, specific site identification through its
wholly-owned subsidiary HWS Real Estate Advisory Group, Inc. ("HWS REAG"),
negotiation, due diligence, entitlement, planning, zoning and other approval
requirements, selection of contractors, and design and construction of new
hotels, as well as development, construction and purchasing services required
for each project. Prime was responsible for project design, management and
franchise services once each property was complete. The Company and Prime were
to be equally responsible for the financing requirements (up to $30 million
each) and were to have a 50% equity interest in the new hotels. In December
1997, the Company formed a wholly-owned subsidiary, Hospitality Development
Services Corporation ("HDS"), based in New York, New York, to manage the Prime
project and any other hotel development projects in the future. In late 1998,
the Company was informed by Prime that Prime was no longer going to pursue new
development opportunities and that they were abandoning their responsibilities
under the master development agreement, even though the company had incurred
significant costs up to such time. The Company is pursuing recovery of its costs
and lost profits from Prime under a demand for arbitration as provided for in
the master development agreement. As a result, in December 1998, the management
decided to discontinue its hotel development business. The Company anticipates
ceasing operations by April 1999, although the resolution date to recover costs
and lost profits from Prime is uncertain. The Company has reflected the current
year operating results associated with its development business, as well as the
estimated loss on disposal, as discontinued operation on the statements of
operations.
In January 1998, the Company acquired 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. Additionally, under the terms of the purchase agreement, the
Company was required to issue an additional 639,512 shares of Common Stock in
January 1999, as a post closing adjustment to the purchase price based on the
price of the Company's common stock on the one year anniversary of the date of
acquisition. The acquisition has been accounted for as a purchase with the
results of Bekins included in the consolidated financial statements of the
Company from the acquisition date.
In February 1998, the Company, through HWS REAG, purchased the
assets of Watermark's real estate advisory business, consisting primarily of
development contracts. Watermark is an international management company that is
the general partner of and manages Watertone Holdings LP, a shareholder of the
Company. The
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purchase price for such business was $1,500,000 of cash. The acquisition has
been accounted for as a purchase with the results included in the consolidated
financial statements of the Company from the acquisition date.
In March 1998, the Company entered into a joint venture with ING
Realty Partners ("ING Joint Venture"), to acquire the Clarion Quality Hotel in
Chicago, Illinois. As of March 30, 1999, the Company contributed approximately
$2.1 million to the ING Joint Venture. There are no additional material capital
commitments to be made by the Company with respect to this project. In addition,
the ING Joint Venture obtained financing for $38.65 million to fund the purchase
of the hotel as well as the renovation and refurbishment costs. The Company has
an approximately 18.09% interest in the ING Joint Venture. The other partners in
the ING Joint Venture are entitled to specified, preferred returns and priority
distributions of capital. In addition, the joint venture agreement provides ING
Realty Partners with the right to have the joint venture sell the property after
March 2000, and certain buy/sell provisions which may be exercised by any
partner. The Company is accounting for this investment under the equity method.
The Company is fully renovating and refurbishing this property pursuant to a
contract with the ING Joint Venture.
On March 30, 1999 the Company, Watermark Investments Limited LLC, an
affiliate of Robert Berman, Chairman of the Board and Chief Executive Officer of
the Company, Leonard Parker, a Director of the Company, Douglas Parker,
President of the Company and a Director and certain members of the family of
Leonard Parker and Douglas Parker (collectively, the "Parker Family") entered
into an agreement (the "Parker Agreement") pursuant to which members of the
Parker Family agreed to sell to Watermark all remaining shares of the LPC
Preferred held by members of the Parker Family and 1,397,000 shares of Common
Stock of the Company, constituting substantially all of the Common Stock held by
members of the Parker Family. Also under the Agreement and effective upon the
closing of the transactions contemplated under the Agreement, Leonard Parker and
Douglas Parker have agreed to resign as Directors of the Company, and Douglas
Parker will relinquish his position as President of the Company. Leonard Parker
and Douglas Parker will remain executive officers of the Company in different
capacities. Consummation of the transactions contemplated by the Agreement are
subject to, among other things, financing of the purchase of the shares of LPC
Preferred and Common Stock.
Financial information about the Company's business segments appears
in Footnote 17 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. In its logistics business, the Company competes with national,
regional and local trucking and installation companies. There is no single
competitor or small number of competitors that 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 and logistics businesses are 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 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 22 states and has applications pending in an
additional 6 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
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and delivery of merchandise purchased by the Company on behalf of its clients.
Internationally, the Company must comply with the individual country'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, 1998, two customers, a major
lodging company and a major hotel development company, accounted for 15% and
10%, respectively, of the Company's net revenues. During the year ended December
31, 1997, one customer, a high-ranking government official of the United Arab
Emirates, 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. As the Company continues to grow and expand its businesses 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, 1998, the Company employed 385 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. Other than Bekins employees at the Las
Vegas warehouse, 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 in New York, New York,
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 its office in Los Angeles, California, 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.
LPC and Parker Reorder maintain their offices in Coral Gables,
Florida. 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, Singapore,
The Netherlands 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.
HDS maintained its office in New York, New York where it occupied
approximately 4,600 square feet under a five-year lease which expires in
December 2002 at an annual fixed rental of approximately $145,000. The Company
is currently in the process of exploring sublease alternatives for the space.
Bekins maintains its office in St. Louis, Missouri under a lease
which expires in December 1999 at an annual fixed rental of approximately
$100,000 for 8,000 square feet. Bekins also owns a 78,000 square foot warehouse
in Orlando, Florida and leases warehouse space in Las Vegas, Nevada where it
occupies 22,000 square feet under a lease which expires in October, 1999 at an
annual fixed rental of $112,000.
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HWS REAG maintains its offices in Chicago, Illinois where it
occupies approximately 3,200 square feet under a lease expiring in March 2003 at
an annual fixed rental of $58,000. HWS REAG also maintains satellite offices in
Denver, Colorado and Stamford, Connecticut.
ITEM 3. LEGAL PROCEEDINGS
Given the nature of the construction industry and the contracting
process, disputes often arise among contractors, subcontractors and customers.
These disputes have the potential to result in the assertion of claims and
litigation.
We are a defendant in various litigation incident to our business,
and in certain instances the amounts sought include substantial claims and
counterclaims. Although we cannot predict the outcome with certainty, in our
opinion based on the facts known by us at this time, we anticipate that the
resolution of such litigation will not have a material adverse effect on our
business, operating results or financial condition.
On June 1, 1998, an action (the "State Action") was brought against
the Company by West Atlantic Corp. in the Supreme Court of the State of New
York, County of New York. The State Action alleges that the Company retained
West Atlantic Corp. pursuant to an agreement dated March 1, 1995 (the
"Agreement") to perform certain marketing and selling services for the Company.
The State Action further alleges that fees were earned and not paid under the
Agreement and seeks damages for breach of contract of not less than $10,000,000,
damages with respect to "significant benefits to the Company" in an amount of
not less than $5,000,000 and damages relating to breach of the duties of good
faith and fair dealing in an amount of not less than $10,000,000. The Company
believes that the three claims are duplicative. The State Action also seeks
interest and specific performance. The Company believes that since it has
performed all obligations required to be performed under the Agreement, the
State Action does not have merit and intends to vigorously defend the claims
asserted against it. In addition, the Company has brought claims in federal and
state court against Tova Schwartz, the former President and Chief Executive
Officer of the Company's predecessor, seeking indemnity and punitive damages.
The state and federal actions claim that, among other things, Schwartz failed to
disclose to the Company the existence of the Agreement when the Company
purchased from Schwartz certain shares of Common Stock which she then held.
Schwartz has filed a motion to dismiss the Company's State Action claims. The
motion has been fully briefed, argued, and submitted, and is presently awaiting
decision. By agreement of the parties, the Federal Action has been stayed,
subject to reinstatement upon notice by either party.
