UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 1998
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission File Number: 0-23054
HOSPITALITY WORLDWIDE SERVICES, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
NEW YORK 11-3096379
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
450 PARK AVENUE, SUITE 2603, NEW YORK, NY 10022
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(Address of principal executive offices) (Zip Code)
(212) 223-0699
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(Registrant's telephone number, including area code)
Indicate by check whether the registrant: (1) has filed all reports to be filed
by section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 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
APPLICABLE ONLY TO CORPORATE ISSUER
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:12,113,856 as of November 12,
1998.
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997..............................................3
Consolidated Statements of Operations for the three months
ended September 30, 1998 and 1997 and nine months
ended September 30, 1998 and 1997..................................4
Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended September 30, 1998................5
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 ..........................6
Notes to Consolidated Financial Statements ........................7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................................................11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................15
Item 5. Other Information.................................................15
Item 6. Exhibits and Reports on Form 8-K..................................15
Signatures..................................................................16
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES LITIGATION
REFORM ACT OF 1995.
Except for historical information contained herein, the Report on Form 10-Q
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. In assessing forward-looking statements contained herein, readers
are urged to carefully read those statements. When used in the Report on Form
10-Q, the words "estimate," "anticipate," "expect," "believe" and similar
expressions are intended to identify forward-looking statements.
2
HOSPITALITY WORLDWIDE SERVICES, INC. and SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS
September 30, 1998 December 31, 1997
------------------ -----------------
Unaudited
CURRENT ASSETS:
Cash and cash equivalents $ 11,322 $ 11,964
Marketable securities -- 18,916
Accounts receivable, less allowance for doubtful
accounts of $413 [HRT] and $268 42,940 21,933
Current portion of note receivable -- 342
Costs and estimated earnings in excess of billings 21,559 3,421
Advances to vendors 7,629 4,255
Prepaid and other current assets 3,139 1,037
-------- --------
Total current assets 86,589 61,868
Property and equipment, less accumulated depreciation of $1,007 and $338 9,011 3,548
Goodwill and other intangibles, less accumulated amortization of $2,437 25,161 17,078
and $1,490
Deferred taxes 1,059 739
Other assets 6,674 1,035
-------- --------
$128,494 $ 84,268
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Loan payable - bank 11,000 --
Current portion of notes payable and
capital lease obligations 656 --
Accounts payable 27,532 16,374
Accrued and other liabilities 7,467 2,540
Billings in excess of costs and
estimated earnings 148 296
Customer deposits 13,533 13,324
Income taxes payable 911 8
-------- --------
Total current liabilities 61,247 32,542
Notes payable and capital lease
obligations, net of current portion 3,129 --
-------- --------
Total liabilities 64,376 32,542
-------- --------
STOCKHOLDERS' EQUITY:
Convertible preferred stock,$.01 par
value, $25 stated value, 3,000,000 5,000 5,000
shares authorized, 200,000 shares
issued and outstanding, $5,000,000
liquidation preference
Common stock, $.01 par value,
50,000,000 shares authorized,
12,113,856 and 11,345,572 shares 121 113
issued and outstanding
Additional paid-in capital 55,030 47,520
Retained earnings (deficit) 3,967 (907)
-------- --------
Total stockholders' equity 64,118 51,726
-------- --------
$128,494 $ 84,268
======== ========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
3
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Net revenues $ 69,937 $ 16,532 $ 163,586 $ 54,240
Cost of revenues 59,287 11,876 136,824 41,570
--------- --------- --------- ---------
Gross profit 10,650 4,656 26,762 12,670
Selling, general and administrative expenses 7,067 3,348 18,762 9,608
--------- --------- --------- ---------
Income from operations 3,583 1,308 8,000 3,062
--------- --------- --------- ---------
Other income (expense):
Interest income 518 148 1,248 289
Interest and other expense (341) (164) (601) (420)
--------- --------- --------- ---------
177 (16) 647 (131)
--------- --------- --------- ---------
Income before provision for income taxes 3,760 1,292 8,647 2,931
Provision for income taxes 1,462 573 3,548 1,390
--------- --------- --------- ---------
Net income $ 2,298 $ 719 $ 5,099 $ 1,541
========= ========= ========= =========
Basic earnings per common share $ 0.18 $ 0.08 $ 0.41 $ 0.17
========= ========= ========= =========
Diluted earnings per common share $ 0.17 $ 0.07 $ 0.37 $ 0.16
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 12,112 7,897 11,952 7,960
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING 13,652 9,985 13,758 9,941
========= ========= ========= =========
The accompanying notes to consolidated financial statements are an integral part
of these statements.
