1
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, 2000
[ ] 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
HOTELWORKS.COM, INC.
- --------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
New York 11-3096379
- ---------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 Alhambra Circle, Coral Gables, FL 33134
- -------------------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(305) 774-3200
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
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.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUER
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date: 14,812,867 as of November 6, 2000.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2000
(unaudited) and December 31, 1999......................................................3
Condensed Consolidated Statements of Operations for the three
months ended September 30, 2000 and 1999 (unaudited) and the nine
months ended September 30, 2000 and 1999 (unaudited)...................................4
Condensed Consolidated Statement of Stockholders' Equity
for the nine months ended September 30, 2000 (unaudited)...............................5
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 2000 and 1999 (unaudited)...................................6
Notes to Condensed Consolidated Financial Statements ...............................7-11
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations..............................................................................12-16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................................................16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..........................................................................17
Item 6. Exhibits and Reports on Form 8-K...........................................................17
Signatures...........................................................................................18
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.
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HOTELWORKS.COM, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
ASSETS
September 30, 2000 December 31, 1999
------------------ -----------------
Unaudited
Cash and cash equivalents $ 5,583 $ 4,560
Accounts receivable, less allowance for
doubtful accounts of $1,755 and $1,743 41,989 28,301
Costs and estimated earnings in excess of billings 85 276
Deposits with vendors 12,780 7,051
Income taxes receivable 511 3,907
Prepaid and other current assets 922 1,187
-------- --------
Total current assets 61,870 45,282
-------- --------
Property and equipment, net 5,460 5,195
Goodwill and other intangibles, net 10,738 11,038
Other assets 138 86
Non-current assets of discontinued
operations 180 180
-------- --------
Total other assets 16,516 16,499
-------- --------
$ 78,386 $ 61,781
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 2,662 $ 2,902
Accounts payable 28,565 21,248
Accrued and other liabilities 5,536 5,550
Billings in excess of costs and estimated earnings 1,775 142
Customer deposits 20,925 12,018
Loans payable 9,885 15,835
Net current liabilities of discontinued
operations 3,243 3,542
-------- --------
Total current liabilities 72,591 61,237
Long-term debt 6,878 68
-------- --------
Total liabilities $ 79,469 $ 61,305
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value, $25 stated
value, 5,000,000 shares authorized, none issued and outstanding -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
14,812,867 and 14,659,067 shares issued and outstanding 148 147
Additional paid-in capital 59,972 59,613
Retained earnings (deficit) (61,203) (59,284)
-------- --------
Total stockholders' equity (1,083) 476
-------- --------
$ 78,386 $ 61,781
======== ========
See notes to condensed consolidated financial statements.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Unaudited
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Revenues $ 64,254 $ 52,840 $ 158,014 $ 165,339
Cost of revenues 60,425 51,536 147,188 154,799
--------- --------- --------- ---------
Gross profit 3,829 1,304 10,826 10,540
Selling, general and administrative
expenses 3,717 7,579 11,855 17,589
Asset impairment charge -- 9,017 -- 9,017
--------- --------- --------- ---------
Income (loss) from operations 112 (15,292) (1,029) (16,066)
Other income (expense):
Interest income 49 76 427 618
Interest and other expenses (452) (281) (1,319) (1,224)
--------- --------- --------- ---------
Loss from continuing operations (291) (15,497) (1,921) (16,672)
before provision for income taxes
(Benefit) provision for income taxes (3) 755 (2) 285
--------- --------- --------- ---------
Loss from continuing operations (288) (16,252) (1,919) (16,957)
Discontinued operations:
Loss from discontinued operations -- (20,045) -- (19,355)
Loss on disposal of discontinued operations -- (11,060) -- (11,060)
--------- --------- --------- ---------
-- (31,105) -- (30,415)