Prime and the Company entered into a master development agreement in
June 1998 which committed Prime and the Company to the joint development of up
to 20 AmeriSuite Hotels. Pursuant to the master development agreement, the
Company committed its resources to the development of the AmeriSuite Hotel
projects. Prior to the completion of development of several approved AmeriSuite
projects, Prime, in late 1998, withdrew from the venture. On March 17, 1999, the
Company filed an arbitration demand with the New York office of the American
Arbitration Association seeking to recover damages incurred by the Company due
to Prime's withdrawal from the joint development of the AmeriSuite projects. The
amount of damages calculated by the Company are $1,702,320 for out-of-pocket
costs and overhead plus $34,534,685 in lost profits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
NONE
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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
1997
First Quarter $ 8-11/16 $ 5-5/16
Second Quarter 9-3/8 5-3/8
Third Quarter 14-13/16 7-3/8
Fourth Quarter 13-15/16 8-1/2
1998
First Quarter $ 13-1/2 $8-3/4
Second Quarter 10-7/16 7-7/8
Third Quarter 9-5/16 2-7/8
Fourth Quarter 6-1/4 1-7/8
On March 26, 1999, the last reported sales price of the Common Stock
on the American Stock Exchange was $3.625 per share.
(b) Holders. As of March 26, 1999, there were approximately 92
record holders and approximately 1,500 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. 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, except share amounts)
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Net Revenues $ 524 $ 4,980 $ 24,367 $ 85,442 $229,979
Income (loss) from continuing operations (1,285) (380) 1,907 (844) 950
Basic earnings (loss) from continuing operations (.28) (.07) .27 (.13) .06
per common share
Diluted earnings (loss) from continuing operations (b) (b) .27 (b) .05
per common share
Total assets 4,492 10,031 12,750 84,268 133,374
Long-term debt -- -- -- -- 2,965
(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.
(b) Antidilutive.
ITEM 7. MANAGEMENT'S 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 services to the hospitality industry on a global basis, the Company acquired
its procurement and reorder businesses in January 1997 and its logistics
business in January 1998. As a result of this significant change in the
Company's business focus, period to period historical comparisons are not
considered meaningful.
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RESULTS OF OPERATIONS: 1998 COMPARED TO 1997
Revenues for the year ended December 31, 1998 were $229,979,210,
compared to $85,441,712 for the year ended December 31, 1997. The increase in
revenues resulted from growth in the customer base and project scope across all
product lines, along with the purchase of Bekins in January 1998 and HWS REAG in
February 1998.
Gross profit for 1998 was $22,260,891 or 9.7% of revenues, compared
to $10,806,820 or 12.6% of revenues for 1997. The growth in gross profit in
dollars was a result of the increase in sales volume. The decrease in gross
profit as a percent of sales was due primarily to the provision on contract
revenues recorded in 1998 related to specific renovation projects which have
been substantially completed but have not yet been closed out with the customer.
Selling, general and administrative ("SG&A") expenses for 1998
totaled $21,113,908 or 9.2% of revenues, as compared to $10,622,184 or 12.4% of
revenues for 1997. The increase in SG&A expenses in 1998 was due primarily to
the expansion of administrative staff to support the higher sales level as well
as the acquisition of Bekins and HWS REAG in early 1998. The drop in SG&A
expenses as a percent of revenue was the result of operating efficiencies
achieved as sales increased.
Income from operations for 1998 totaled $1,146,983 as compared to
$184,636 for the previous year. Operating profits increased in the current year
due to higher sales coupled with a slower growth rate in expenses. As a result,
income from operations increased to 0.5% in 1998 from 0.2% in 1997.
Interest expenses increased from $287,633 in 1997 to $756,100 in
1998. The rise in interest expense was the result of increased borrowings under
the Company's lines of credit and the addition of Bekins debt to the balance
sheet upon its acquisition. Interest income grew in 1998 to $1,314,605 from
$774,836 in the prior year due primarily to interest earned on invested funds
raised in the public offering of the Company's common stock in September 1997.
The provision for income taxes for the year ended December 31, 1998
was $755,150, based on an effective tax rate of 44.3%. For 1997, the provision
for taxes was $227,988. The increase in the provision in 1998 was due to the
higher level of pre-tax income. For 1997, the Company recorded a provision for
income taxes despite a pre-tax loss primarily due to the non-deductibility of
goodwill amortization as well as state and local taxes payable.
Based on factors discussed above, income from continuing operations
increased from a $843,649 loss in 1997 to $950,338 of income in 1998. Basic
earnings per share increased from a $0.13 loss in 1997 to $0.06 of income in
1998.
The discontinued operations for 1998 relate to the Company's
subsidiary, HDS, which was formed to manage the Company's hotel development
projects. Based on the abandonment of the hotel devlopment program with Prime in
late 1998 and an assessment of its future viability, the Company, in December
1998, decided to discontinue its hotel development business. The Company
anticipates ceasing operations by April, 1999 and has no future material cost
obligations related to this business.
RESULTS OF OPERATIONS: 1997 COMPARED TO 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 $10,806,820,
or 12.6% 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. Customer deposits and advances to
vendors increased during 1997 due to the acquisition of LPC.
9
Selling, general and administrative ("SG&A") expenses for the year
ended December 31, 1997 were $10,622,184, or 12.4% 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 and other intangible assets 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.
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 the decrease in income
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. As disclosed in Note 15 to the
consolidated financial statements, if the Company accounted for its stock-based
employee compensation plans using the fair value-based method, rather than the
permitted intrinsic value-based method, the net loss would have been
approximately $2,031,000 as compared to the reported net loss of approximately
$844,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term and long-term liquidity requirements
generally consist of operating capital for its business and SG&A expenses. The
Company continues to satisfy its short-term and long-term liquidity requirements
with cash generated from operations, bank lines of credit and funds from a
public offering of its Common Stock in September 1997. Debt maturing in 1999 and
capital expenditures in 1999 will be paid from funds available from these
sources.
Net cash used in operating activities was $17,696,601 for the year
ended December 31, 1998, compared to net cash provided of $3,693,798 for 1997.
Due to the Company's significant revenue growth and acquisitions, the Company's
accounts receivable and advances to vendors increased by $40,156,030. This
increase was only partially offset by an increase in accounts payable and
customer deposits of $20,518,174. The Company expects to collect the receivables
fully in 1999.
Net cash used in investing activities for 1998 was $2,432,068,
compared to net cash used of $21,131,147 for last year. The difference is
primarily due to the net sale of marketable securities in 1998 as opposed to the
net purchase of marketable securities in 1997 using funds from the proceeds of
the public offering in September, 1997. The 1998 sale of marketable securities
was offset by the cash purchase of HWS REAG for $1,500,000, an investment in
real estate ventures of $4,187,260 an investment in mortgages receivable for
$3,637,000 and property and equipment purchases of $3,461,494.
Net cash provided by financing activities for 1998 was $10,343,396
as compared to net cash provided in 1997 of $29,539,760. The major items for
each year were a net borrowing under lines of credit of $10,925,000 in 1998, as
opposed to proceeds from the public offering in 1997 of $32,126,630.
10
In March 1998, the Company obtained a $7,000,000 unsecured line of
credit with Marine Midland Bank of New York. Borrowings under the line of credit
bear interest at the bank's prime lending rate. Proceeds from the borrowing are
utilized to fund short-term cash requirements. At December 31, 1998, there was
$4,975,000 in outstanding borrowings under the line of credit.
In July 1998, the Company obtained a new unsecured line of credit
with NationsBank N.A. which provides the Company a maximum of borrowing of
$6,000,000. Borrowings under the line bear interest at the bank's prime lending
rate. Proceeds from the borrowing are used to fund short-term cash requirements.