4
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(in thousands)
Unaudited
Preferred Stock Common Stock
---------------------------------------
Number Number Addt'l Retained Total
of Stated Of Par Paid In Earnings Stockholders'
Shares Value Shares Value Capital (Deficit) Equity
-------- ----- ------ ----- ------- --------- -------------
BALANCE, JANUARY 1, 1998 200 $ 5,000 11,346 $ 113 $ 47,520 $ (907) $ 51,726
Exercise of stock options and warrants -- -- 246 2 765 -- 767
Stock issued in connection with acquisition -- -- 514 6 6,166 -- 6,172
Warrants issued for services -- -- -- -- 579 -- 579
Net income -- -- 5,099 5,099
Preferred dividends -- -- -- -- -- (225) (225)
---------------------------------------------------------------------------------
Balance, Sept. 30, 1998 200 $ 5,000 12,106 $ 121 $ 55,030 $ 3,967 $ 64,118
=================================================================================
The accompanying notes to consolidated financial statements notes are an
integral part of these statements.
5
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Nine Months ended
September 30,
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITES:
Net income $ 5,099 $ 1,541
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 1,463 870
Stock based compensation charge 420 22
Deferred income tax benefit (320) 25
(Increase) decrease in current assets:
Accounts receivable (17,845) (1,688)
Notes receivable 342 --
Costs in excess of billings (18,138) (1,015)
Advances to vendors (3,374) (3,486)
Prepaid and other current assets 192 (464)
(Increase) in other assets (2,036) (597)
Increase (decrease) in current liabilities:
Accounts payable 9,611 (2,406)
Accrued and other liabilities 4,140 216
Billings in excess of costs (142) (97)
Customer deposits 209 7,765
Income taxes payable 903 515
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (19,476) 1,201
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of short term marketable securities 18,916 --
Purchase price of acquisition (1,500) --
Investment ING Joint Venture (2,245) --
Cash acquired, upon acquisition,
net of acquisition costs (62) 689
Purchase of property and equipment (3,335) (1,379)
Investment in mortgages receivable (3,555) --
-------- --------
NET CASH PROVIDED BY (USED IN)INVESTING ACTIVITIES 8,219 (690)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of loan payable (8,800) (1,400)
Proceeds from borrowings on loan payable 19,800 --
Repayment of notes payable and capital
lease obligations (1,152) 141
Proceeds from stock offering -- 32,251
Proceeds from exercise of stock options and warrants 767 826
Purchase of treasury stock -- (2,210)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 10,615 29,608
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (642) 30,119
-------- --------
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,964 276
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,322 $ 30,395
======== ========
6
HOSPITALITY WORLDWIDE SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 2,780 $ 507
Interest $ 505 $ 288
NON-CASH INVESTING & FINANCING ACTIVITIES:
Fair value (including goodwill) of net assets acquired $ 6,232 $11,166
Stock issued for assets acquired $ 6,172 $11,953
Preferred stock dividends not paid in lieu of purchase price reduction for LPC $ --- $ 225
acquisition
The accompanying notes to consolidated financial statements are an integral part
of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: CONSOLIDATION
The consolidated financial statements of Hospitality Worldwide Services, Inc.
and Subsidiaries (the "Company") and related notes thereto as of September 30,
1998 and for the three months and nine months ended September 30, 1998 and 1997
are presented as unaudited, but in the opinion of management include all
adjustments necessary to present fairly the information set forth therein. These
adjustments consist solely of normal recurring adjustments. The consolidated
balance sheet information for December 31, 1997 was derived from the audited
consolidated financial statements included in the Company's Form 10-K. These
interim consolidated financial statements should be read in conjunction with
that report. The interim results are not necessarily indicative of the results
for any future period.
