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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
[X] Annual Report under Section 13 or 15 (d) of the Securities Exchange Act of
1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
[ ] 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
HOTELWORKS.COM, 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.)
201 ALHAMBRA CIRCLE, CORAL GABLES, FL 33134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 305-774-3200
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.
[ ] YES [X] 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 June
18, 2001 (based upon the last sale price for the Common Stock on the American
Stock Exchange) was approximately $4,924,727.
The number of shares of Common Stock outstanding as of June 18, 2001
was 15,112,867.
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EXPLANATORY NOTE
This Amendment No. 1 to the Form 10-K for the fiscal year ended
December 31, 2000 of Hotelworks.com, Inc. (the "Company") is being filed to
address certain requests from the staff of the Securities and Exchange
Commission.
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. Such statements, including
without limitation, those relating to our future business, prospects, revenues,
working capital, liquidity, capital needs, interest costs and income, wherever
they may appear in this document or in other statements attributable to us,
involve estimates, assumptions and uncertainties which could cause actual
results to differ materially from those expressed in the forward-looking
statements. Such uncertainties include, among others, the following factors:
GOING CONCERN
The Company's 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 in 1999 and 2000 by significant
losses from continuing operations and discontinued operations, which has
resulted in a significant deterioration of the stockholders' equity of the
Company from $58.4 million at December 31, 1998 to $0.5 million at December 31,
1999 to a capital deficit of $1.8 million at December 31, 2000. In addition, the
Company has a working capital deficiency and significant litigation. These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern. Although management has taken measures intended to positively
impact profit and cash flow, there can be no assurance that the measures taken
will allow the Company to achieve profitability or maintain positive cash flows.
RISKS OF FINANCIAL LEVERAGE
Our long-term debt, including current portion, was approximately $18.0
million as of December 31, 2000, which is significant in relation to our total
capitalization. While we believe that we will be able to service our debt, there
can be no assurance to that effect. The degree to which we are leveraged could
affect our ability to service our indebtedness, make capital expenditures,
respond to market conditions and extraordinary capital needs, take advantage of
certain business opportunities or obtain additional financing. Unexpected
declines in our future business, or the inability to obtain additional financing
on terms acceptable to us, if required, could impair our ability to meet our
debt service obligations or fund acquisitions and therefore, could have material
adverse effect on our business and future prospects.
LIMITATIONS ON CAPITAL RAISING FUNCTIONS;STOCK LIQUIDITY ISSUES
The Company has been notified that it has fallen below the continued
listing requirements of the American Stock Exchange ("AMEX"). Also, on April 20,
2001, the AMEX halted trading of the Company's common stock because the Company
had failed to file its Form 10-K for the period ended December 31, 2000.
Until the trading halt on the Company's common stock is lifted, there
is no public liquidity in the Company's common stock. As a result of falling
below the listing requirements, the AMEX may move to delist the common stock and
if the common stock is delisted, the Company's ability to raise capital and its
liquidity would be adversely affected. If the Company's common stock is
delisted, the Company will likely apply to have its stock traded
over-the-counter, more commonly known as the OTC market. OTC transactions
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involve risks in addition to those associated with transactions in securities
traded on an exchange. Many OTC stocks trade less frequently and in smaller
volume than exchange-listed stocks and the values of these stocks may be more
volatile than exchange-listed stocks. If the Company's stock is traded in the
OTC market and a market maker sponsors the Company, the Company may have the
price of its stock electronically displayed on the OTC Bulletin Board, or OTCBB.
However, if the Company lacks sufficient market maker support for display on the
OTCBB, it must have its price published by the National Quotations Bureau LLP in
a paper publication known as the "Pink Sheets". The marketability of the
Company's stock will be even more limited if its price must be published on the
"Pink Sheets".
In addition, the financial statements included in this Form 10-K do not
meet all of the requirements under the rules and regulations of the Securities
and Exchange Act of 1934, as amended, because our predecessor auditor has
declined to accept the engagement to reissue their opinion on our 1998 and 1999
financial statements included in this Form 10-K because of an ongoing fee and
service dispute with our predecessor auditor. As a result, we are currently
restricted from filing registration statements with the Securities and Exchange
Commission, which adversely affects our liquidity and our ability to raise
capital. Additionally, there is no assurance that if our predecessor auditor
were to reissue their opinion on our 1998 and 1999 financial statements, it
would be issued in its original form and without qualification.
SUPPLIER RELATIONSHIPS
The Company's purchasing arrangements with suppliers of
hospitality-related products are by purchase order and terminable at will by
either party. There can be no assurance that any of the Company's supplier
relationships will not be terminated in the future. While the Company has been
able to obtain products on a timely basis in the past, the Company is subject to
the risk that it will be unable to purchase sufficient products to meet its
clients' requirements. Any shortages or delays in obtaining these products could
have a material adverse effect on the Company.
RISKS RELATED TO INTANGIBLE ASSETS
As of December 31, 2000, intangible assets totaled approximately 16% of
our total assets. For the year ended December 31, 1999, the Company recorded an
asset impairment charge of approximately $9.3 million. At December 31, 2000, we
did not consider any of the unamortized balance of intangible assets to be
impaired. Any future determination, based on reevaluation of the underlying
facts and circumstances, that a significant impairment has occurred would
require the write-off of the impaired portion of un-amortized intangible assets,
which could have a material effect on our business and results of operations.
RISK ASSOCIATED WITH COLLECTION OF ACCOUNTS RECEIVABLE
The Company carries accounts receivable at the amount it deems to be
collectible. Accordingly, the Company provides allowances for accounts it deems
to be uncollectible based on management's best estimates. Recoveries are
recognized in the period they are received. The ultimate amount of accounts
receivable that becomes uncollectible could differ from those estimated, which
could have a material adverse effect on the Company.
STOCKHOLDER RIGHTS PLAN
The Company's Board of Directors adopted a Stockholder Rights Plan.
These rights may have the effect of discouraging a third party from making an
acquisition proposal for the Company and may thereby inhibit a change in
control. For example, such provisions may deter tender offers for shares of
common stock, which be attractive to shareholders, or deter purchases of large
blocks of common stock, thereby limiting the opportunity for shareholders to
receive a premium for their shares of common stock or exchangeable shares over
the then-prevailing market prices.