At December 31, 1998, there was $5,950,000 in outstanding borrowings under the
line of credit.
In January 1998, the Company acquired 100% of the outstanding
capital stock of Bekins. The purchase price for Bekins of approximately
$11,000,000 consisted of 514,117 shares of Common Stock issued in January 1997,
and the assumption of certain Bekins' debt. In addition, under the terms of the
acquisition agreement, in January 1998 the Company was required to issue an
additional 639,512 shares of common stock given the decrease in the price of the
Company's common stock.
In February 1998, the Company acquired the assets of Watermark's
real estate advisory business consisting primarily of development contracts. The
purchase price for such business was $1,500,000 of cash.
Capital expenditures for property and equipment were $3.5 million
compared to $2.7 million in 1997, an increase of $0.8 million. Significant
capital expenditures were incurred during the past two years in developing the
Parker FIRST system. The Company does not anticipate incurring this level of
expenditures for the Parker FIRST system in 1999, given that the system became
operational in 1998.
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 the Historic Hotel in Richmond, Virginia. The
Company does not anticipate having to make additional capital commitments
related to these Apollo Joint Venture acquisitions. The ING Joint Venture has
acquired the Clarion Hotel in Chicago, Illinois and the Company anticipates that
its capital commitments will not be significant going forward.
The Company believes its present cash position, including
anticipated increasing revenues, cash on hand, availability under bank lines of
credit and its ability to obtain additional financing as necessary, will allow
the Company to meet its anticipated capital commitments and its short-term
operating needs for at least the next twelve months.
INFLATION
Inflation and changing prices during the current 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.
YEAR 2000
The Year 2000 issue results from computer programs and circuitry
that do not differentiate between the year 1900 and the year 2000 because they
were written using two- rather than four-digit dates to define the applicable
year. If not corrected, many computer applications and date-sensitive devices
could fail or create
11
erroneous results before, on or after January 1, 2000. The Year 2000 issue
affects virtually all companies and organizations, including the Company.
The Company has developed, and is implementing a plan, the goal of
which is to assure that the Company will achieve Year 2000 readiness in time to
avoid significant Year 2000 failures. The Company is proceeding with its
assessment of the Year 2000 readiness issues for its computer systems, business
processes, facilities and equipment to assure their continued functionality. The
Company is continuing its assessment of the readiness of external entities,
including subcontractors, suppliers, vendors, and customers that interface with
us. To that end, the Company has taken the following actions:
o Computer Systems. The Company periodically upgrades its computer systems as
its needs require. The Company began the process of upgrading the software
for its internal computer systems in 1998, and expects to complete this
process, including the upgrade of its financial and project management
systems by the third quarter of 1999. Vendors of the new internal computer
systems certified them to be Year 2000 compliant. The Company's computer
hardware is limited to stand-alone and networked desk-top systems. The
Company has assessed the Year 2000 readiness of its computer hardware and
potential risks to operations, and intends to replace those systems that
may pose a risk to operations in 1999. Parker FIRST, the Company's new
proprietary software product, has been developed and maintained by Parker
Reorder. Parker FIRST software was designed to account for the Year 2000
and beyond. This software product was in use by hotel companies beginning
in 1998.
o Business Processes. The Company has and continues to assess the potential
impact of Year 2000 on its business processes. Management for each division
is assessing the risks of Year 2000 issues as it specifically relates to
such businesses, and the division's readiness. The Company is in the
process of contacting its key vendors, suppliers and subcontractors
regarding their Year 2000 readiness.
The costs incurred for upgrading the Company's computer systems are
being funded with cash flows from operations and available financing. The costs
incurred principally relate to new systems being implemented to improve business
functionality rather that solely to address Year 2000 issues. These costs
associated with the computer systems upgrades and implementation are anticipated
to be significant.
The Company believes that its internal computer systems, facilities,
and equipment will be Year 2000 compliant. However there is no assurance that
all of the planned upgrades will be completed in time or function as intended.
As the Company has no contingency plan other than to deal as expeditiously as
possible with situations if and when they arise, the Company may experience
significant disruptions, the costs of which the Company is unable to estimate at
this time. The Company also believes that disruptions in some of our vendors' or
subcontractors' operations will not significantly affect our projects because
the Company has relationships with other vendors and subcontractors with similar
expertise. The Company cannot assume, however, that an adequate supply of
vendors or subcontractors will be available.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not have a material exposure to risks associated
with foreign currency fluctuations related to our operations. The Company does
not use derivative financial instruments in its operations. The Company does not
have a material exposure to market risks associated with changes in interest
rates given (a) the relative stability of interest rates currently, (b) the
types of debt securities the Company invests in, and (c) the Company's lack of
significant balances of variable interest rate debt. The Company does not
believe that it has any other material exposure to market risks associated with
interest rates.
ITEM 8. FINANCIAL STATEMENTS
See Index to Financial Statements.
12
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On November 19, 1997, the Company dismissed BDO Seidman, LLP ("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 prior 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, Arthur Andersen LLP was engaged as independent
accountants to the Company.
13
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Financial Statements:
* Hospitality Worldwide Services, Inc. and Subsidiaries
* Report of Independent Public Accountants
* Consolidated Financial Statements
(b) Exhibits
Exhibit Number Exhibits
3.1 Certificate of Incorporation, as amended, of the Company
(Incorporated by reference to Exhibit 3.1 to the Company's
Form 10-Q for the quarter ended June 30, 1998).
3.2 Amended and Restated By-laws of the Company (Incorporated by
reference to Exhibit 3.2 to the Company's Form 10-Q for the
quarter ended June 30, 1998).
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
(Incorporated by reference to Exhibit 4.3 of the Company's
Form 10-K for the year ended December 31, 1997).
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).
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 January 1, 1988, by and between
the Company and Robert A. Berman (Incorporated by reference
to Exhibit 10.6 to Amendment No. 1 to the Company's Form
10-K, filed on April 29, 1998, for the year ended December
31, 1997).
10.7 Employment Agreement dated January 1, 1998, by and between
the Company and Howard G. Anders (Incorporated by reference
to Exhibit 10.7 to Amendment No. 1 to the Company's Form
10-K, filed on April 29, 1998, for the year ended December
31, 1997).
10.8 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).
10.9 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).
14
10.10 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).
10.11 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).
10.12 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).
10.13 Employment Agreement, dated as of January 9, 1997, by and
among The Leonard Parker Company, the Company and Leonard
Parker (Incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form SB-2 filed July 22,
1997, No. 333-31765).
10.14 Employment Agreement, dated as of January 1, 1998, by and
between the Company and Douglas Parker (Incorporated by
reference to Exhibit 10.14 to Amendment No. 1 to the
Company's Form 10-K, filed on April 29, 1998, for the year
ended December 31, 1997.
10.15 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 Exhibit 10.18 to the
Company's Registration Statement on Form SB-2 filed July 22,
1997, No. 333-31765).
10.16 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 Exhibit 10.19 to the Company's Registration
Statement on Form SB-2 filed July 22, 1997, No. 333-31765).
10.17 Warrant dated May 12, 1997 issued to Apollo Real Estate
Advisors II, L.P. (Incorporated by reference to Exhibit
10.20 to the Company's Registration Statement on Form SB-2
filed July 22, 1997, No. 333-31765).
10.18 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 Exhibit
2.1 the Company's Current Report on Form 8-K dated January
9, 1998).
10.19 Registration Rights Agreement dated as of January 1, 1998,
by and among the Company and the Shareholders named therein
(Incorporated by reference to Exhibit 10.1 to the Company's
Amendment No. 3 to Current Report on Form 8-K, dated
September 16, 1998).
10.20 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).
10.21 Master Development Agreement, dated June 5, 1998, by and
between the Company and Prime Hospitality Corp.
(Incorporated by reference to Exhibit 10 to the Company's
Form 10-Q for the quarter ended June 30, 1998).