NOTE 2: ACQUISITIONS
On January 9, 1998, the Company completed the acquisition of Bekins Distribution
Services, Inc. ("Bekins"), a leading provider of transportation, warehousing and
installation services to a variety of customers worldwide. Founded in 1969,
Bekins is a logistical services company that serves clients who are opening,
renovating or relocating facilities by assuring that materials, fixtures,
furniture and merchandise are moved from multiple vendor locations to their
ultimate destinations in a controlled orderly sequence so that each item can be
installed on schedule. The purchase price of Bekins of approximately $11,000,000
consisted of 514,117 shares of Common Stock and the assumption of certain
Bekins' debt. The purchase agreement contains a make-whole adjustment whereby,
on a formula-basis, additional shares will be issued if the average price of the
Company's common stock for the 20 trading days prior to the one year anniversary
date is less than 85% of the share price as of the date of acquisition. The
closing share price on the date of acquisition was $12.25. The acquisition was
accounted for as a purchase with the results of Bekins included in the
consolidated financial statements of the Company from the acquisition date.
On February 9, 1998, the Company purchased the assets of the real estate
advisory business, consisting primarily of development contracts, from Watermark
Limited, LLC, an international management company that is the general partner
and manages Watertone Holdings LP, a shareholder of the Company. The resulting
wholly owned subsidiary of the Company is named HWS Real Estate Advisory Group,
Inc. ("HWS REAG"). The purchase price of HWS REAG was $1,500,000 and their
results are included in the consolidated financial statements of the Company
from the acquisition date.
7
On March 6, 1998, in conjunction with a joint venture formed with ING Realty
Partners ("ING Joint Venture"), the Company acquired the Clarion Quality Hotel
in Chicago, Illinois. A wholly-owned subsidiary of the Company will renovate and
refurbish this property pursuant to a contract with the ING Joint Venture, which
is expected to generate approximately $11 million of revenue for the Company in
1998.
On April 27, 1998, in conjunction with a joint venture formed with Apollo Real
Estate Advisors II, L.P. ("Apollo Joint Venture"), the Company acquired the
Historic District Hotel in Richmond, Virginia. A wholly-owned subsidiary of the
Company will renovate and refurbish this property pursuant to a contract with
the Apollo Joint Venture which is expected to generate approximately $1 million
of revenue for the Company in 1998.
NOTE 3: EARNINGS PER SHARE OF COMMON STOCK
In 1997, the Company adopted SFAS No. 128, "Earnings Per Share," which replaced
the calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share are very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
prior periods have been restated to conform to the new requirements.
Basic earnings per common share are based on net income less preferred stock
dividends divided by the weighted average number of common shares outstanding.
Diluted earnings per common share are adjusted to reflect the assumed conversion
of convertible preferred stock and the elimination of the preferred stock
dividends, if such conversion is dilutive, and the weighted average number of
common share equivalents from stock options and warrants.
NOTE 4: PRO FORMA INFORMATION
The following pro forma consolidated financial information has been prepared to
reflect the acquisition of the assets and business of Bekins. The pro forma
financial information is based on the historical financial statements of the
Company and Bekins, and should be read in conjunction with the accompanying
footnotes. The accompanying pro forma financial information is presented as if
the transaction occurred January 1, 1997. The pro forma financial information is
unaudited and is not necessarily indicative of what the actual results of
operation of the Company would have been assuming the transaction had been
completed as of January 1, 1997, and neither is it necessarily indicative of the
results of operations for future periods.