--------- --------- --------- ---------
Net loss $ (288) $ (47,357) $ (1,919) $ (47,372)
========= ========= ========= =========
Basic earnings per common share:
Loss from continuing operations $ (0.02) $ (1.22) $ (0.13) $ (1.28)
Discontinued operations:
Loss from discontinued operations -- (1.50) -- (1.45)
Loss on disposal -- (0.83) -- (0.83)
--------- --------- --------- ---------
Net loss $ (0.02) $ (3.55) $ (0.13) $ (3.56)
========= ========= ========= =========
Diluted earnings per common share:
Loss from continuing operations $ (0.02) $ (1.22) $ (0.13) $ (1.28)
Discontinued operations:
Loss from discontinued operations -- (1.50) -- (1.45)
Loss on disposal -- (0.83) -- (0.83)
--------- --------- --------- ---------
Net loss $ (0.02) $ (3.55) $ (0.13) $ (3.56)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING,
BASIC AND DILUTED 14,813 13,353 14,801 13,332
========= ========= ========= =========
See notes to condensed consolidated financial statements.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(in thousands)
Unaudited
Preferred Stock Common Stock
-------------------- ---------------------- Addt'l Retained Total
Number of Stated Number of Par Paid in Earnings Stockholders'
Shares Value Shares Value Capital (Deficit) Equity
--------- ------ --------- -------- -------- --------- -------------
BALANCE, JANUARY 1, 2000 -- -- 14,659 $ 147 $ 59,613 $(59,284) $ 476
Exercise of stock options
and warrants -- -- 154 1 309 -- 310
Options issued for services -- -- -- -- 50 -- 50
Net loss -- -- -- -- -- (1,919) (1,919)
--- --- ------- -------- -------- -------- --------
BALANCE, SEPTEMBER 30, 2000 -- -- 14,813 $ 148 $ 59,972 $(61,203) $ (1,083)
=== === ======= ======== ======== ======== ========
See notes to condensed consolidated financial statements.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
Nine Months ended
September 30,
----------------------
2000 1999
-------- --------
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $ (1,919) $(47,372)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities of continuing operations:
Depreciation and amortization 1,100 1,092
Deferred income tax provision -- 4,535
Loss from discontinued operations -- 19,355
Loss on disposal of discontinued operations -- 11,060
Asset impairment charge -- 9,017
(Increase) decrease in current assets:
Accounts receivable, net (13,688) 4,281
Costs and estimated earnings in excess
of billings 191 91
Deposits with vendors (5,729) (6,508)
Income taxes receivable 3,396 (4,250)
Prepaid and other current assets 265 (74)
(Increase) decrease in other assets (52) 274
Increase (decrease) in current liabilities:
Accounts payable 7,317 (1,977)
Accrued and other liabilities (14) (669)
Billings in excess of costs and estimated
earnings 1,633 28
Customer deposits 8,907 4,648
Income taxes payable -- (176)
-------- --------
NET CASH PROVIDED BY USED IN OPERATING ACTIVITIES
OF CONTINUING OPERATIONS 1,407 (6,645)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES
OF DISCONTINUED OPERATIONS (299) (3,543)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities -- 8,500
Purchase of property and equipment (1,014) (599)
-------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES
OF CONTINUING OPERATIONS (1,014) 7,901
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES
OF DISCONTINUED OPERATIONS -- 2,750
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 7,102 --
Borrowings on loans payable -- 4,910
Repayment of loans payable (5,950) --
Repayment of long term debt (533) (492)
Payment of preferred stock dividends -- (270)
Proceeds from exercise of stock options 310 72
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS 929 4,220
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,023 4,683
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,560 2,179
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,583 $ 6,862
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 73 $ 162
Interest $ 1,281 $ 1,017
NON-CASH INVESTING & FINANCING ACTIVITIES:
Preferred stock dividends accrued $ -- $ 135
See notes to condensed consolidated financial statements.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: CONSOLIDATION
The condensed consolidated financial statements of Hotelworks.com, Inc. and
subsidiaries, formerly known as Hospitality Worldwide Services, Inc. (the
"Company") and related notes thereto as of September 30, 2000 and for the three
months and nine months ended September 30, 2000 and 1999 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 condensed consolidated balance sheet
information for December 31, 1999 was derived from the audited consolidated
financial statements included in the Company's Form 10-K. These interim
condensed 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: DISCONTINUED OPERATIONS
In September, 1999, the Company announced a strategic initiative to reposition
the core supply and distribution businesses into a business-to-business