POSSIBLE ANTI-TAKEOVER EFFECTS OF PREFERRED STOCK; POTENTIAL DILUTION OF COMMON
STOCK
The Company's Certificate of Incorporation authorizes the Board of
Directors to issue up to 3,000,000 shares of preferred stock, par value $ .01
per share (the "Preferred Stock"). The Preferred Stock may be issued in one or
more series, the terms of which may be determined at the time of issuances by
the Board of Directors, without further action by shareholders. As of the date
of this Form 10-K, 1.0 million shares of 8% convertible preferred stock (the
"HSBC Preferred") are outstanding, which shares were issued in connection with
the restructuring of a loan with HSBC Bank. Although the Company currently has
no plans for the issuance of additional shares of Preferred Stock, there can be
no assurance that the Company will not do so in the future. The ability of the
Board of Directors to issue Preferred Stock could have the effect of delaying,
deferring or preventing a change of control of the Company or the removal of
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existing management and, as a result, could prevent the shareholders of the
Company from being paid a premium over the market value for their shares of
Common Stock.
The risk factors described above could cause actual results or outcomes
to differ materially from those expressed in any forward-looking statements made
by or on behalf of us. Any forward-looking statement speaks only as of the date
on which such statement is made, and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrences of
unanticipated events. New factors emerge from time to time and it is not
possible for us to predict all of such factors. Further, we cannot assess the
impact of each such factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
PART I
ITEM 6. SELECTED FINANCIAL DATA (a)
In September 1999, Hotelworks.com, Inc. announced a strategic
initiative to reposition the core purchasing, reorder and logistics 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. Given the change in strategic direction, the operating results of the
purchasing, reorder and logistics businesses are presented as continuing
operations and the operating results associated with the renovation, real estate
investment and asset management, and hotel development businesses, as well as
the estimated losses on disposal, are presented as discontinued operations in
the consolidated statements of operations for all years presented.
The following table presents selected financial data for the Company
for each of the five years in the period ended December 31, 2000. The
information in the table has been restated to reflect such amounts related
solely to the continuing operations of the Company, comprising the purchasing
and reorder businesses acquired in January 1997 and the logistics business
acquired in January 1998. All amounts are in thousands except per share amounts.
2000 1999 1998 1997 1996
---- ----- ----- ---- ----
(UNAUDITED) (UNAUDITED)
STATEMENT OF OPERATIONS DATA:
Operating revenues (b) $ 216,356 $ 223,425 $176,745 (d) $66,577 (c) --
Loss from continuing operations (3,876) (18,245)(e) (2,069) (1,802) (183)
Basic loss from continuing operations (0.26) (1.35) (.19) (.24) (.03)
per common share
Diluted loss from continuing (0.26) (1.35) (.19) (.24) (.03)
operations per common share
BALANCE SHEET DATA:
Total assets 66,503 61,781 122,355 79,594 9,523
Long-term debt 10,256 68 2,965 -- --
- ------------
(a) No cash dividends were declared during the five-year period presented
above.
(b) Certain amounts have been reclassified for the effects of Emerging Issues
Task Force Issue 00-10, "Accounting for Shipping and Handling Fees and
Costs".
(c) Includes revenues of LPC and Parker Reorder from the date of acquisition,
January, 1997.
(d) Includes revenues of Bekins from the date of acquisition, January, 1998.
(e) See ITEM 7, RESULTS OF OPERATIONS: 1999 COMPARED TO 1998 for further
description of this amount.
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ITEM 8. FINANCIAL STATEMENTS
See Index to Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 21, 2000, Arthur Andersen LLP ("Andersen") resigned as the
Company's independent accountants. Andersen's accountants' report on the
consolidated financial statements of the Company for the year ended December 31,
1999 did not contain an adverse opinion or a disclaimer of opinion but did
contain a modification expressing substantial doubt about the Company's ability
to continue as a going concern. There were no other reportable events or
disagreements with Andersen in response to Item 304 of Regulation S-K. The
Company is involved in an ongoing fee and service dispute with Andersen. In
light of this dispute, Andersen has declined to accept the engagement to reissue
their opinion on the 1998 and 1999 financial statements included in this Form
10-K. The most recent Exchange Act filing in which Andersen's opinion on the
1998 and 1999 financial statements are presented was the Company's Form 10-K for
the year ended December 31, 1999. There is no assurance that, if Andersen were
to reissue their opinion on the 1998 and 1999 financial statements, it would be
issued in its original form and without qualification.
On June 26, 2000, BDO Seidman LLP was engaged as the independent
accountants to the Company.
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PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Index of Financial Statements of Hotelwork.com Inc.
(1) Financial Statements included under Item 8:
Consolidated Balance Sheets as of December 31, 2000 and 1999
Consolidated Statements of Operations for years ended December
31, 2000, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2000, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
(2) Financial Statements Schedules:
Schedule I - Condensed Financial Information of Registrant
Schedule II - Valuation and Qualifying Accounts
(3) Report of Independent Certified Public Accountants
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(b) Exhibits
EXHIBIT NUMBER EXHIBITS
-------------- --------
3.1 Certificate of Incorporation, as amended, of the Company.
3.2 Amended and Restated By-laws of the Company.
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, 1998, by and between
the Company and Robert A. Berman (Incorporated by reference to
Exhibit 10.6 to the 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 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).
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 January 1, 1998, by and between
the Company and Douglas Parker (Incorporated by reference to
Exhibit 10.14 to the Amendment No. 1 to the Company's Form
10-K, filed on April 29, 1998, for the year ended December 31,
1997).
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EXHIBIT NUMBER EXHIBITS
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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
Amended Current Report on 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 31, 1999, by and among
the Company, Watermark Investments Limited, LLC, Leonard
Parker, Douglas Parker, Philip Parker, Mitchell Parker, Gregg
Parker and Bradley Parker.
10.23 Agreement, by and between the Company and Watermark
Investments Limited, LLC, as terminated by Termination
Agreement, dated September 30, 1999 (Incorporated by reference
to Exhibit 10.1 to the Company's Form 10-Q for the quarter
ended Sept 30, 1999).
10.24 Termination Agreement, dated September 30, 1999, by and
between the Company and Robert A. Berman (Incorporated by
reference to Exhibit 10.2 to the Company's Form 10-Q for the
quarter ended September 30, 1999).
10.25 Employment Agreement, dated September 1, 1999, by and between
the Company and John F. Wilkens (Incorporated by reference to
Exhibit 10.3 to the Company's Form 10-Q for the quarter ended
September 30, 1999).
10.26 Stipulation of Settlement and Mutual Release between
Hospitality Worldwide Services and Prime Hospitality
Corporation dated December 14, 1999.