Nine Months Ended September 30, 1997
------------------------------------------------------------------
(amounts in thousands, except share data) (Unaudited)
Net revenues $69,268
Net income $1,718
Basic earnings per common share $0.20
The above unaudited pro forma statements have been adjusted to reflect the
amortization of goodwill, as generated by the acquisition over a 30-year period,
adjustments to reflect historical compensation per employment agreements entered
into at the date of acquisition, additional income taxes on pro forma income and
the 514,117 common shares issued as consideration in the transaction.
8
NOTE 5: RECENT DEVELOPMENTS
On June 5, 1998, the Company signed a master development agreement with Prime
Hospitality Corp. ("Prime") to develop twenty hotel properties over a two-year
period under the AmeriSuites brand name. Under the agreement, the Company will
provide the site identification, development, construction and purchasing
services required for each project and Prime will provide project design and
management and franchise services once each property is complete. With a change
in the capital markets, the Company has decided to reassess its commitment to
the Prime venture. It is exploring the possibility of significantly scaling back
the scope of its relationship with Prime. This may include discussions with
other joint venture partners and other potential franchisees. The Company's
commitment to date is immaterial to its overall operations.
NOTE 6: COMPREHENSIVE INCOME
In July 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a separate
financial statement. Comprehensive income generally includes net income as
reported by the Company adjusted for cumulative foreign translation adjustments
and unrealized gains and losses on marketable securities that are
available-for-sale, which are currently reported in the stockholders' equity
section of the balance sheet. The statement is effective for fiscal years
beginning after December 15, 1997. The Company has adopted the standard at the
beginning of 1998. The differences between net income as reported and
comprehensive income is immaterial for the three and nine months ended September
30, 1998 and 1997.
NOTE 7: DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." This statement requires that the Company
report financial and descriptive information about its reportable operating
segments in financial statements issued to shareholders for interim and annual
periods. The Statement also establishes standards for related disclosures about
products and services, geographic areas and major customers. Under this
Statement, operating segments are components of an enterprise about which
separate financial information is available that is regularly evaluated by the
enterprise's chief operational decision-maker in deciding how to allocate
resources and in assessing performance. This statement is effective for fiscal
years beginning after December 15, 1997. The Company will conform with the new
standard as of December 31, 1998.
9
NOTE 8: EARNINGS PER SHARE
The following table reconciles the components of basic and diluted earnings per
common share for the three and nine months ended September 30, 1998 and 1997 (in
thousands).
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---- ---- ---- ----
Numerator:
Net income $ 2,298 $ 719 $ 5,099 $ 1,541
Preferred stock dividends (75) (75) (225) (225)
-------- -------- -------- --------
Basic earnings per common share - 2,223 644 4,874 1,316
Net income available to common
shareholders
Effect of dilutive securities 75 75 225 225
-------- -------- -------- --------
Preferred stock dividends
Diluted earnings per common share - $ 2,298 $ 719 $ 5,099 $ 1,541
Net income available to common
stockholders
Denominator:
Basic earnings per common share - weighted
average common shares outstanding 12,112 7,897 11,952 7,960
Effect of dilutive securities
Stock-based compensation plans 540 1,088 806 981
Preferred stock 1,000 1,000 1,000 1,000
-------- -------- -------- --------
Diluted earnings per common share -
Weighted average common and common
equivalent shares outstanding 13,652 9,985 13,758 9,941
10
HOSPITALITY WORLDWIDE SERVICES INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS/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 for
the hospitality industry on a global basis, the Company acquired its procurement
and reorder businesses in January 1997, its transportation, warehousing and
installation business in January 1998 and its real estate advisory business in
February 1998. As a result of this significant change in the Company's business
focus, period to period historical comparisons are not considered meaningful.
Additionally, historical comparisons are not considered meaningful because
revenue recognition methodologies vary across the Company's businesses. The
Company recognizes all revenues associated with a renovation, transportation,
warehousing or installation project on a percentage of completion basis. As part
of this process, the Company develops a complete scope of work to be performed
and invoices its clients on a monthly or bi-monthly basis as work is performed.