e-commerce company, and to divest itself of its renovation business and real
estate investment and asset management business. In December, 1998, the Company
decided to discontinue its hotel development business. As a result, for 1999,
the Company has reflected the operating results associated with the divested
businesses, as well as the estimated losses on disposal, as discontinued
operations on the consolidated statements of operations. Results of these
operations, were as follows (in thousands):
Three Months ended Nine Months ended
September 30, 1999 September 30, 1999
------------------ ------------------
Renovation Business:
Revenues $ 1,751 $ 23,594
Loss from operations, net of taxes (19,379) (18,148)
Loss on disposal, net of taxes (5,497) (5,497)
Real Estate Investment and Asset Management Business:
Revenues -- 78
Loss from operations, net of taxes (666) (1,207)
Loss on disposal, net of taxes (4,410) (4,410)
Hotel Development Business:
Revenues -- --
Loss from operations, net of taxes -- --
Loss on disposal, net of taxes (1,153) (1,153)
Total Discontinued Operations:
Revenues 1,751 23,672
Loss from operations, net of taxes (20,045) (19,355)
Loss on disposal, net of taxes (11,060) (11,060)
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The remaining assets and liabilities of the discontinued operations as of
September 30, 2000 and December 31, 1999, as presented in the accompanying
condensed consolidated balance sheets, are as follows (in thousands):
Real Estate
Investment & Asset Hotel
September 30, 2000: Renovation Management Development Total
---------- ------------------ ----------- --------
Accounts receivable $ 22,362 $ -- $ -- $ 22,362
Allowance for doubtful accounts (20,404) -- -- (20,404)
Accounts payable (2,662) -- -- (2,662)
Accrued and other liabilities (1,539) (1,000) -- (2,539)
-------- -------- -------- --------
Net current liabilities $ (2,243) $ (1,000) $ -- $ (3,243)
-------- -------- -------- --------
Property and equipment, net $ 43 $ -- $ 27 $ 70
Other assets 78 -- 32 110
-------- -------- -------- --------
Net non-current assets $ 121 $ -- $ 59 $ 180
======== ======== ======== ========
Real Estate
Investment & Asset Hotel
December 31, 1999: Renovation Management Development Total
---------- ------------------ ----------- --------
Accounts receivable $ 23,536 $ -- $ -- $ 23,536
Allowance for doubtful accounts (20,904) -- -- (20,904)
Prepaids and other current
assets, net 753 -- -- 753
Accounts payable (3,428) -- -- (3,428)
Accrued and other liabilities (2,468) (1,000) (31) (3,499)
-------- -------- -------- --------
Net current liabilities $ (2,511) $ (1,000) $ (31) $ (3,542)
-------- -------- -------- --------
Property and equipment, net $ 74 $ -- $ 34 $ 108
Other assets 38 -- 34 72
-------- -------- -------- --------
Net non-current assets $ 112 $ -- $ 68 $ 180
======== ======== ======== ========
Net current liabilities of discontinued operations at September 30, 2000 and
December 31, 1999, include renovation accounts receivable and costs and
estimated earnings in excess of billings which include disputed change orders
and estimated net claims, which involve negotiations with customers and in some
cases has resulted or may result in additional litigation. The Company believes
that it has established contractual or legal bases for pursuing recovery of
disputed change orders and claims and it is management's intention to pursue
these matters and litigate, if necessary, until a decision or settlement is
reached. Disputed change orders and claims involve the use of estimates and it
is reasonably possible that revisions to the estimated recoverable amounts could
be made within the next year. The settlement of these amounts depends on
individual circumstances and negotiations with the counter party, accordingly,
the timing of the collection will vary and may extend beyond one year.
The Company ceased the remaining renovation operations in 2000. However, the
resolution date as to certain disputed receivables with customers related to
specific renovation projects which have been substantially completed is
uncertain. The Company disposed of its real estate investments, and ceased the
real estate asset management and advisory operations in 2000. The Company ceased
its hotel development business in April 1999.
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In May 2000, the Company entered into an agreement to restructure its
involvement in the ING Joint Venture. As a result of the restructuring, the
Company exchanged mutual releases with ING Realty Partners, its joint venture
partner, which released the Company from future obligations to the joint
venture. The principal asset of the ING Joint Venture is its ownership of the
Radisson O'Hare (former Clarion Quality) Hotel in Chicago, Illinois. In 1999,
the Company wrote-off its investment in the ING Joint Venture, and as such this
agreement did not have a material impact on the current period financial
statements.