10.27 Hospitality Worldwide Services, Inc. 1999 Stock Option Plan.
10.28 Second Amended and Restated Loan Agreement between Bank of
America, N.A. and Bekins Distribution Services Co., Inc. dated
September 1, 2000 (Incorporated by reference to Exhibit 10.28
to the Company's Form 10-Q for the quarter ended September 30,
2000).
10.29 Overadvance Term Note by Bekins Distribution Services Co.,
Inc. in favor of Bank of America, N.A. dated September 1, 2000
(Incorporated by reference to Exhibit 10.29 to the Company's
Form 10-Q for the quarter ended September 30, 2000).
10.30 Revolving Note by Bekins Distribution Services Co., Inc. in
favor of Bank of America, N.A. dated September 1, 2000
(Incorporated by reference to Exhibit 10.30 to the Company's
Form 10-Q for the quarter ended September 30, 2000).
10.31 Amended and Restated Agreement among the Company, HSBC Bank
USA and Hospitality Restoration and Builders, Inc. dated
December 15, 2000.
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.
(c) Reports on Form 8-K
The Company filed a Form 8-K on December 31, 2000, to report that it
had negotiated and executed an Amended and Restated Agreement with HSBC
Bank USA.
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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.
HOTELWORKS.COM, INC.
Dated:July 13, 2001 By: /s/ DOUGLAS A. PARKER
---------------------------------------------
Douglas A. Parker, Chief Executive Officer,
(principal executive officer)
President 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/ LEONARD F. PARKER Chairman of the Board, Secretary July 13, 2001
- ------------------------------------- And Director
Leonard F. Parker
/s/ DOUGLAS A. PARKER Chief Executive Officer, President and July 13, 2001
- ------------------------------------- Director
Douglas A. Parker
/s/ JOHN F. WILKENS Vice President - Treasurer (principal July 13, 2001
- ------------------------------------- financial officer, principal
John F. Wilkens accounting officer)
/s/ LOUIS K. ADLER Director July 13, 2001
- -------------------------------------
Louis K. Adler
/s/ GEORGE ASCH Director July 13, 2001
- -------------------------------------
George Asch
Director
- -------------------------------------
Richard A. Bartlett
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ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
PAGE NO.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
BDO Seidman, LLP F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-3
Statements of operations F-4
Statements of stockholders' equity F-5
Statements of cash flows F-6, F-7
Notes to consolidated financial statements F-8-F-32
Schedule I - Condensed Financial Information of Registrant F-33-F-36
Schedule II - Valuation and Qualifying Accounts F-37
F-1
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REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Hotelworks.com, Inc.
Coral Gables, Florida
We have audited the accompanying consolidated balance sheet of Hotelworks.com as
of December 31, 2000 and the related consolidated statements of operations,
(capital deficit) and cash flows for the year then ended. We have also audited
the schedules listed in the accompanying index. These financial statements and
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and the schedules based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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
presentation of the financial statements and the schedules. 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 financial position of Hotelworks.com at
December 31, 2000, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America.
Also in our opinion, the schedules present fairly, in all material respects, the
information set forth therein as of and for the year ended December 31, 2000.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 3 to the
consolidated financial statements, the Company has suffered significant
recurring losses from operations, has a net capital deficiency, a working
capital deficiency and is engaged in significant litigation that raise
substantial doubt about its ability to continue as a going concern. Management's
plans in regard to these matters are also described in Note 3. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
BDO Seidman, LLP
Miami, Florida
June 6, 2001
F-2
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
2000 1999
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(Unaudited)
ASSETS (NOTE 10)
Cash and cash equivalents $ 4,976,963 $ 4,559,938
Accounts receivable, net of allowance for doubtful accounts 33,676,781 28,300,842
of $2,002,051 and $1,743,364
Costs and estimated earnings in excess of billings (Note 7) -- 276,000
Deposits with vendors 10,762,510 7,050,701
Income taxes refundable (Note 11) 490,302 3,906,804
Prepaids and other current assets 446,550 1,187,637
------------ ------------
Total current assets 50,353,106 45,281,922
Property and equipment, net (Notes 5 and 8) 5,315,324 5,195,180
Goodwill, net (Notes 5 and 6) 10,638,579 11,038,178
Other assets 101,926 85,818
Non-current assets of discontinued operations (Note 4) 93,835 180,067
------------ ------------
$ 66,502,770 $ 61,781,165
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LIABILITIES AND (CAPITAL DEFICIT) STOCKHOLDERS' EQUITY
Accounts payable $ 26,988,156 $ 21,247,448
Accrued expenses and other liabilities 5,085,245 5,550,258
Billings in excess of costs and estimated earnings (Note 7) 1,294,373 142,000
Customer deposits 14,136,174 12,017,566
Current portion of long-term debt (Note 10) 3,165,880 2,902,000
Loans payable (Note 9) -- 15,835,000
Net current liabilities of discontinued operations (Note 4) 7,366,432 3,542,293
------------ ------------
Total current liabilities 58,036,260 61,236,565
Long-term debt (Note 10) 10,255,906 68,294
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Total liabilities 68,292,166 61,304,859
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Commitments and contingencies (Notes 3 and 13)
(Capital deficit) stockholders' equity: (Note 15)
8 % convertible preferred stock, $.01 par value, $1 stated, 1,000,000 --
value, 5,000,000 shares authorized, 1,000,000 and 0
shares issued and outstanding
Common stock, $.01 par value, 50,000,000 shares authorized, 149,125 146,592
14,912,867 and 14,659,067 issued and outstanding
Additional paid-in capital 60,019,244 59,612,964
(Deficit) (62,957,765) (59,283,250)
------------ ------------
Total (capital deficit) stockholders' equity (1,789,396) 476,306
------------ ------------
$ 66,502,770 $ 61,781,165
------------ ------------
See accompanying report of independent certified public accountants and notes
to consolidated financial statements.