*10.22 Stock Purchase Agreement, dated March 30, 1999, by and among
the Company, Watermark Investments Limited, LLC, Leonard
Parker, Douglas Parker, Philip Parker, Mitchell Parker,
Gregg Parker and Bradley Parker.
11 Computation of earnings per share (Incorporated herein by
reference to Note 16 to the Company's Consolidated Financial
Statements).
*21 Subsidiaries of the Company.
*27 Financial Data Schedule
*Filed herewith.
(c) Reports on Form 8-K
Form 8-K dated January 9, 1998, filed with the Commission on January 23, 1998,
as amended on March 24, 1998, April 16, 1998 and September 16, 1998 reporting
Item 2, Acquisition or Disposition of Assets.
15
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 30, 1999 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 30, 1999
- ------------------------ Chief Executive Officer
Robert A. Berman (principal executive officer)
and Director
/s/ Leonard F. Parker Chairman Emeritus of the Board March 30, 1999
- ------------------------ and Director
Leonard F. Parker
/s/ Douglas A. Parker President and Director March 30, 1999
- ------------------------
Douglas A. Parker
/s/ Howard G. Anders Executive Vice President, March 30, 1999
- ------------------------ Chief Financial Officer,
Howard G. Anders (principal financial officer,
principal accounting officer)
and Secretary
/s/ Scott A. Kaniewski Director March 30, 1999
- ------------------------
Scott A. Kaniewski
/s/ Louis K. Adler Director March 30, 1999
- ------------------------
Louis K. Adler
/s/ George C. Asch Director March 30, 1999
- ------------------------
George C. Asch
/s/ Richard A. Bartlett Director March 30, 1999
- ------------------------
Richard A. Bartlett
16
FINANCIAL STATEMENTS
Index to Financial Statements
Page No.
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
REPORTS OF INDEPENDENT PUBLIC ACCOUNTANTS F-2, F-3
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-4
Statements of operations F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7, F-8
Notes to consolidated financial statements F-9-F-23
17
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, 1998 and 1997 and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
New York, New York
March 30, 1999
18
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 consolidated statements of operations, stockholders' equity
and cash flows of Hospitality Worldwide Services, Inc. (formerly Light Savers
U.S.A., Inc.) and subsidiary for the year 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 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 consolidated financial statements referred to above present
fairly, in all material respects the results of its operations and cash flows of
Hospitality Worldwide Services, Inc. and subsidiary for the year 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
19
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31,
1998 1997
---- ----
Cash and cash equivalents $ 2,178,856 $ 11,964,129
Marketable securities 8,500,000 18,915,686
Accounts receivable, net (Note 5) 56,846,432 21,932,667
Costs and estimated earnings in 5,566,942 3,420,829
excess of billings (Note 6)
Note receivable (Note 3) -- 342,144
Advances to vendors 12,759,446 4,255,181
Prepaids and other current assets 4,737,140 1,037,480
------------- -------------
Total current assets 90,588,816 61,868,116
Property and equipment, net (Note 7) 8,715,682 3,547,712
Goodwill and other intangibles, net (Note 3) 24,746,934 17,078,180
Deferred taxes (Note 9) 4,535,178 739,088
Other assets 4,787,440 1,034,595
------------- -------------
Total assets $ 133,374,050 $ 84,267,691
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable (Note 5) $ 32,075,326 $ 16,374,426
Accrued and other liabilities 6,558,959 2,540,222
Billings in excess of costs and 1,758,158 295,967
estimated earnings (Note 6)
Customer deposits 19,863,845 13,323,571
Current portion of long-term debt (Note 9) 621,000 --
Loan payable (Note 8) 10,925,000 --
Income taxes payable 176,045 7,669
------------- -------------
Total current liabilities 71,978,333 32,541,855
Long-term debt (Note 9) 2,964,862 --
------------- -------------
Total liabilities 74,943,195 32,541,855
Commitments and contingencies (Note 11)
Stockholders' equity (Notes 13, 14 and 17)
Convertible preferred stock, $.01 par value, 3,000,000 5,000,000
$25 stated value, 5,000,000 shares
authorized, 120,000 and 200,000 shares
issued and outstanding, $3,000,000 and
$5,000,000 liquidation preference
Common stock, $.01 par value, 50,000,000 127,102 113,456
shares authorized, 12,710,156 and
11,345,572 issued
Additional paid-in capital 56,447,760 47,519,725
Retained earnings (deficit) (1,144,007) (907,345)
------------- -------------
Total stockholders' equity 58,430,855 51,725,836
------------- -------------
Total liabilities and stockholders' equity $ 133,374,050 $ 84,267,691
------------- -------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
20
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
1998 1997 1996
---- ---- ----
Net revenues $ 229,979,210 $ 85,441,712 $ 24,367,112
-----------------------------------------------
Cost of revenues:
Cost of revenues 198,855,319 74,364,892 18,289,924
Provision on contract revenues 8,863,000 -- --
-----------------------------------------------
Total cost of revenues 207,718,319 74,364,892 18,289,924
-----------------------------------------------
Gross profit 22,260,891 10,806,820 6,077,188
Selling, general and administrative expenses 21,113,908 10,622,184 3,218,520
-----------------------------------------------
Income from operations 1,146,983 184,636 2,858,668
-----------------------------------------------
Other income (expense):
Interest expense (756,100) (287,633) (26,101)
Interest income 1,314,605 774,836 1,141
Warrant expense -- (1,287,500) --
-----------------------------------------------
Total other income (expense) 558,505 (800,297) (24,960)
-----------------------------------------------
Income (loss) from continuing operations 1,705,488 (615,661) 2,833,708
before income taxes
Provision for income taxes 755,150 227,988 926,325
-----------------------------------------------
Income (loss) from continuing operations 950,338 (843,649) 1,907,383
-----------------------------------------------
Discontinued operations (Note 4):
Loss from discontinued operations (less applicable
income taxes of $536,900 in 1998) (826,100) -- (64,705)
Loss on disposal of discontinued operations, including
provision of $104,000 for operating losses during
phase-out period (less applicable income taxes of $59,100) (90,900) -- --
-----------------------------------------------
Loss from discontinued operations (917,000) -- (64,705)
-----------------------------------------------
Net income (loss) $ 33,338 $ (843,649) $ 1,842,678
-----------------------------------------------
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ 0.06 $ (0.13) $ 0.27
-----------------------------------------------
Discontinued operations:
Loss from discontinued operations (0.07) -- (0.01)
Loss on disposal (0.01) -- --
-----------------------------------------------
(0.08) -- (0.01)
-----------------------------------------------
Net income (loss) $ (0.02) $ (0.13) $ 0.26
-----------------------------------------------
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ 0.05 (a) $ 0.27
-----------------------------------------------
Discontinued operations:
Loss from discontinued operations (a) -- (0.01)
Loss on disposal (a) -- --
-----------------------------------------------
(a) -- (0.01)
-----------------------------------------------
Net income (loss) (a) (a) $ 0.26
-----------------------------------------------
Weighted average common shares outstanding 12,092,437 8,885,570 6,983,333
-----------------------------------------------
Weighted average common and common equivalent shares outstanding
12,831,421 9,876,802 7,131,915
-----------------------------------------------
(a) Antidilutive
The accompanying notes to consolidated financial statements are an integral part
of these statements.