In October, 2000, the Company entered into an agreement to restructure its
involvement in the Apollo Joint Venture. As a result of the restructuring, the
Company exchanged mutual releases with Apollo Real Estate Advisors II, L.P., its
joint venture partner, which released the Company from future obligations to the
joint venture. The principal assets of the Apollo Joint Venture are its
ownership of the Warwick Hotel in Philadelphia, Pennsylvania and the Historic
Inn in Richmond, Virginia. In conjunction with this agreement, the Company
issued 100,000 unregistered shares of its Common Stock to its former joint
venture partner, warrants formerly issued to the joint venture partner were
returned to the Company and cancelled, and the Company received payment on its
remaining receivables with the properties. In 1999, the Company wrote-off its
investment in the Apollo Joint Venture, and as such, this agreement did not have
a material impact on the current period financial statements.
NOTE 3: BANK REFINANCING
In September, 2000, the Company's wholly-owned subsidiary, Bekins Distribution
Services, Inc. ("Bekins") executed an Amended and Restated Loan Agreement with
Bank of America, N.A. whereby the proceeds were primarily used to pay-off the
Company's defaulted unsecured line of credit. The new facility consists of a
three-year overadvance term loan in the amount of $5,300,000 and a three-year
revolving note in the amount of $1,500,000. Both facilities are secured by the
assets and stock of Bekins, and bear interest at the bank's prime rate for the
first eighteen months, subject to quarterly rate increases thereafter based on
outstanding balances. In conjunction with this Agreement, Bank of America, N.A.
dismissed its legal action against the Company. Additionally, the Company's term
loan and mortgage note payable with Bank of America, N.A., which were in
default, have been restructured to eliminate their default status.
NOTE 4: NEW ACCOUNTING PRONOUNCEMENT
In March, 2000 the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), Accounting for Certain Transactions
Involving Stock Compensation. Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock-Based Compensation. Interpretation 44 is effective
July 1, 2000, with certain provisions that are effective retroactively to
December 15, 1998 and January 12, 2000. Interpretation 44 is not expected to
have a material impact on the Company's consolidated financial statements.
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NOTE 5: 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 purchasing, reorder and logistics services. The
Company's renovation business and real estate investment and asset management
business have been classified as discontinued operations (Note 2) and are no
longer reported as part of segment reporting. Segment data is as follows (in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Sales to Customers:
Purchasing $ 42,166 $ 129,665 $ 130,280 $ 55,232
Reorder 1,664 4,230 9,211 10,482
Logistics 7,358 6,444 19,138 24,577
Corporate -- -- -- --
--------- --------- --------- ---------
$ 64,254 $ 52,840 $ 158,014 $ 165,339
Inter-segment Sales:
Purchasing $ -- $ -- -- $ --
Reorder -- -- -- --
Logistics 2,471 1,960 4,200 4,286
Corporate -- -- -- --
--------- --------- --------- ---------
$ 2,471 $ 1,960 $ 4,200 $ 4,286
Income (loss) from Operations:
Purchasing $ 504 $ (2,332) $ 1,573 $ (753)
Reorder (526) (9,870) (1,612) (11,317)
Logistics 694 85 895 1,365
Corporate (560) (3,175) (1,885) (5,361)
--------- --------- --------- ---------
$ 112 $ (15,292) $ (1,029) $ (16,066)
The Company's revenues and assets principally relate to the United States
operations, with immaterial amounts related to foreign operations.
For the three months ended September 30, 2000, one customer, a lodging and hotel
development company, accounted for 20% of the Company's revenues. For the nine
months ended September 30, 2000 and for the three and nine months ended
September 30, 1999, no customers accounted for over 10% of the Company's
revenues.
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NOTE 6: EARNINGS PER SHARE
The following table reconciles the components of basic and diluted earnings per
common share for income from continuing operations for the three and nine months
ended September 30, 2000 and 1999 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- -------- -------- --------
Numerator:
Loss from
continuing operations $ (288) $(16,252) $ (1,919) $(16,957)
Preferred stock dividends -- (45) -- (135)
-------- -------- -------- --------
Loss available
to common stockholders
from continuing
operations - Basic $ (288) (16,297) (1,919) (17,092)
Effect of dilutive securities
Preferred stock dividends -- 45 -- 135
-------- -------- -------- --------
Loss available to common
stockholders from continuing
operations - Diluted $ (288) $(16,252) $ (1,919) $(16,957)
======== ======== ======== ========
Denominator:
Weighted average common
shares outstanding - Basic 14,813 13,353 14,801 13,332
Effect of dilutive securities
Stock-based compensation
plans (a) (a) (a) (a)
Convertible preferred stock -- (a) -- (a)
-------- -------- -------- --------
Weighted average common and
common equivalent shares
outstanding - Diluted 14,813 13,353 14,801 13,332
======== ======== ======== ========
Basic earnings per common share from continued
operations $ (0.02) $ (1.22) $ (0.13) $ (1.28)
======== ======== ======== ========
Diluted earnings per common share from continuing
operations $ (0.02) $ (1.22) $ (0.13) $ (1.28)
======== ======== ======== ========
(a) antidilutive.