The Company's cost of services has been relatively stable over the past two
years. In contrast to the Company's recognition of renovation, transportation,
warehousing or installation revenues, the Company recognizes procurement
revenues in three ways: (i) when the Company is a principal, during which it
functions as a purchaser and reseller of products, the Company recognizes all
revenues associated with the products it purchases at the time of shipment of
the respective product, (ii) when the Company acts as an agent only, service fee
income is recognized as revenue at the time the service is provided and (iii)
when the Company provides these services under long-term contracts, earnings are
recognized under the percentage of completion method, based on efforts expended
over the life of the contract. In each case, the Company charges its clients a
procurement fee based upon the amount of time and effort it expects to spend on
a project. The Company intends to continue to expand its role as a purchaser and
reseller because the Company believes that it can enter into more advantageous
arrangements with its vendors when acting as principal rather than agent. Under
each method of procurement revenue recognition, profits primarily include only
procurement service fees. The Company realizes reorder and real estate advisory
revenue based on the fees it charges its clients for services rendered.
RESULTS OF OPERATIONS: NINE MONTHS ENDED SEPTEMBER 30, 1998 vs. NINE MONTHS
ENDED SEPTEMBER 30, 1997.
The Company experienced a significant increase in its net revenues to
$163,586,000 for the nine months ended September 30, 1998 in comparison to
$54,240,000 for the nine months ended September 30, 1997, due in large part to
increased revenues for the renovation and procurement businesses which have
increased over last year due to continued growth in their customer base,
attributed to increased sales and marketing efforts, and the further
establishment of the Company's name in the hospitality industry. In addition,
the acquisitions of Bekins and HWS REAG have contributed approximately
$19,330,000 to such revenues.
Cost of revenues for the nine months ended September 30, 1998 were $136,824,000,
compared to $41,570,000 for the same period last year. This increase is due
mainly to revenue growth and the additions of Bekins and HWS REAG, which
incurred costs of approximately $14,200,000 for the nine months ended September
30, 1998. Gross profit, as a percent of revenue was
11
16.4% for the nine months ended September 30, 1998 as compared to 23.4% for the
same period last year due to expansion into businesses which have different
pricing structures as well as increased volume of activity in the procurement
businesses which historically has lower gross margins as compared to the
renovation business.
Selling, general and administrative expenses for the nine months ended September
30, 1998 have increased to $18,762,000, compared to $9,608,000 for the same
period last year. Contributing to this increase are the acquisitions of Bekins
and HWS REAG, which incurred expenses of approximately $3,500,000 and an
investment in the infrastructure of the Company to support the revenue growth.
Additionally, selling, general and administrative expenses include $794,000 and
$591,000 of goodwill amortization for the periods ended September 30, 1998 and
1997, respectively. As a percentage of net revenues, selling, general and
administrative expenses for the nine months ended September 30, 1998 have
decreased to 11.5% from 17.7% for the same period last year. This reduction is
the result of greater economies of scale provided by growth and the
acquisitions.
Interest income increased from $289,000 to $1,248,000 in the nine months ended
September 30, 1998 due to the investment of the proceeds received from the
Company's public offering in September 1997. Interest and other expense
increased in the nine months ended September 30, 1998 as compared to the same
period last year primarily due to the acquisition of Bekins which carries
approximately $3,700,000 of long-term debt.
The provision for income taxes for the nine months ended September 30, 1998 was
$3,548,000, compared to $1,390,000 for the nine months ended September 30, 1997.
The increase in the provision for income taxes was primarily due to an increase
in income before income taxes.
As a result of the above, net income for the nine month period ended September
30, 1998 was $5,099,000 compared to net income of $1,541,000 for the same period
last year.