21
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Preferred Stock Common Stock
--------------- ------------
Number of Stated Number of Par Value Treasury Additional Retained Total
Shares Value Shares Stock Paid in Earnings Stockholders'
Capital (Deficit) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, -- -- 7,125,655 $ 71,257 $-- $ 7,865,285 ($1,606,374) $ 6,330,168
January 1, 1996
Purchase of treasury stock -- -- (1,000,000) -- (1,152,500) -- -- (1,152,500)
Sale of treasury stock -- -- 500,000 -- 437,500 62,500 -- 500,000
Stock issued in settlement -- -- 75,000 750 -- 149,250 -- 150,000
of service agreements
Stock options issued for -- -- -- -- -- 44,000 -- 44,000
services
Exercise of stock options -- -- 25,000 250 -- 64,375 -- 64,625
and warrants
Net income -- -- -- -- -- -- 1,842,678 1,842,678
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, -- -- 6,725,655 72,257 (715,000) 8,185,410 236,304 7,778,971
December 31, 1996
Purchase of treasury stock -- -- (500,000) -- (2,210,000) -- -- (2,210,000)
Exercise of stock options -- -- 419,917 4,199 -- 1,018,931 -- 1,023,130
and warrants
Issuance of shares in 200,000 5,000,000 1,250,000 12,500 -- 6,940,000 -- 11,952,500
connection with acquisition
Stock issued in connection -- -- 3,450,000 24,500 2,925,000 27,379,246 -- 30,328,746
with offering, net of
expenses
Income tax benefit from -- -- -- -- -- 360,349 -- 360,349
warrants exercised
Warrants issued for services -- -- -- -- -- 3,635,789 -- 3,635,789
Net loss -- -- -- -- -- -- (843,649) (843,649)
Preferred dividends -- -- -- -- -- -- (300,000) (300,000)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, 200,000 $ 5,000,000 11,345,572 $113,456 -- $47,519,725 $ (907,345) $ 51,725,836
December 31, 1997
Exercise of stock options -- -- 265,667 2,657 -- 768,024 -- 770,681
and warrants
Issuance of shares in -- -- 514,117 5,141 -- 6,165,859 -- 6,171,000
connection with acquisition
Conversion of preferred (80,000) (2,000,000) 584,800 5,848 -- 1,994,152 -- --
stock
Net income -- -- -- -- -- -- 33,338 33,338
Preferred dividends -- -- -- -- -- -- (270,000) (270,000)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE 120,000 $ 3,000,000 12,710,156 $127,102 -- $56,447,760 $(1,144,007) $ 58,430,855
December 31, 1998
====================================================================================================================================
The accompanying notes to consolidated financial statements are an integral part
of these statements.
22
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 33,338 $ (843,649) $ 1,842,678
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,091,907 1,114,001 404,114
Stock based compensation charge 213,555 1,593,420 44,000
Deferred income tax benefit (3,796,090) (668,422) (65,280)
(Increase) decrease in current assets:
Accounts receivable (31,651,765) (12,299,779) (1,548,005)
Notes receivable 342,144 -- --
Current assets of discontinued operations -- -- 145,317
Costs in excess of billings (2,146,113) (1,243,922) (2,047,173)
Advances to vendors (8,504,265) (4,255,181) --
Prepaid and other current assets 138,268 36,528 (290,632)
Other assets 519,942 (487,100) (81,014)
Increase (decrease) in current liabilities:
Accounts payable 13,977,900 10,579,593 134,481
Accrued and other liabilities 3,059,737 316,802 862,204
Billings in excess of costs 1,316,191 95,165 (419,772)
Customer deposits 6,540,274 10,046,533 --
Accrued loss on disposal of discontinued operations -- -- (398,806)
Income taxes payable 168,376 (290,191) 297,860
------------ ------------ ------------
Net cash provided by (used in) operating activities (17,696,601) 3,693,798 (1,120,028)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (8,500,000) (18,915,686) --
Sale of marketable securities 18,915,686 -- 715,000
Purchase price of acquisition (1,500,000) -- --
Cash acquired upon acquisition, net of acquisition costs (62,000) 479,061 --
Investment in real estate ventures (4,187,260) (414,473) --
Purchase of property and equipment (3,461,494) (2,694,522) (65,682)
Investment in mortgages receivable (3,637,000) -- --
------------ ------------ ------------
Net cash provided by (used in) investing activities (2,432,068) (21,545,620) 649,318
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on loan payable 26,625,000 3,180,000 1,400,000
Repayment of loan payable (15,700,000) (4,580,000) (455,926)
Repayment of long term debt (1,352,285) -- --
Purchase of treasury stock -- (2,210,000) (1,152,500)
Proceeds from sale of treasury stock -- -- 500,000
Proceeds from stock offering -- 32,126,630 --
Proceeds from exercise of stock options and warrants 770,681 1,023,130 64,625
------------ ------------ ------------
Net cash provided by financing activities 10,343,396 29,539,760 356,199
------------ ------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (9,785,273) 11,687,938 (114,511)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,964,129 276,191 390,702
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 2,178,856 $ 11,964,129 $ 276,191
------------ ------------ ------------
The accompanying notes to consolidated financial statements are an integral part
of these statements.
23
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
1998 1997 1996
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 794,724 $ 178,113 $ 26,101
Income taxes 3,826,546 785,127 696,324
NON-CASH INVESTING & FINANCING ACTIVITIES:
Fair value (including goodwill) of net assets acquired 6,233,000 11,166,229 --
Stock issued for assets acquired 6,171,000 11,952,500 --
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 -- 300,000 --
price reduction for LPC acquisition
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.
24
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
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, acts as a
purchasing agent and principal for leading hotel and hospitality customers,
provides logistical services to a wide variety of customers and provides real
estate advisory services to the hospitality industry throughout the United
States, with limited operations abroad.
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 investments in
real estate joint ventures, which are accounted for under the equity and cost
method, as appropriate. All significant inter-company 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. Unapproved change orders and
claims are included in earnings from renovation contracts at their estimated
recoverable amounts 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 contracts.
25
PROCUREMENT
The Company recognizes procurement earnings for fixed fee service
contracts 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 efforts expended bears to the estimated efforts over
the life of the contract. Earnings for variable fee service contracts are
generally recognized upon completion of the associated service.
The Company performs procurement services either acting as a
principal, for which it functions in a manner similar to a purchaser and
reseller of merchandise, or as an agent. As an agent, revenues include solely
the service fee income and the cost of the contracts includes labor and other
direct costs associated with the contract and those indirect costs related to
contract performance. As a principal, the revenues and cost of the contracts
also include the associated merchandise purchased for the customer, which are
recognized when the merchandise is shipped directly from the vendor to the
customer.
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.
LOGISTICS
The Company recognizes earnings on logistics and installation
services 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 efforts expended bears to the estimated efforts over
the life of the contract. The cost of the contracts includes labor and other
direct costs associated with the contract and those indirect costs related to
contract performance.
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, 7 years; furniture and fixtures, 10 years; and building, 25
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 15-30 years. Goodwill represents the costs of an acquisition in
excess of the fair value of net assets acquired at the date of acquisition.
Accumulated amortization was $2,439,238 and $1,489,855 at December 31, 1998 and
1997, respectively.
EARNINGS PER COMMON SHARE
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 incremental number of shares issuable under stock-based compensation plans,
the assumed conversion of convertible preferred stock and the elimination of the
preferred stock dividends, if such adjustments are dilutive.
26
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 consisted of certificates of deposit maturing
in six months or less as of December 31, 1998 and commercial paper and treasury
notes maturing in six months or less as of December 31, 1997. These securities
are classified as available-for-sale or as held-to-maturity, based on the
Company's intended holding period. Available-for-sale securities are reported at
fair value with unrealized gains or losses, if any, reported as other
comprehensive income. 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
Long-lived assets to be held and used are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. If such review indicates that the asset is
impaired, when the carrying amount of an asset exceeds the sum of its expected
future cash flows, on an undiscounted basis, the asset's carrying amount is
written down to fair value. Long-lived assets to be disposed of are reported at
the lower of carrying amount or fair value less cost to sell.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and
cash equivalents, accounts receivable, accounts payable, and accrued and other
liabilities approximate the fair values as of December 31, 1998, due to the
short-term maturity of these instruments. The carrying amounts as of December
31, 1998 of costs and estimated earnings in excess of billings, advances to
vendors, billings in excess of costs and estimated earnings and customer
deposits approximate fair value as these amounts are due or payable within the
Company's operating cycle. The fair value of marketable securities is based on
settlement amounts for such instruments given the intended holding period and
approximate their carrying amounts as of December 31, 1998. The carrying amount
of the loan payable approximates its fair value given the short term maturity of
the loan. The fair value of long-term debt is estimated based on the Company's
year-end, risk-adjusted incremental borrowing rate for similar liabilities. As
of December 31, 1998, the carrying amount of the debt approximated fair value.
COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting
Standards ("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 includes net
income plus other comprehensive income, which includes changes in cumulative
foreign translation adjustments and
-27-
unrealized gains and losses on marketable securities that are
available-for-sale. The Company has not presented statements of comprehensive
income, as other comprehensive income was not material.
3. ACQUISITION OF BUSINESSES
In January 1997, the Company completed the acquisition of Leonard
Parker Company ("LPC") and Parker Reorder Online, Inc, ("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 provides such clients with access to forecasting and product
evaluation capabilities. The purchase price of LPC and Parker Reorder, including
acquisition costs and after final adjustments, was approximately $12,140,000
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. The acquisition resulted in goodwill and other intangible assets of
approximately $11,400,000, which are being amortized on a straight-line basis
over their 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.
In January 1998, the Company acquired 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. Additionally, under the terms of the purchase agreement, the
Company was required to issue an additional 639,512 shares of Common Stock in
January 1999 given the decrease in the price of the Company's common stock on
the one year anniversary date of the acquisition. The acquisition resulted in
goodwill of approximately $7,000,000 which is being amortized on a straight-line
basis over its estimated useful life of 30 years. The acquisition has been
accounted for as a purchase with the results of Bekins included in the
consolidated financial statements of the Company from the acquisition date.
In February 1998, the Company, through HWS REAG, purchased the
assets of Watermark Investments Limited's ("Watermark") real estate advisory
business, consisting primarily of development contracts. Watermark is an
international management company that is the general partner of and manages
Watertone Holdings LP, a shareholder of the Company. The purchase price for such
business was $1,500,000 of cash and its results have been 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 LPC, Parker
Reorder and Bekins. The pro forma financial information is based on the
historical financial statements of the Company and LPC, Parker Reorder and
Bekins 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, 1996. 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, 1996, and neither is it necessarily indicative of the results of
operations for future periods.
Year Ended December 31 1997 1996
- --------------------------------------------------------------------------------
(unaudited)
Net sales $105,357,000 $76,429,000
Income (loss) from continuing operations
applicable to common shares (457,000) 428,000
Diluted loss per share from continuing operations (.04) _____
- --------------------------------------------------------------------------------
28
The above unaudited pro forma statements have been adjusted to
reflect the amortization of goodwill and other intangible assets as generated by
the acquisitions over a 30 year period, dividends of 6% on preferred shares in
the LPC transaction, officers compensation based on employment agreements
entered into at the date of acquisition, additional income taxes on pro forma
income and given Bekin's organizational structure and the 1,764,117 common
shares and $5,000,000 preferred shares issued as consideration in the
transactions through December 31, 1998.
4. DISCONTINUED OPERATIONS
In December 1998, the Company decided to discontinue its hotel
development business, especially in light of Prime Hospitality Corp.'s ("Prime")
decision to no longer pursue new development opportunities with the Company. The
Company anticipates ceasing operations by April 1999, although the resolution
date as to the recovery from Prime of costs incurred by the Company under their
master development agreement is uncertain. The Company has reflected the current
year operating results associated with its development business, as well as the
estimated loss on disposal, as discontinued operations on the statement of
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 1996, the Company
incurred additional losses from discontinued operations of $64,705.
5. ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE
Accounts receivables include retainages of $3,756,317 at December
31, 1998 and $636,577 at December 31, 1997, on contracts which are collectible
upon the acceptance by the owner. All amounts at December 31, 1997 were
collected in 1998 and amounts at December 31, 1998 are anticipated to be
collected in their entirety in 1999. Accounts receivable is shown net of the
1998 provision on contract revenues of $8,863,000 at December 31, 1998.
Accounts receivables and costs and estimated earnings in excess of
billings include unapproved change orders and estimated net claims, which
involves negotiations with the custmer and in some cases may result in
litigation. The Company believes it has established legal bases for pursuing
recovery of recorded amounts and it is management's intention to pursue these
claims and litigate, if necessary, until a decision or settlement is reached.
Claims involve the use of estimates and it is reasonably possible that revisions
to the estimated recoverable amounts of recorded claims could be made within the
next year. The settlement of the amounts depends on the individual
circumstances, accordingly, the timing of the collection will vary and may
extend beyond one year. The amounts recorded at December 31, 1998 were
approximately $12,200,000.
The Company withholds a portion of payments due subcontractors as
retainages, which amounted to $1,348,124 at December 31, 1998 and $212,278 at
December 31, 1997. The subcontractor balances are paid when the Company collects
its retainages receivable.
29
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,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $ 62,823,883 $ 15,629,620
Estimated earnings 18,494,385 7,333,524
Billings to date (77,509,484) (19,838,282)
- ------------------------------------------------------------------------------------------------------------------------------------
Costs and estimated earnings on uncompleted contracts in excess of billings $ 3,808,784 $ 3,124,862
- ------------------------------------------------------------------------------------------------------------------------------------
Included in the accompanying consolidated balance sheet under the following
captions:
Costs and estimated earnings in excess of billings $ 5,566,942 $ 3,420,829
Billings in excess of costs and estimated earnings (1,758,158) (295,967)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 3,808,784 $ 3,124,862
- ------------------------------------------------------------------------------------------------------------------------------------
7. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31,
1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Building $ 2,263,874 $ --
Furniture and fixtures 1,056,746 347,769
Office equipment 2,295,139 1,068,352
Leasehold improvements 609,064 245,297
Software 3,911,256 2,224,167
- ------------------------------------------------------------------------------------------------------------------------------------
10,136,079 3,885,585
Less: Accumulated depreciation and amortization (1,420,397) (337,873)
- ------------------------------------------------------------------------------------------------------------------------------------
$ 8,715,682 $ 3,547,712
- ------------------------------------------------------------------------------------------------------------------------------------
8. LOAN PAYABLE
In 1996, the Company obtained a secured line of credit with a bank. The
line provided for borrowings of up to $2.5 million, with interest at prime plus
1/2% and was collateralized by all Company assets and was guaranteed by the
Company's renovation subsidiary. In September 1997, the Company repaid all
outstanding borrowings under the line.
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.
In March 1998, the Company obtained a unsecured line of credit with
Marine Midland Bank. The line provides for borrowings of up to $7,000,000 with
interest at the bank's prime lending rate. At December 31, 1998, there were
$4,975,000 in outstanding borrowings under the line. The line of credit matures
on May 31, 1999.
30
In July 1998, the Company obtained an unsecured line of credit with
NationsBank. The line provides for borrowings of up to $6,000,000 with interest
at the bank's prime lending rate. At December 31, 1998, there were $5,950,000 in
outstanding borrowings under the line. The line of credit matures on May 30,
1999.
The weighted average interest rates for 1998 and 1997 on the loans
outstanding during the year were 8.20% and 8.92%, respectively.
9. LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
1998 1997
- -------------------------------------------------------------------------------------------------
Term loan with NationsBank held by Bekins. Payable in $1,854,000 --
quarterly installments of $117,000 with the final
balance due on April 1, 2001. Interest is at the bank's
prime lending rate (7.75% at December 31, 1998)
Mortgage payable with NationsBank held by Bekins 1,633,000 --
Payable in quarterly installments of $31,000 with the
final balance due on April 1, 2001. Interest is at
the bank's prime lending rate (7.75% at December 31,
1998)
Capital lease obligations held by Bekins covering 43,000 --
various office furniture and equipment bearing
interest at fixed rates of 6.75% to 10.50% with
varying payments through December 2001
Notes payable held by LPC covering computer and 55,862 --
office equipment bearing interest at fixed rates of 9%
to 23%, with payments through September 2001
-----------------------------
3,585,862 --
Less current maturities 621,000 --
-----------------------------
$2,964,862 --
-----------------------------
The term loan and mortgage payable contain restrictive covenants that require,
among other things, Bekins to maintain certain ratios of operating cash flow to
fixed charges and total funded debt to operating cash flows, as well as minimum
operating cash flows. At December 31, 1998, Bekins was in violation of one of
the covenants and received a waiver of such violation from the bank.
The following represents the schedule of the aggregate annual principal payments
on long-term debt for the years ended December 31:
1999 $621,000
2000 633,931
2001 2,330,931
2002 --
thereafter --
-------------
$3,585,862
31
10. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Current:
Federal $ 3,165,654 $ 360,349 $ 620,929
State and Local 838,118 536,061 370,676
- ------------------------------------------------------------------------------------------------------------------------------------
4,003,772 896,410 991,605
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred:
Federal (3,094,938) (465,547) (65,280)
State and Local (749,684) (202,875) --
- ------------------------------------------------------------------------------------------------------------------------------------
(3,844,622) (668,422) (65,280)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 159,150 $ 227,988 $ 926,325
- ------------------------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 1998, the Company recorded a provision
for income taxes for continuing operations of $755,150 and a benefit for income
taxes for discontinued operations of $596,000.
The following is a reconciliation of the Company's income taxes based on the
statutory rate and the actual provision for income taxes for both continuing
operations and discontinued operations:
Year Ended December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Statutory federal income tax at 34% $ 65,446 $(209,325) $ 963,640
Increase (decrease) resulting from:
Tax return-to-accrual adjustment (205,028) -- --
State and local taxes, net of federal tax benefit 58,366 219,903 239,027
Nondeductible goodwill amortization and expenses 240,366 217,410 62,778
- ------------------------------------------------------------------------------------------------------------------------------------
Provision for income taxes $ 159,150 $ 227,988 $ 926,325
- ------------------------------------------------------------------------------------------------------------------------------------
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, 1998 and 1997 are as follows:
Deferred Income Tax Liability (Asset) 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Warrant expense $ (677,580) $ (735,016)
Rent expense (102,562) (52,800)
Goodwill amortization 62,959 50,017
Allowance for doubtful accounts (3,834,079) (64,881)
Other 16,084 63,592
----------- -----------
$(4,535,178) $ (739,088)
----------- -----------
The Company has recorded net deferred tax assets at December 31, 1998
and 1997 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 the
expectation that the Company will generate taxable income in future years.
32
11. 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 1996 the Company
paid fees of $172,786 to Interstate.
(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, 1998 and December 31, 1997 the Company had no
receivables due 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 14), 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 1998 and 1997.
12. COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
The Company leases office space in New York, Los Angeles, St. Louis,
Chicago and Coral Gables which expire at various dates through 2007. In
conjunction with the acquisition of Bekins in January, 1998 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
- --------------------------------------------------------------------------------
1999 $ 2,614,970
2000 1,958,723
2001 1,752,330
2002 1,675,677
2003 1,635,314
Thereafter 8,387,794
---------
$18,024,808
Rent expense for 1998, 1997 and 1996 was $2,581,948, $1,093,686 and
$120,534 respectively.
33
(B) EMPLOYMENT AGREEMENTS
The Company currently has employment agreements with twelve members of
management personnel that expire from January 2000 to March 2001 at an aggregate
annual compensation of $2,575,000.
(C) LITIGATION
The Company is a defendant in various litigation incident to its
business and in some instances the amounts sought include substantial claims and
counterclaims. Although the outcome of the 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. As
these matters continue to proceed through the litigation process to ultimate
resolution, it is reasonably possible that the Company's estimation of the
effect of such matters could change within the next year.
(D.) OFFICER AND EMPLOYEE LOANS
At various times during the year, the Company has provided short-term
loans to various of its officers and employees of the Company bearing interest
at 12%. Loans provided during 1998, 1997 & 1996 amounted to 3,590,000, 767,000
and 0, respectively. The balance owed to the Company was 250,000 and 647,500 at
December 31, 1998 and 1997, respectively.
13. MAJOR CUSTOMERS AND SUBCONTRACTORS
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, 1998, one customer accounted for approximately 27% of accounts receivable.
The largest customers of the Company for 1998, a major lodging company
and a major hotel development company high ranking official of the United Arab
Emirates accounted for 15% and 10%, respectively, of the Company's net revenue.
The largest customer of the Company for 1997, a high-ranking government official
of the United Arab Emirates, accounted for 14% of the Company's net revenues.
The two largest customers of the Company for 1996 accounted for 49% and 31% of
net revenues.
During 1998 and 1997, no subcontractors accounted for over 10% of the
Company's cost of revenues. During 1996, 35% of the Company's cost of revenues
were costs charged by one subcontractor.
14. 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. Dividends for 1998 have been accrued as of
December 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 12% 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 at the stated
value of the stock.
In October 1998, 80,000 shares of LPC Preferred were converted into an
aggregate of 584,800 shares of common stock. The remaining 120,000 shares of LPC
Preferred are convertible, at any one time during the period from January 10,
1998 to January 10, 2000, into (i) 600,000 shares of the Company's common stock,
subject to an
34
upward adjustment in the event that the market price of the Company's common
stock is below $5.00 at the time of conversion, based on a defined conversion
formula, up to a maximum of 2,400,000 shares, or (ii) 5.88% of the outstanding
capital stock of Parker Reorder. The conversion formula related to the
conversion into the Company's common stock is defined as the number of shares of
common stock equal to the product of 25 (which represents the stated value per
share of the LPC Preferred) and the number of shares of LPC Preferred, divided
by the average closing sale price for the common stock for the 20 trading days
immediately prior to the date written notice of the intention to exercise the
conversion option is given, provided, however, that in no case shall the number
of shares of common stock into which each share of LPC Preferred may be
converted be less than 5 or greater than 20. 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.
The Company cannot pay or declare dividends on any capital stock other
than the LPC Preferred, so long as such LPC Preferred is outstanding, unless all
accrued and unpaid dividends on the LPC Preferred for all prior applicable
periods have been declared and paid and the dividends on the LPC Preferred Stock
for the current and applicable period has been declared and set apart for
payment. The Company is not otherwise restricted from declaring and paying
dividends to its shareholders.
In January 1998, in connection with the acquisition of Bekins, the
Company issued 514,117 shares of Common Stock. Further, pursuant to a make-whole
adjustment in the purchase agreement, 639,512 additional shares of Common Stock
were issued by the Company in January 1999 (Note 3).
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, 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. In
September 1997, the Apollo Joint Venture acquired the Warwick Hotel in
Philadelphia, Pennsylvania. As of December 31, 1998, the Company contributed
approximately $720,000 to the joint venture operating entity that was formed to
purchase the property. As of December 31, 1998, there are no additional material
capital commitments to be made by the Company. The joint venture operating
entity is owned 95% by the general partner, which is owned by Apollo and
Watermark, and 5% by the Company as a limited partner. The Company is accounting
for this investment on the cost method as all decisions are made by the general
partner. 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 renovation revenue and purchasing fees earned and to be earned by
the Company from the joint venture. The costs associated with the warrants for
the 100,000 share increments earned and anticipated to be earned by Apollo are
recognized as an additional cost of the related renovation and procurement
contract. The fair value of the warrant for 250,000 shares was $1,287,500 (or
$5.15 per share) and the warrant for 100,000 shares was $550,000 (or $5.50 per
share). In 1997, the Company recognized an expense of approximately $1,593,400,
of which $1,287,500 is reflected as Warrant Expense and $305,900 is included in
Cost of Revenues on the accompanying consolidated Statement of Operations. In
1998, the Company recognized an expense of $213,575, which is included in Cost
of Revenues on the accompanying Consolidated Statement of Operations.