F-3
13
HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998
------------- ------------- -------------
(Unaudited) (Unaudited)
Revenues $ 216,355,887 $ 223,424,822 $ 176,744,593
Cost of revenues 202,509,785 211,952,584 163,142,439
------------- ------------- -------------
Gross profit 13,846,102 11,472,238 13,602,154
Selling, general and administrative expenses 16,391,932 22,697,922 16,659,136
Asset impairment charge (Note 5) -- 9,252,000 --
------------- ------------- -------------
Loss from operations (2,545,830) (20,477,684) (3,056,982)
------------- ------------- -------------
Other income (expense):
Interest expense (1,795,859) (1,774,111) (756,100)
Interest income 543,010 902,753 1,297,245
------------- ------------- -------------
Total other income (expense) (1,252,849) (871,358) 541,145
------------- ------------- -------------
Loss from continuing operations before
income taxes (3,798,679) (21,349,042) (2,515,837)
Income tax provision (benefit) (Note 11) 77,000 (3,103,829) (447,263)
------------- ------------- -------------
Loss from continuing operations (3,875,679) (18,245,213) (2,068,574)
------------- ------------- -------------
Discontinued operations (Notes 4 and 11):
Income (loss) from operations of discontinued businesses,
net of tax -- (22,589,150) 2,192,812
Gain (loss) on disposal of discontinued businesses,
including provision of $2,290,000 in 1999 and $104,000 in
1998 for operating losses during phase-out period, net of tax 204,671 (17,169,880) (90,900)
------------- ------------- -------------
Income (loss) from discontinued operations 204,671 (39,759,030) 2,101,912
------------- ------------- -------------
Net income (loss) $ (3,671,008) $ (58,004,243) $ 33,338
------------- ------------- -------------
Basic and diluted loss per common share (Note 16):
Loss from continuing operations $ (0.26) $ (1.35) $ (0.19)
------------- ------------- -------------
Discontinued operations:
Income (loss) from operations -- (1.65) 0.18
Gain (loss) on disposal 0.01 (1.26) (0.01)
------------- ------------- -------------
Income (loss) from discontinued operations 0.01 (2.91) 0.17
------------- ------------- -------------
Net loss $ (0.25) $ (4.26) $ (0.02)
------------- ------------- -------------
Weighted average common shares outstanding - basic and diluted 14,815,908 13,665,465 12,092,437
------------- ------------- -------------
See accompanying report of independent certified public accountants and notes
to consolidated financial statements.
F-4
14
HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(UNAUDITED WITH RESPECT TO 1999 AND 1998)
PREFERRED STOCK COMMON STOCK TOTAL
-------------------------- -------------------------- STOCKHOLDERS'
NUMBER OF ADDITIONAL EQUITY
NUMBER OF STATED SHARES PAID-IN (CAPITAL
SHARES VALUE OUTSTANDING PAR VALUE CAPITAL (DEFICIT) DEFICIT)
--------- ------ ------------ --------- ---------- --------- --------------
BALANCE,
December 31, 1997 200,000 $ 5,000,000 11,345,572 $113,456 $ 47,519,725 $ (907,345) $ 51,725,836
Exercise of stock
options and
warrants -- -- 265,667 2,657 768,024 -- 770,681
Issuance of shares
in connection with
acquisition -- -- 514,117 5,141 6,165,859 -- 6,171,000
Conversion of
preferred stock (80,000) (2,000,000) 584,800 5,848 1,994,152 -- --
Net income -- -- -- -- -- 33,338 33,338
Preferred dividends
accrued -- -- -- -- -- (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
Exercise of stock
options -- -- 40,000 400 80,294 -- 80,694
Conversion of
preferred stock (120,000) (3,000,000) 1,269,399 12,695 2,987,305 -- --
Issuance of shares
in connection with
acquisition -- -- 639,512 6,395 (6,395) -- --
Warrants issued for
services -- -- -- -- 104,000 -- 104,000
Net loss -- -- -- -- -- (58,004,243) (58,004,243)
Preferred dividends
accrued -- -- -- -- -- (135,000) (135,000)
---------- ----------- ---------- -------- ------------ ------------ ------------
BALANCE
December 31, 1999 -- -- 14,659,067 146,592 59,612,964 (59,283,250) 476,306
Exercise of stock
options and warrants -- -- 153,800 1,533 310,920 -- 312,453
Stock and options
issued in
settlements (Note 4) -- -- 100,000 1,000 95,360 -- 96,360
Issuance of shares
in connection with
refinancing 1,000,000 1,000,000 -- -- -- -- 1,000,000
Net loss -- -- -- -- -- (3,671,008) (3,671,008)
Preferred dividends
accrued -- -- -- -- -- (3,507) (3,507)
---------- ----------- ---------- -------- ------------ ------------ ------------
BALANCE
December 31, 2000 1,000,000 $ 1,000,000 14,912,867 $149,125 $ 60,019,244 $(62,957,765) $ (1,789,396)
---------- ----------- ---------- -------- ------------ ------------ ------------
See accompanying report of independent certified public accountants and notes
to consolidated financial statements.
F-5
15
HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---- ---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ($3,671,008) ($58,004,243) $ 33,338
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,351,768 2,208,706 1,667,785
Provision for bad debts 764,562 1,632,922 668,922
Loss (gain) from operations of discontinued businesses -- 18,857,810 (2,858,325)
Loss (gain) on disposal of discontinued businesses (204,671) 16,557,668 150,000
Asset impairment charge -- 9,252,000 --
Deferred income tax provision (benefit) -- 4,535,178 (3,796,090)
(Increase) decrease in current assets:
Accounts receivable (6,140,501) 4,441,236 (14,817,443)
Costs and estimated earnings in excess of billings 276,000 221,717 (86,878)
Deposits with vendors (3,711,809) 5,708,745 (8,504,265)
Income taxes refundable 3,416,502 (3,906,804) --
Prepaid and other current assets 741,087 (296,713) 245,399
Other assets (16,108) 696,903 166,684
Increase (decrease) in current liabilities:
Accounts payable 5,740,708 (3,268,623) 8,547,541
Accrued expenses and other liabilities (237,160) 1,063,029 2,451,782
Billings in excess of costs and estimated earnings 1,152,373 (85,000) 80,800
Customer deposits 2,118,608 (7,846,279) 6,540,274
Income taxes payable -- (176,045) 168,376
----------- ------------ ------------
Net cash provided by (used in) operating activities of
continuing operations 1,580,351 (8,407,793) (9,342,100)
----------- ------------ ------------
Net cash (used in) operating activities of dscontinued
operations (469,958) (4,710,429) (8,492,603)
----------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities -- -- (8,500,000)
Sale of marketable securities -- 8,500,000 18,915,686
Cash acquired upon acquisition, net of acquisition costs -- -- (62,000)
Purchases of property and equipment (1,072,313) (1,705,479) (3,156,883)
----------- ------------ ------------
Net cash provided by (used in) investing activities
of continuing operations (1,072,313) 6,794,521 7,196,803
----------- ------------ ------------
Net cash provided by (used in) investing activities
of discontinued operations -- 4,599,657 (9,490,769)
----------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings on loans payable -- 4,910,000 26,625,000
Repayment of loans payable (5,950,000) -- (15,700,000)
Repayment of long term debt (1,045,513) (615,568) (1,352,285)
Payment of preferred stock dividends (135,000) (270,000) --
Borrowings on long-term debt 7,197,005 -- --
Proceeds from exercise of stock options and warrants 312,453 80,694 770,681
----------- ------------ ------------
Net cash provided by (used in) financing activities of
continuing operations 378,945 4,105,126 10,343,396
----------- ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 417,025 2,381,082 (9,785,273)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,559,938 2,178,856 11,964,129
----------- ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,976,963 $ 4,559,938 $ 2,178,856
----------- ------------ ------------
See accompanying report of independent certified public accountants and notes
to consolidated financial statements.