NOTE 7: WEB SITE DEVELOPMENT
The Emerging Issues Task Force ("EITF") recently issued EITF Issue No. 00-2,
Accounting for Web Site Development Costs, in which the Task Force specified the
types of costs that should be capitalized and those that should be expensed
relating to web site development costs. The EITF is effective for web site
development costs incurred for fiscal quarters beginning after June 30, 2000,
including costs incurred for projects in process as of the beginning of the
quarter in which the new rules are adopted, with earlier application encouraged.
In connection with the early adoption of this EITF, the Company capitalized
$217,045 of web site development costs for the period ended September 30, 2000.
The Company will amortize the web site development costs over 3 years, which
will commence when the web site begins full operation.
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ITEM 2. HOTELWORKS.COM, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company believes that historical comparisons of revenue levels, gross profit
levels and gross profit percentages may not be meaningful on a period to period
basis because revenue recognition methodologies vary across the Company's
businesses. The Company recognizes revenues and the associated earnings of fixed
fee service contracts under the percentage of completion method. Under this
method, the Company recognizes earnings relating to the 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. In addition, in the purchasing and reorder business, the Company
performs its 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 costs of contracts also include the cost of the associated
merchandise purchased for the customer, which are recognized when the
merchandise is shipped directly from the vendor to the customer.
THREE MONTHS ENDED SEPTEMBER 30, 2000 vs. THREE MONTHS ENDED SEPTEMBER 30, 1999
Revenues for the three months ended September 30, 2000 increased to $64,254,000
as compared to $52,840,000 for the three months ended September 30, 1999. The
increase was concentrated in the purchasing business where several large
contracts were shipped in the current quarter.
Cost of revenues for the quarter ended September 30, 2000 increased to
$60,425,000 as compared to $51,536,000 for the second quarter of 1999 primarily
due to the higher revenues.
Gross profit for the third quarter of 2000 was $3,829,000 or 6.0% of revenues,
compared to $1,304,000 or 2.5% of revenues for the same period last year. The
increase in gross profit percentage is mostly due to the purchasing and
logistics businesses, where the sales mix tended toward higher margin contracts
in the current quarter.
Selling, general and administrative ("S,G&A") expenses decreased from $7,579,000
in the three months ended September 30, 1999 to $3,717,000 in the current year's
quarter. The decrease was primarily the result of the consolidation of offices
accomplished in 1999 and the related reduction in administrative and corporate
headcount. Further, in the prior year quarter, the Company increased their
reserves against certain receivables. S,G&A expenses include $100,000 and
$99,000 of goodwill amortization for the quarters ended September 30, 2000 and
1999, respectively. As a percent of revenue, S,G&A expenses declined from 14.3%
in last year's third quarter to 5.8% in the current quarter.
An asset impairment charge of $9,017,000 was recorded in the quarter ended
September 30, 1999 as the Company made a determination that the Parker Reorder
proprietary software product, Parker FIRST, would not provide future long term
benefits to the Company based on the repositioning of the Company's core
businesses. Additionally, the Company determined that the goodwill and other
intangibles associated with the acquisition of Parker Reorder Online in 1997 was
closely related to the Parker FIRST system and was considered an impaired asset,
as well. Together, these assets were written-off at their net book value of
$9,017,000 at September 30, 1999.
Income from operations for the quarter ended September 30, 2000 was $112,000 as
compared to a loss from operations of $15,292,000 for the quarter ended
September 30, 1999. The improvement was primarily due to the improvement in
gross profit, the drop in S,G&A expenses and the asset impairment charge
recorded in 1999.
12
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Interest income dropped in the current quarter due to a drop in the level of
invested funds. Interest and other expenses increased primarily as a result of a
rise in interest rates on the Company's variable rate debt.
Due to the losses sustained in the three months ended September 30, 2000 and the
lack of any additional carryback opportunity, no significant provision or
benefit for income taxes was recorded. The amount recorded as a provision in the
third quarter of 1999 is comprised of a current benefit of a carryback claim
based on estimated taxable losses for 1999, net of estimated alternative minimum
taxes payable, offset by a valuation allowance against previously recorded
deferred tax assets and the benefit recorded in prior quarters.