35
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.
15. STOCK OPTION PLAN
At December 31, 1998, the Company has three stock option plans. As
permitted by SFAS No. 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
five 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.
SFAS No. 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 No. 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 1998, 1997 and 1996, respectively: no dividends paid for all years;
expected volatility of 98%, 9% and 40%; risk-free interest rate of 5.54%, 6.04%
and 6.41%; and expected lives of 5.8 years, 5.3 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.
36
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------
Net income (loss)(in thousands)
As reported $ 33 $ (844) $ 1,843
Pro forma (1,762) (2,031) 1,583
Basic earnings per share
As reported (0.02) (0.13) 0.26
Pro forma (0.15) (0.23) 0.23
Diluted earnings per share
As reported (a) (a) 0.26
Pro forma (a) (a) 0.22
(a) Antidilutive
The following table contains information on stock options for the three
year period ended December 31, 1998.
Option shares Weighted average
exercise price
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1995 160,000 $ 1.275
Granted 984,000 2.50
Exercised (12,500) 1.57
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
Granted 426,000 8.95
Exercised (250,834) 2.74
Canceled (179,750) 8.28
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding, December 31, 1998 1,723,416 $ 6.42
- ---------------------------------------------------------------------------------------------------------------------------------
Exercise price less Exercise price equal to Total
than market market options
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of:
Options granted in 1996 -- $0.82 $0.82
Options granted in 1997 -- $4.88 $4.88
Options granted in 1998 -- $7.14 $7.14
The following table summarizes information about stock options outstanding at
December 31, 1998.
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Weighted Average Range of Exercise Price Weighted Average Amount Exercisable Weighted Average
Outstanding Remaining Exercise Price Exercise Price
Contractual Life
(years)
735,250 6.55 $1.275-2.75 $2.57 715,250 $2.56
231,666 3.11 6.125-6.75 6.65 75,000 6.67
756,500 8.99 8.94-12.00 10.09 74,400 11.24
1,723,416 7.16 $1.275-12.00 $6.42 864,650 $3.67
37
16. EARNINGS PER SHARE
The following table reconciles the components of basic and diluted
earnings per common share for income (loss) from continuing operations for the
years ended December 31, 1998, 1997 and 1996.
1998 1997 1996
Numerator:
Income (loss) from continuing operations $ 950,338 $ (843,649) $ 1,907,383
Preferred stock dividends (270,000) (300,000) --
Income (loss) available to common stockholders from 680,338 (1,143,649) 1,907,383
continuing operations - Basic
Effect of dilutive securities (a):
Preferred stock dividends -- -- --
Income (loss) available to common stockholders from $ 680,338 $ (1,143,649) $ 1,907,383
continuing operations - Diluted
Denominator:
Weighted average common shares outstanding - Basic 12,092,437 8,885,570 6,983,333
Effect of dilutive securities(a):
Stock-based compensation plans 738,984 -- 148,582
Convertible Preferred stock -- -- --
Weighted average common and common equivalent shares 12,831,421 8,885,570 7,131,915
outstanding - Diluted
Basic earnings (loss) per common share from continuing $ 0.06 $ (0.13) $ 0.27
operations
Diluted earnings (loss) per common share from continuing $ 0.05 (a) $ 0.27
operations
(a) The common stock equivalent shares for the year ended December 31, 1998
was 1,020,474 shares for the convertible preferred stock and for the
year ended December 31, 1997 was 991,232 shares for the Stock-based
compensation plans; and 1,000,000 shares for the convertible preferred
stock. 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.
38
17. OPERATING SEGMENTS
The Company's operating segments are based on the separate lines of
business acquired over the past several years which provide different
services to the hospitality industry, namely renovation, purchasing and
logistics services.
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Sales to Unaffiliated Customers
Renovation $ 74,707,871 $ 19,394,593 $ 24,367,112
Purchasing 132,379,848 64,886,119 --
Logistics 21,979,962 -- --
General Corporate and Real Estate 911,529 1,161,000 --
---------------------------------------------------------------
$ 229,979,210 $ 85,441,712 $ 24,367,112
---------------------------------------------------------------
Inter-segment Sales
Renovation $ -- $ -- $ --
Purchasing 18,107,008 165,000 --
Logistics 4,047,038 -- --
General Corporate and Real Estate -- -- 115,980
---------------------------------------------------------------
$ 22,154,046 $ 165,000 $ 115,980
---------------------------------------------------------------
Income (Loss) from Operations
Renovation $ 4,572,174 $ 842,539 $ 3,309,399
Purchasing 509,365 190,314 --
Logistics 1,377,000 -- --
General Corporate and Real Estate (5,311,556) (848,217) (450,731)
---------------------------------------------------------------
$ 1,146,983 $ 184,636 $ 2,858,668
---------------------------------------------------------------
Depreciation and Amortization
Renovation $ 415,739 $ 431,019 $ 387,631
Purchasing 970,222 658,183 --
Logistics 537,000 -- --
General Corporate and Real Estate 168,946 24,799 16,483
---------------------------------------------------------------
$ 2,091,907 $ 1,114,001 $ 404,114
---------------------------------------------------------------
Interest Income
Renovation $ -- $ 51,961 $ --
Purchasing 509,914 443,074 --
Logistics 1,000 -- --
General Corporate and Real Estate 803,691 279,801 1,141
---------------------------------------------------------------
$ 1,314,605 $ 774,836 $ 1,141
---------------------------------------------------------------
Interest Expense
Renovation $ -- $ 9,089 $ --
Purchasing 39,779 41,547 --
Logistics 353,000 -- --
General Corporate and Real Estate 363,321 236,997 26,101
---------------------------------------------------------------
$ 756,100 $ 287,633 $ 26,101
---------------------------------------------------------------
39
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Total Assets at Year End
Renovation $ 22,131,893 $ 10,287,288 $ 12,636,374
Purchasing 55,220,488 39,437,337 --
Logistics 15,110,396 -- --
General Corporate and Real Estate 40,911,273 34,543,066 113,716
---------------------------------------------------------------
$ 133,374,050 $ 84,267,691 $ 12,750,090
---------------------------------------------------------------
Capital Expenditures
Renovation $ 390,475 $ 79,870 $ 65,682
Purchasing 2,569,088 2,315,151 --
Logistics 454,000 -- --
General Corporate and Real Estate 107,931 299,501 --
---------------------------------------------------------------
$ 3,521,494 $ 2,694,522 $ 65,682
---------------------------------------------------------------
All transactions between reportable segments are accounted for on an
arms length basis and are eliminated in consolidation.
The Company's revenue and assets predominately relate to our United
States operations, with immaterial amounts related to foreign operations.
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information", which revised the disclosures about
the Company's operating segments. The Company has restated prior year to conform
to the new disclosure requirements.
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (A)
1998 Quarter Ended March 31 June 30 September 30 December 31
- ------------------ -------- ------- ------------ -----------
Net revenues $ 41,270 $ 52,359 $ 69,937 $ 66,393
Gross profit 7,392 8,720 10,650 (4,501)
Income (loss) from operations 1,903 2,514 3,583 (6,853)
Net income (loss) 1,218 1,583 2,298 (5,066)
Basic earnings per common share (b) .10 .13 .18 .43
Diluted earnings per common share (b) .09 .12 .17 (c)
Income from continuing operations .10 .13 .18 .05
Net income (loss) .09 .12 .17 .04
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)
(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
Venture.