F-6
16
HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2000 1999 1998
---- ---- ----
(Unaudited) (Unaudited)
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $1,875,333 $1,550,027 $ 794,724
Income taxes 65,360 466,081 3,826,546
Cash received during the period for:
Income tax refunds 3,416,502 -- --
NON-CASH ACTIVITIES:
Net assets acquired (including goodwill and other -- -- 6,233,000
intangibles)
Stock issued for assets acquired -- -- 6,171,000
Options and warrants issued for services -- 104,000 --
Stock and options issued in settlements 96,360 -- --
Preferred stock cash dividends accrued -- 135,000 270,000
Preferred stock in-kind dividends accrued 3,507 -- --
Conversion of preferred stock into common stock -- 3,000,000 2,000,000
Refinancing of HSBC debt 9,885,000 -- --
See accompanying report of independent certified public accountants and notes
to consolidated financial statements.
F-7
17
HOTELWORKS.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED WITH RESPECT TO 1999 AND 1998 INFORMATION)
1. ORGANIZATION AND BUSINESS
Hotelworks.com, Inc., formerly known as Hospitality Worldwide Services,
Inc., (the "Company"), was incorporated in the State of New York on October 10,
1991. Through its wholly owned operating subsidiaries, the Company performs
purchasing services of furniture, fixtures and equipment, and operating supplies
and equipment for leading hotels and hospitality customers; performs reorder
services of operating supplies and equipment for leading hotel and hospitality
customers; and performs logistics services, including transportation,
warehousing and installation, to a wide variety of customers. Through September
1999, the Company's core businesses also included providing renovation services
to the hospitality industry as well as being active in the real estate
investment and asset management business.
In September 1999, the Company announced a strategic initiative to
reposition the core supply and distribution businesses, 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, the Company has reflected the operating
results associated with the renovation, real estate investment and asset
management, and hotel development businesses, as well as the estimated losses on
disposal, as discontinued operations on the consolidated statements of
operations for all years presented. Discontinued operations are further
discussed in Note 4.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated. Certain prior year balances have been
reclassified in the consolidated financial statements in order to provide a
presentation consistent with the current year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Management believes that the estimates utilized in preparing
the Company's financial statements are reasonable and prudent, however, actual
results could differ from those estimates.
The most significant estimates for the Company relates to the
recognition of revenues under the percentage of completion method for its
purchasing and logistics businesses, and the estimation of reserves for asset
realizability and contingent liabilities. To the extent that contracts extend
over more than one reporting period, revisions in estimated earnings and the
estimated efforts during the course of the work are reflected in the year in
which the facts which require the revision become known. Due to the
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.
F-8
18
REVENUE RECOGNITION
PURCHASING BUSINESS (LPC)
The Company recognizes 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
measured by which the ratio of efforts expended bears to the estimated efforts
over the life of the contract. Earnings for variable fee service contracts,
where the fee is usually a percentage of the merchandise purchased, are
generally recognized upon completion of the associated service.
The Company performs purchasing 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. Deposits with vendors consist of
amounts paid by the Company to vendors on specific contracts.
REORDER BUSINESS (PARKER REORDER)
The Company recognizes earnings for variable fee service contracts,
where the fee is usually a percentage of the merchandise purchased, upon
completion of the associated service. The Company performs reorder 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.
LOGISTICS BUSINESS (BEKINS)
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 measured by which the ratio of 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, including warehousing and
transportation costs, 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, 5 years; furniture and fixtures, 7 years; and building and
improvements, 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.
F-9
19
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 adoption of this EITF, the Company
capitalized $221,872 of web site development costs and expensed $17,829 of web
site costs for the year ended December 31, 2000. The capitalized costs are
included in property and equipment, net in the accompanying consolidated balance
sheet. The Company will amortize the web site development costs over 3 years.
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.
GOODWILL
Goodwill is amortized on a straight-line basis over its estimated
useful life of 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 $1,359,391 and $959,792 at December 31, 2000 and
1999, respectively.
EARNINGS PER COMMON SHARE
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,
contingently issuable shares, the assumed conversion of convertible preferred
stock and the elimination of the preferred stock dividends, if such adjustments
are dilutive.
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.
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 based method, under which the cost is measured as the fair value of the
security at the date of grant based on option-pricing models.
F-10
20
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable, accrued and other
liabilities and long-term debt approximate the fair values as of December 31,
2000, due to the short-term maturity of these instruments. The carrying amounts
as of December 31, 2000 of costs and estimated earnings in excess of billings,
deposits with 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.
SHIPPING AND HANDLING FEES
The Company includes shipping and handling fees billed to customers as
revenues and the related costs as cost of revenues. Such fees and costs are
primarily comprised of outbound freight. Included in revenues in the
accompanying consolidated statements of operations for the years ended December
31, 2000, 1999 and 1998 are shipping and handling fees of approximately
$8,900,000, $8,248,000 and $6,990,000, respectively. Amounts for prior periods
presented have been reclassified.
ADVERTISING COSTS
The Company expenses advertising costs as incurred. Advertising
expenses included in selling, general and administrative expenses for the years
ended December 31, 2000, 1999 and 1998 were approximately $125,000, $100,000 and
$160,000, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities", which
provides that all derivative instruments should be recognized as either assets
or liabilities depending on the rights and obligations under the contract and
that all derivative instruments be measured at fair value. This pronouncement is
required to be adopted by January 1, 2001. The Company did not engage in
derivative instruments or hedging activities in any periods presented in the
consolidated financial statements. Management has determined that the adoption
of this pronouncement will not have a material impact on the Company's
consolidated financial statements.