As a result of the above, the loss from continuing operations decreased from a
loss of $16,252,000 in the three months ended September 30, 1999 to a loss of
$288,000 in the current three month period.
The discontinued operations reflect the operating results associated with the
Company's renovation, real estate investment and asset management, and hotel
development businesses, as well as their estimated losses on disposal. As part
of a strategic initiative announced in September 1999 to reposition the core
supply and distribution businesses, the Company discontinued these non-core
businesses.
The operating results associated with the discontinued operations were a loss of
$20,045,000 for the three months ended September 30, 1999. The loss includes
additional provisions on contract receivables relating to the renovation
business of approximately $17.0 million for substantially complete renovation
projects which have not yet been closed out with customers, and the write-off of
certain real estate investments and receivables of approximately $500,000
relating to the real estate investment and asset management business.
The loss on disposal of discontinued operations for the three months ended
September 30, 1999 was $11,060,000. The loss included the write-off of goodwill
of approximately $5.0 million and anticipated operating losses during the
phase-out period of $490,000 relating to the renovation business; the write-off
of goodwill of $450,000 and anticipated write-downs and reserves in connection
with the disposal of the real estate investments of approximately $3.9 million
relating to the real estate investment and asset management business; and
additional write-downs of approximately $1.1 million on certain real estate
development projects relating to the hotel development business.
NINE MONTHS ENDED SEPTEMBER 30, 2000 vs. NINE MONTHS ENDED SEPTEMBER 30, 1999
Revenues for the nine months ended September 30, 2000 totaled $158,014,000
compared to $165,339,000 for the nine months ended September 30, 1999. The
revenue decrease was concentrated in the logistics business where significant
revenues were recorded in the first nine months of 1999 on a large one-time
contract that did not repeat in 2000.
Cost of revenues declined in the first nine months of 2000 to $147,188,000
compared to $154,799,000 for the comparable period last year due primarily to
lower revenues.
Gross profit for the nine months ended September 30, 2000 was $10,826,000 or
6.9% of revenues, compared to $10,540,000 or 6.4% of revenues for the same
period last year.
Selling, general and administrative ("S,G&A") expenses decreased from
$17,589,000 in the nine months ended September 30, 1999 to $11,855,000 in the
current year's first nine months. The decrease was primarily the result of the
consolidation of offices accomplished in 1999 and the related reduction in
administrative and corporate headcount. Further, in the nine months ended
September 30, 1999, the Company increased its reserves against certain
receivables. S,G&A expenses include $300,000 and $470,000 of goodwill
amortization for the nine months periods ending Sept 30, 2000 and 1999,
respectively. As a percent of revenue, S,G&A expenses have decreased from 10.6%
in the first nine months last year to 7.5% in the first nine months of the
current year.
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An asset impairment charge of $9,017,000 was recorded in the nine months ended
September 30, 1999 as the Company made a determination that the Parker Reorder
proprietary software product, Parker FIRST, would not provide future long term
benefits to the Company based on the repositioning of the Company's core
businesses. Additionally, the Company determined that the goodwill and other
intangibles associated with the acquisition of Parker Reorder Online in 1997 was
closely related to the Parker FIRST system and was considered an impaired asset,
as well. Together, these assets were written-off at their net book value of
$9,017,000 at September 30, 1999.
The loss from operations for the nine months ended September 30, 2000 was
$1,029,000 compared to a loss of $16,066,000 for the nine months ended September
30, 1999. The improvement was primarily due to the drop in S,G&A expenses
discussed earlier and the asset impairment charge recorded in 1999.
Interest income decreased in the current year due to a drop in invested funds.
Interest and other expenses were relatively stable between the periods.
Due to the losses sustained in the nine months ended Sept 30, 2000 and the lack
of any additional carryback opportunity, no significant provision or benefit for
income taxes was recorded in 2000. The amount recorded as a provision in the
nine months ended September 30, 1999 is comprised of a current benefit of a
carryback claim for income taxes based on estimated taxable losses for 1999, net
of estimated alternative minimum taxes payable, offset by a valuation allowance
against previously recorded deferred tax assets.
As a result of the above factors, the loss from continuing operations decreased
from $16,957,000 in the nine months ended September 30, 1999 to a loss of
$1,919,000 in the nine months ended September 30, 2000.