RESULTS OF OPERATIONS: THREE MONTHS ENDED SEPTEMBER 30, 1998 vs. THREE MONTHS
ENDED SEPTEMBER 30, 1997
The Company's net revenues increased substantially in the three months ended
September 30, 1998 to $69,937,000 as compared to $16,532,000 for the three
months ended September 30, 1997. The increase was due primarily to increased
revenues for the procurement and renovation businesses which have utilized sales
and marketing efforts and further establishment of the Company's name in the
hospitality industry to continue growth in their customer base. Additionally,
the acquisition of Bekins and HWS REAG have contributed approximately $7,530,000
to revenue to the quarter ended September 30, 1998.
Cost of revenues for the three months ended September 30, 1998 were $59,287,000,
compared to $11,876,000 for the three months ended September 30, 1997. This
increase is due to revenue growth and the additions of Bekins and HWS REAG,
which incurred cost of revenues of approximately $5,700,000 in the quarter ended
September 30, 1998. As a percent of revenues, gross profit was 15.2% for the
three months ended September 30, 1998 as compared to 28.2% for the same period
last year. The change in gross profit percent was primarily due to an increased
volume of activity in the procurement businesses which historically have lower
gross margins as compared to the renovation business.
Selling, general and administrative expenses for the quarter ended September 30,
1998 were $7,067,000, compared to $3,348,000 for the same period last year. The
primary contributors to this increase were the acquisitions of Bekins and HWS
REAG, which incurred expenses of
12
approximately $1,300,000 and an investment in the infrastructure of the Company
to support the revenue growth, Additionally, selling, general and administrative
expenses include $268,000 and $197,000 of goodwill amortization for the three
months ended September 30, 1998 and 1997, respectively. As a result of greater
economies of scale from growth and acquisitions, selling, general and
administrative expenses as a percentage of net revenues declined to 10.1% in the
quarter ended September 30, 1998 from 20.3% in the same quarter a year ago.
Interest income increased from $148,000 to $518,000 in the quarter ended
September 30, 1998 due to the investment of the proceeds received from the
Company's public offering in September, 1997. Interest and other expense
increased in the three months ended September 30, 1998 as a result of the
acquisition of Bekins which carries long-term debt of approximately $3,700,000
and the recognition of the Company's proportionate share of the operating losses
of the ING Joint Venture.
The provision for income taxes for the three months ended September 30, 1998 was
$1,462,000 compared to $573,000 for the same period last year. The increase was
primarily due to the increase in income before income taxes.
As a result of the above, net income for the three month period ended September
30, 1998 increased to $2,298,000, compared to net income of $719,000 for the
same period last year.
LIQUIDITY AND CAPITAL RESOURCES
In March 1998, the Company obtained a new unsecured line of credit with Marine
Midland Bank, which provides the Company a maximum borrowing of $7,000,000.
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 September 30, 1998, there were $5,650,000 in outstanding
borrowings under the line of credit.
In July 1998, the Company obtained a new unsecured line of credit with
NationsBank, which provides the Company a maximum borrowing of $6,000,000.
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 September 30, 1998 there were $5,350,000 in outstanding
borrowings under the line of credit.
The Company's short-term and long-term liquidity requirements generally consist
of operating capital for its businesses and selling, general and administrative
expenses. The Company continues to satisfy its short-term and long-term
liquidity requirements with cash generated from operations, borrowings under
lines of credit and funds from a public offering of its Common Stock in
September 1997. Due to the nature of its resources allocated to personnel for
performance of its services, capital requirements are insignificant.
Net cash used by operating activities was $19,476,000 for the nine months ended
September 30, 1998, compared to net cash provided of $1,201,000 for the same
period last year. During the nine months ended September 30, 1998, the Company's
accounts receivable and costs and estimated earnings in excess of billings
increased due to revenue growth and acquisitions. This increase was partially
offset by an increase in accounts payable. The additional accounts receivable at
September 30, 1998 are expected to be collected in full within six months.
Net cash provided by investing activities for the nine months ended September
30, 1998 was $8,219,000, compared to a use of $690,000 for the nine months ended
September 30, 1997. The increase in cash provided is primarily the result of
maturing marketable securities which were used to
13
fund operating activities offset by the purchase of a subsidiary, HWS REAG, the
investment in the ING Joint Venture, which purchased the Clarion Quality Hotel
and the investment in mortgages receivable.