Staff Accounting Bulletin (SAB) 101, "Revenue Recognition in Financial
Statements", provides guidance on the recognition, presentation and disclosure
of revenues in financial statements and requires adoption no later than the
fourth fiscal quarter of fiscal years beginning after December 31, 1999. The
Company implemented SAB during 2000, and its adoption did not have a material
impact on the Company's consolidated financial statements. In September 2000,
the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-10, "Accounting
for Shipping and Handling Fees and Costs" which requires companies to record
shipping and handling fees charged to customers as revenues and the related
costs as expenses. The Company implemented EITF 00-10 as of October 1, 2000.
Amounts relating to prior periods presented have been reclassified to conform to
the new issue.
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishment of
Liabilities", provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. SFAS 140
replaces SFAS 125 and is effective for transfers and servicing of financial
assets and extinguishments occurring after March 31, 2001. SFAS 140 is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. The adoption of SFAS 140 did not have a material impact on
the Company's consolidated earnings or financial statements.
F-11
21
In March, 2000, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation. Interpretation No. 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 No. 44 became effective July 1,
2000, with certain provisions that are effective retroactively to December 15,
1998 and January 12, 2000. The adoption of Interpretation No. 44 did not have a
material impact on the Company's consolidated financial statements.
3. GOING CONCERN
The Company's consolidated financial statements have been presented on
the basis that the Company will continue as 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 in 1999
and 2000 by significant losses from continuing operations and discontinued
operations, which has resulted in a significant deterioration of the
stockholders' equity of the Company from $58.4 million at December 31, 1998 to
$0.5 million at December 31, 1999 to a capital deficit of $1.8 million at
December 31, 2000. In addition, the Company has a working capital deficiency and
is engaged in significant litigation (see Note 13). These circumstances raise
substantial doubt about the Company's ability to continue as a going concern.
The losses from continuing operations in 1999 emanated from a reduction
in the gross margins realized within the purchasing business as compared to
prior years; an increase in selling, general and administrative expenses due to
an expansion of the administrative staff of the on-going businesses and expenses
related to employee terminations and other costs associated with the closing of
the Company's corporate office in New York; and an asset impairment charge of
$9.3 million related to the Parker FIRST software product. Management has taken
the following steps in 2000 and 2001 to improve its operations and reduce its
losses from continuing operations. Management has (a) undertaken a comprehensive
review of its on-going businesses, (b) implemented steps to improve the gross
margin on its contracts and by reducing overhead and labor costs, (c) reduced
its selling, general and administrative expenses, (d) successfully renegotiated
defaulted credit lines and (e) sold its Orlando warehouse in March 2001, the
proceeds of which were used to pay-off substantially all of the mortgage note
and term loan with Bank of America.
As further discussed In Note 4, the losses from discontinued operations
in prior years relate to the Company's decision to divest itself of its
renovation, real estate investment and asset management, and hotel development
businesses. Management has been diligently attempting to resolve any remaining
open matters relating to these businesses to avoid any further financial
deterioration to the Company. Management believes that the reserves established
in 1999 will be sufficient to cover any future obligations related to these
discontinued operations and to bring all open matters to closure.
In September 2000, the Company's wholly-owned subsidiary, 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. In conjunction with this Agreement, Bank of America, N.A.
dismissed its legal action against the Company. In March 2001, Bekins sold for
$2,265,500 its warehouse facility in Orlando, Florida, the net proceeds of which
were used to repay the mortgage in full and reduce the remaining balance on the
term loan to $107,000. In accordance with the Agreement, the remaining balance
of the term loan was transferred to the overadvance term loan and the term loan
was retired. In December 2000, the Company executed an Amended and Restated Loan
Agreement with HSBC Bank USA ("HSBC"). This Agreement consists of two debt
instruments and $1 million of convertible preferred stock, which were used to
pay off the Company's defaulted unsecured line of credit with HSBC.
F-12
22
For 2001, the Company projects a net cash flow deficit from operations
and cash requirements related to the development of its internet web-based
reorder system of approximately $200,000. The net cash flow deficit from
operations for 2001 primarily relates to continued losses of the Parker Reorder
business and corporate expenses. Management believes that its review of the
on-going businesses' gross margins and related expenses, the receipt of
settlement payments from former officers and customers, the proceeds from the
sale of Bekins' Orlando warehouse, and its ability to defer certain capital
expenditures and other current payment obligations, if necessary, will provide
sufficient funds to cover cash flow deficits in 2001.
Net cash provided by operating activities of continuing operations was
$1,580,351 for the year ended December 31, 2000, compared to net cash used of
$8,407,793 for 1999. During the year ended December 31, 2000, cash primarily
generated from an increase in accounts payable and customer deposits and by a
decrease in income taxes refundable was partially offset by an increase in
accounts receivable and deposits with vendors.
4. DISCONTINUED OPERATIONS
In September 1999, the Company announced a strategic initiative to
reposition the core supply and distribution businesses, 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, the Company has reflected the operating
results associated with the renovation, real estate investment and asset
management, and hotel development businesses, as well as the estimated losses on
disposal, as discontinued operations on the consolidated statements of
operations for all years presented. The loss from operations, net of taxes, for
the discontinued businesses was $22,589,150 in 1999. The income from
discontinued operations, net of taxes, was $2,192,812 for 1998. The loss on
disposal, net of taxes, was $17,169,880 and $90,900 for 1999 and 1998,
respectively. The loss on disposal principally includes reserves and write-offs
of certain investments and receivables to their estimated recoverable amounts,
the write-off of goodwill associated with these businesses, and accruals for
estimated liabilities and operating losses during the phase-out period for the
discontinued businesses. The gain on disposal, net of taxes, was $204,671 for
2000 and was related primarily to the reversal of an accrued liability recorded
as a loss on disposal in 1999 on the Apollo Joint Venture.
HOTEL DEVELOPMENT BUSINESS
In December 1997, the Company formed a wholly owned subsidiary,
Hospitality Development Services Corporation ("HDS"). HDS was to provide hotel
development services involving managing and overseeing the development process
related to new hotel construction, to earn a developers fee. HDS commenced
operations in 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. In late 1998, the Company was informed by
Prime that Prime was no longer going to pursue new development opportunities and
that Prime was abandoning their responsibilities under the master development
agreement, even though the Company had incurred significant costs up to such
time. As a result, in December 1998, management decided to discontinue its hotel
development business.