The discontinued operations reflect the operating results associated with the
Company's renovation, real estate investment and asset management, and hotel
development businesses, as well as their estimated losses on disposal. As part
of a strategic initiative announced in September, 1999 to reposition the core
supply and distribution businesses, the Company discontinued these non-core
businesses.
The operating results associated with the discontinued operations were a loss of
$19,355,000 for the nine months ended September 30, 1999. The loss includes
additional provisions on contract receivables relating to the renovation
business of approximately $17.0 million for substantially complete renovation
projects which have not yet been closed out with customers, and the write-off of
certain real estate investments and receivables of approximately $500,000
relating to the real estate investment and asset management business.
The loss on disposal of discontinued operations for the nine months ended
September 30, 1999 was $11,060,000. The loss includes write-off of goodwill of
approximately $5.0 million and anticipated operating losses during the phase-out
period of $490,000 relating to the renovation business; the write-off of
goodwill of $450,000 and anticipated write-downs and reserves in connection with
the disposal of the real estate investments of approximately $3.9 million
relating to the real estate investment and asset management business; and
additional write-downs of approximately $1.1 million on certain real estate
development projects relating to the hotel development business.
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HOTELWORKS.COM, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's condensed consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
liquidity of the Company was severely affected during 1999 by significant losses
from continuing operations and discontinued operations. In addition, the
Company's remaining line of credit facility is in default and the Company
projects negative cash flows from operations in 2000. These circumstances raise
substantial doubt about the Company's ability to continue as a going concern.
In September, 2000, the Company's wholly-owned subsidiary, Bekins Distribution
Services, Inc. ("Bekins") executed an Amended and Restated Loan Agreement with
Bank of America, N.A. whereby the proceeds were primarily used to pay-off the
Company's defaulted unsecured line of credit. As part of this Agreement, Bekins
also restructured its term loan and mortgage note payable with Bank of America,
N.A. to eliminate their default status. The new facilities replacing the
defaulted line of credit have a three year maturity with quarterly repayments of
$75,000 commencing after payoff of the term loan and mortgage note, with a
balloon payment due in September, 2003. The new facilities are secured by the
assets and stock of Bekins and bear interest at the bank's prime rate for the
first eighteen months, subject to quarterly rate increases thereafter based on
outstanding balances. The term loan and mortgage have a maturity of April 1,
2001, when the remaining principal balances are due. The Company anticipates
selling a warehouse facility, the proceeds of which will be used to repay the
term loan and mortgage note payable. The Company's unsecured line of credit
facility with HSBC Bank is currently in default. Accordingly, the HSBC debt
facility is currently due and payable. The Company is also involved in active,
on-going negotiations with HSBC Bank with respect to a refinancing of the
facility or an extension of the expiration date. There is no assurance that the
Company will be able to successfully negotiate this facility at terms favorable
to the Company or that HSBC will not demand payment.
The Company's 2000 budget projects a net cash flow deficit from operations of
approximately $1.4 million and cash requirements related to the development of
its Internet web-based reorder system of approximately $1.9 million. The net
cash flow deficit from operations for 2000 primarily relates to continued losses
of the Parker Reorder business and corporate expenses. Management believes that
given its working capital position (exclusive of short-term debt obligations) as
of September 30, 2000 of $1.8 million, including anticipated tax refunds of
approximately $500,000 relating to the Company's ability to carryback current
year tax losses to prior years for state and local tax purposes, its review of
the on-going businesses' gross margins and related expenses, and its ability to
defer certain capital expenditures and other current payment obligations, if
necessary, that sufficient funds will be available to cover any operating cash
flow deficits over the next twelve months, but will not be sufficient to repay
the debt obligation of the Company which is currently in default and under
renegotiation. Accordingly, there is no assurance that the Company will have
sufficient funds available to it to satisfy all of its obligations over the next
twelve months.
Net cash provided by operating activities of continuing operations was
$1,407,000 for the nine months ended September 30, 2000 compared to net cash
used of $6,645,000 for the nine months ended September 30, 1999. In the current
period, operating cash was primarily provided by increases in customer deposits
and accounts payable and the receipt of a tax refund totalling $19,620,000
exceeding cash used primarily by increases in accounts receivable and vendor
deposits totalling $19,417,000.