Net cash provided by financing activities for the nine months ended September
30, 1998 was $10,615,000 compared to net cash provided of $29,608,000 for the
same period last year. The primary financing source in the nine months ended
September 30, 1998 was the proceeds from borrowings on the Company's available
line of credit. For the nine months ended September 30, 1997, the Company's
public stock offering in September, 1997 generated net proceeds to the Company
of approximately $32,250,000.
As the Company grows and continues to explore opportunities for strategic
alliances and acquisition, investment in additional support systems, including
infrastructure and personnel will be required. The Company expects to increase
its costs and expenses 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 through strategic alliances and acquisitions.
The Company believes its present cash position, including increasing revenues
and cash on hand, amounts available under lines of credit and its ability to
obtain additional financing as necessary, will allow the Company to meet its
short-term operating needs for at least the next twelve months.
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 are 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 erroneous results by or at January 1, 2000. The Year 2000 issue affects
virtually all companies and organizations, including the Company.
The Company is currently in the process of developing 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 assessing the Year 2000 readiness
issues for its computer systems, business processes, facilities and equipment to
assure their continued functionality. Parker FIRST, the Company's new
proprietary software product, has been developed and maintained by Parker
Reorder and was designed to account for Year 2000 and beyond. The Company is
also assessing the readiness of external entities, such as subcontractors,
suppliers, vendors and customers that interface with the Company. In addition,
the Company is evaluating the requirements for a contingency plan to be designed
to lessen the impact of any Year 2000 problems which may ultimately be
uncovered.
The Company believes based upon its internal reviews and other factors, that
future external and internal costs to be incurred relating to the modification
of internal-use software for the Year 2000 will not have a material adverse
effect on the Company's results of operations or financial position. In
addition, the Company believes that its internal computer systems, facilities
and equipment will be upgraded for Year 2000. However, there is no assurance
that all of the upgrades will be completed in time or function as intended. In
such an event, the Company may experience significant disruptions, the cost of
which the Company is unable to estimate at this time. The Company, also, cannot
assure that its failure or failure of third parties to address adequately Year
2000 issues will not have a material effect on the Company.
14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
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.
Item 5. Other Information
In accordance with recent amendments to the proxy rules under the
Securities Exchange Act of 1934, as amended, the Company's shareholders are
notified that the deadline for providing the Company timely notice of any
shareholder proposal to be submitted outside of the Rule 14a-8 process for
consideration at the Company's 1999 Annual Meeting of Shareholders will be April
7, 1999. As to all such matters as to which the Company does not have notice on
or prior to April 7, 1999, discretionary authority shall be granted to the
designated persons in the Company's proxy for such Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of earnings per share
(Incorporated herein by reference to Note 9
to the Company's Consolidated Financial
Statements).
27 Financial Data Schedule
(b) Reports on Form 8-K
SEPTEMBER 16, 1998 THE FOLLOWING EVENT WAS REPORTED:
The Company filed a Form 8-K/A to amend the filing of Form 8-K on January 23,
1998, as amended on March 24, 1998 and April 16, 1998 to include certain revised
pro forma financial statements with respect to the Company's acquisition of
Bekins.
The following financial statements were filed with this report:
Hospitality Worldwide Services, Inc. Pro Forma Financial Information.
Balance Sheet as of September 30, 1997.
Income Statement for the nine months ended September 30, 1997.
Income Statement for the year ended December 31, 1996.
15
SIGNATURES
Pursuant to the requirements 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.
By: /S/ROBERT A. BERMAN
------------------------------------
ROBERT A. BERMAN
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
By: /S/HOWARD G. ANDERS
------------------------------------
HOWARD G. ANDERS
EXECUTIVE VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER,
PRINCIPAL ACCOUNTING OFFICER) AND
SECRETARY
Dated: November 12, 1998