The Company ceased its hotel development operations in April 1999. In
December 1999, the Company and Prime reached an agreement to terminate the
master development agreement, whereby the Company received a settlement payment
of $300,000 and both parties agreed to a full release of obligations and claims.
The loss on disposal for the year ended December 31, 1999 includes approximately
$1,670,000 of additional write-offs to record certain real estate development
projects to the amount realized by the Company. The loss on disposal for the
year ended December 31, 1998 included $150,000 of estimated operating losses
during the phase-out period.
F-13
23
RENOVATION BUSINESS
The Company provided renovation services to the hospitality industry,
through its wholly owned subsidiary, Hospitality Restoration & Builders, Inc.
("HRB"). HRB provided a complete package of renovation services to the hotel
industry, ranging from pre-planning and scope preparation of a project to
performing the renovation requirements and delivering furnished rooms.
In November 1997, the Company formed a wholly owned subsidiary,
Hospitality Construction Corporation ("HCC"), to specialize in new hotel
construction projects and major hotel upgrades. HCC's operations commenced in
1998 and related solely to hotel upgrade and renovation projects, and did not
include any new hotel construction projects. In an effort to consolidate
operations, the Company transferred the HCC operations to HRB in 1998.
In September 1999, as part of the Company's strategic initiative
discussed above, the Company decided to divest itself of its renovation
business. The Company transferred certain in-process renovation contracts to a
company owned by the former President of the renovation subsidiary in November
1999. 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. Losses from discontinued operations for 1999 and 1998 include
provisions on contract receivables of approximately $17,090,000 and $8,863,000
related to renovation projects (including approximately $15,400,000 and
$5,500,000, respectively, relating to the Servico litigation, see Note 13 c),
which have been substantially completed but have not yet been closed out with
customers. The loss on disposal in 1999 includes additional provisions on
contract receivables of $2,075,000, a write-off of goodwill of approximately
$5,000,000 and anticipated operating losses during the phase-out period of
$2,066,000.
In December 2000, as part of an Amended and Restated Loan Agreement
with HSBC Bank USA ("HSBC"), HRB assigned a portion of its contract right in a
disputed receivable with a former customer to HSBC in the form of a five-year
$4,585,000 promissory note, bearing interest at the bank's prime rate. This HRB
note is secured solely by its interest in the receivable and any collections are
to be divided between HRB and HSBC according to a prescribed formula. At
maturity, HRB has the option of extending the term for an additional twelve
months, at which time, if the disputed receivable has not been resolved, title
in full of the contract right along with the related debt passes to HSBC (see
Note 10).
REAL ESTATE INVESTMENT AND ASSET MANAGEMENT BUSINESS
In May 1997, the Company entered into a joint venture ("Apollo Joint
Venture") with Apollo Real Estate Advisors II, L.P. ("Apollo") and Watermark
Investments Limited, LLC ("Watermark"), which is affiliated with Robert Berman,
the former Chairman and Chief Executive Officer of the Company, to identify,
acquire, renovate, refurbish and sell hotel properties. The Company performed
the renovation and procurement services for the properties purchased by the
Apollo Joint Venture. In addition, the Company acquired a non-controlling equity
interest in each of the entities formed to purchase such properties. In
September 1997, the Apollo Joint Venture acquired the Warwick Hotel in
Philadelphia, Pennsylvania. The Company made cumulative capital contributions of
approximately $791,000 to the joint venture operating entity that was formed to
purchase the property. In March 1998, the Apollo Joint Venture acquired the
Historic Inn in Richmond, Virginia. The Company made cumulative capital
contributions of approximately $311,000 to the joint venture operating entity
that was formed in connection with the purchase of the property. In September
1999, as part of the Company's strategic initiative discussed above, the Company
decided to divest itself of its real estate investment and asset management
business.
F-14
24
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, which released the Company
from future obligations to the joint venture. In conjunction with this
agreement, the Company surrendered its equity ownership interest, the Company
issued 100,000 unregistered shares of its Common Stock to Apollo, warrants
formerly issued to Apollo were returned to the Company and cancelled, and the
Company received payment on its remaining receivables with the properties. The
Company wrote off its investment in the Apollo Joint Venture in 1999, and as
such, this agreement did not have a material impact on the current year
financial statements. As a result of the agreement, the Company reversed an
accrued liability recorded in 1999 related to the Apollo Joint Venture and
recorded a gain on disposal of $204,671 in the 2000 consolidated statement of
operations.
In March 1998, the Company entered into a joint venture with ING Realty
Partners ("ING Joint Venture"), to acquire the Radisson O'Hare (formerly Clarion
Quality) Hotel in Chicago, Illinois, whereby the Company acquired a
non-controlling equity interest in the ING Joint Venture. The Company also
performed the renovation and procurement services for the property. The Company
made cumulative capital contributions of approximately $3.2 million to the ING
Joint Venture. In September 1999, as part of the Company's strategic initiative
discussed above, the Company decided to divest itself of its real estate
investment and asset management business.
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 its joint venture partner, which released
the Company from future obligations to the joint venture, in exchange for its
equity ownership interest. The Company wrote off its investment in the ING Joint
Venture in 1999, and as such, this agreement did not have a material impact on
the 2000 financial statements.
In February 1998, the Company formed a wholly owned subsidiary, HWS Real
Estate Advisory Group, Inc. ("HWS REAG") to purchase the assets of Watermark's
real estate advisory business, consisting primarily of contracts to perform
future asset management and advisory services as well as certain equity
interests in the Apollo Joint Venture. The purchase price for such business was
$1,500,000 of cash. The acquisition was accounted for as a purchase with the
results of HWS REAG included in the consolidated financial statements of the
Company from the acquisition date. On September 30, 1999, the Company and
Watermark entered into a Termination Agreement whereby all agreements between
the parties were terminated, and among other things, includes a payment by
Watermark to the Company of $885,000, that was made in December 1999.
The Company's real estate investment and asset management business was
comprised of the HWS REAG operations and investments in various real estate
ventures, including the Apollo Joint Venture and ING Joint Venture discussed
above. In September 1999, as part of the Company's strategic initiative
discussed above, the Company decided to divest itself of its real estate
investment and asset management business. The Company disposed of its real
estate investments, and ceased the real estate asset management and advisory
operations in 2000. Losses from discontinued operations for 1999 include the
write-off of certain real estate investments and receivables no longer deemed
realizable of approximately $500,000. The loss on disposal for 1999 includes the
write-off of goodwill of $450,000 and write-downs and reserves in connection
with the anticipated disposal of real estate investments of approximately
$4,900,000 to record such investments at their estimated recoverable amounts.