Net cash used by operating activities of discontinued operations was $299,000
for the first nine months of 2000 as compared to net cash used of $3,543,000 for
the first nine months of 1999.
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Net cash used in investing activities of continuing operations for the nine
months ended September 30, 2000 was $1,014,000 attributable to purchases of
property and equipment as compared to net cash provided of $7,901,000 for the
nine months ended September 30, 1999. The primary source of investing cash for
the 1999 period was the sale of marketable securities.
For discontinued operations, net cash provided by investing activities for the
current nine months was $0, compared to net cash provided of $2,750,000 for the
first nine months of 1999. In 1999, the Company received a repayment of a
mortgage receivable.
Net cash provided by financing activities of continuing operations was $929,000
for the nine months ended September 30, 2000 due primarily to additional
borrowings in conjunction with the Bank of America refinancing, as compared to
net cash provided of $4,220,000 for the nine months ended September 30, 1999.
The primary financing source for 1999 was borrowings under the Company's lines
of credit.
The American Stock Exchange ("Exchange") has advised the Company that it has
fallen below the threshold requirements for listing on the Exchange.
Representatives of the Company and the Exchange have met to discuss whether the
Company will be able to satisfy those requirements or obtain a waiver of the
requirements that it does not satisfy. The Exchange may then commence
proceedings to delist the Company's securities. The Company will have an
opportunity to oppose any such delisting through administrative procedures. If
the Company's securities are delisted, its ability to raise capital and the
liquidity of its securities would be adversely affected.
New Accounting Pronouncement
In March, 2000 the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), Accounting for Certain Transactions
Involving Stock Compensation. Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock-Based Compensation. Interpretation 44 is effective
July 1, 2000, with certain provisions that are effective retroactively to
December 15, 1998 and January 12, 2000. Interpretation 44 is not expected to
have an impact on the Company's consolidated financial statements.
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 resulted 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 have
failed or created erroneous results before, on or after January 1, 2000. The
Year 2000 issue affected virtually all companies and organizations, including
the Company.
During 1999, the Company developed and implemented a plan to assure Year 2000
readiness to avoid significant Year 2000 failures. The Company completed its
implementation and testing of its plan in November, 1999 and to-date in 2000 has
experienced no significant Year 2000 failures, either in its own computer
operations or those of its major customers or vendors. The Company also does not
anticipate any material Year 2000 failures going forward.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although the Company does maintain offices outside the United States and does
conduct certain transactions in foreign currencies, the Company does not believe
that it has material exposure to risks associated with foreign currency
fluctuations related to its operations given the terms of its contracts with
customers. The Company does not use derivative financial instruments in its
operations. The Company does have exposure to market risks associated with
changes in interest rates given that the Company does maintain a line of credit
and long-term debt facilities which have variable interest rates.
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On April 19, 2000, Bank of America, N.A. filed an action against the Company in
the Circuit Court of the County of St. Louis, State of Missouri, seeking to
recover the unpaid principal of a promissory note, together with interest
thereon and related costs, in the approximate aggregate amount of $6,000,000. In
conjunction with the refinancing agreement signed in September, 2000 (see Note
3), Bank of America, N.A. dismissed its legal action against the Company.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of earnings per share (Incorporated herein by
reference to Note 6 to the Company's Consolidated Financial
Statements).
10.28 Second Amended and Restated Loan Agreement between Bank of
America, N.A. and Bekins Distribution Services Co., Inc. dated
September 1, 2000.
10.29 Overadvance Term Note by Bekins Distribution Services Co.,
Inc. in favor of Bank of America, N.A. dated September 1,
2000.
10.30 Revolving Note by Bekins Distribution Services Co., Inc. in
favor of Bank of America, N.A. dated September 1, 2000.
27 Financial Data Schedule.
(b) Reports on Form 8-K
Form 8-K dated September 1, 2000, filed with the Commission on
September 8, 2000 reporting Item 5, Other Events and Item 7, Financial
Statements, Proforma Financial Information and Exhibits.
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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.
HOTELWORKS.COM, INC.
By: /s/ DOUGLAS A. PARKER
-----------------------------------
DOUGLAS A. PARKER
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
By: /s/ JOHN F. WILKENS
----------------------------------
JOHN F. WILKENS
VICE PRESIDENT - TREASURER
(PRINCIPAL FINANCIAL OFFICER, PRINCIPAL
ACCOUNTING OFFICER)
Dated: November 10, 2000
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