SUMMARY OF FINANCIAL INFORMATION
The Company has reflected the operating results associated with the
renovation, real estate investment and asset management, and hotel development
businesses, as well as the estimated losses on disposal, as discontinued
operations on the consolidated statements of operations for all years presented.
Results of these operations, as presented in accompanying consolidated
statements of operations, are as follows:
F-15
25
2000 1999 1998
-------- ------------ ------------
RENOVATION BUSINESS:
Revenues $ -- $ 22,053,206 $ 56,014,202
Income (loss) from operations, net of taxes -- (21,223,412) 3,141,971
Loss on disposal, net of taxes -- (9,847,414) --
REAL ESTATE INVESTMENT AND ASSET MANAGEMENT
BUSINESS:
Revenues -- -- 961,529
Loss from operations, net of taxes -- (1,365,738) (82,407)
Gain (loss) on disposal, net of taxes 204,671 (5,652,262) --
HOTEL DEVELOPMENT BUSINESS:
Revenues -- -- --
Loss from operations, net of taxes -- -- (866,752)
Loss on disposal, net of taxes -- (1,670,204) (90,900)
TOTAL DISCONTINUED OPERATIONS:
Revenues -- 22,053,206 56,975,731
Income (loss) from operations, net
of taxes -- (22,589,150) 2,192,812
Gain (loss) on disposal, net of taxes 204,671 (17,169,880) (90,900)
The remaining assets and liabilities of the discontinued operations as
of December 31, 2000 and 1999, as presented in the accompanying consolidated
balance sheets, are as follows:
REAL ESTATE
INVESTMENT & HOTEL
RENOVATION ASSET MANAGEMENT DEVELOPMENT TOTAL
---------- ---------------- ----------- -----
DECEMBER 31, 2000:
Accounts receivable $ 19,483,650 $ -- $ -- $ 19,483,650
Allowance for doubtful accounts (19,071,638) -- -- (19,071,638)
Prepaids and other current assets, net 110,000 -- -- 110,000
Accounts payable (1,548,735) -- -- (1,548,735)
Accrued and other liabilities (707,082) (1,000,000) (47,627) (1,754,709)
Current portion of long-term debt (4,585,000) -- -- (4,585,000)
------------ ----------- -------- ------------
Net current liabilities $ (6,318,805) $(1,000,000) $(47,627) $ (7,366,432)
------------ ----------- -------- ------------
Property and equipment, net 30,000 -- 23,640 53,640
Other assets 18,638 -- 21,557 40,195
------------ ----------- -------- ------------
Net non-current assets $ 48,638 $ -- $ 45,197 $ 93,835
------------ ----------- -------- ------------
DECEMBER 31, 1999:
Accounts receivable $ 23,535,764 $ -- $ -- $ 23,535,764
Allowance for doubtful accounts (20,903,638) -- -- (20,903,638)
Prepaids and other current assets, net 753,000 -- -- 753,000
Accounts payable (3,428,505) -- -- (3,428,505)
Accrued and other liabilities (2,468,028) (1,000,000) (30,886) (3,498,914)
------------ ----------- -------- ------------
Net current liabilities $ (2,511,407) $(1,000,000) $(30.886) $ (3,542,293)
------------ ----------- -------- ------------
Property and equipment, net 74,014 -- 34,420 108,434
Other assets 38,296 -- 33,337 71,633
------------ ----------- -------- ------------
Net non-current assets $ 112,310 $ -- $ 67,757 $ 180,067
------------ ----------- -------- ------------
F-16
26
Net current liabilities of discontinued operations at December 31, 2000
and 1999, include renovation accounts receivables which include unapproved
change orders and estimated net claims, which involve negotiations with
customers and in some cases has resulted in litigation. The Company believes
that it has established contractual or legal bases for pursuing recovery of
unapproved 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. Unapproved 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.
5. ASSET IMPAIRMENT CHARGE
As a result of the Company's strategic initiative to reposition the
core businesses into a business-to-business e-commerce company, the Parker
Reorder proprietary software product, Parker Fully Integrated Reorder Systems
Tracking ("Parker FIRST"), which is a client server-based system used by
clients to reorder operating supplies and equipment, was phased out in 2000 as
the Company migrated the reorder business to an internet web-based system.
Consequently, management determined that the Parker FIRST system will not
provide future long-term benefits to the Company. In addition, management
determined that the goodwill and other intangibles associated with the
acquisition of Parker Reorder in January 1997 is closely related to the Parker
FIRST system, which was under development at the time of the acquisition.
Accordingly, the Company recorded for the year ended December 31, 1999, an
asset impairment charge of $9,252,000, consisting of net capitalized computer
software costs associated with the Parker FIRST system of $3,099,000 and net
goodwill and other intangibles of $6,153,000.
6. ACQUISITIONS
In January 1998, the Company acquired Bekins Distribution Services,
Inc. ("Bekins"), a 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, including acquisition costs, of
approximately $11,400,000 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 result of the decrease in the price
of the Company's common stock on the one year anniversary date of the
acquisition, which was accounted for as an equity transaction resulting in no
adjustment to the purchase price or reported net loss. The acquisition resulted
in goodwill of approximately $7,400,000 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.
7. 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 consists
of:
DECEMBER 31,
--------------------------------
2000 1999
----------- -----------
Costs incurred and earnings on uncompleted contracts $ 3,172,815 $ 6,132,097
Billings to date (4,467,188) (5,998,097)
----------- -----------
Costs and estimated earnings on uncompleted contracts in excess of billings (1,294,373) 134,000
----------- -----------
Included in the accompanying consolidated balance sheets under the following
captions:
Costs and estimated earnings in excess of billings -- 276,000
Billings in excess of costs and estimated earnings (1,294,373) (142,000)
----------- -----------
$(1,294,373) $ 134,000
----------- -----------
F-17
27
8. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
--------------------------------
2000 1999
----------- -----------
Building and improvements $ 2,277,000 $ 2,264,874
Furniture and fixtures 1,093,011 1,043,599
Office equipment 2,401,489 2,227,554
Leasehold improvements 392,431 552,898
Software 1,299,245 877,348
Web Site Development Costs 288,885 67,013
----------- -----------
7,752,061 7,033,286
Less: Accumulated depreciation and amortization (2,436,737) (1,838,106)
----------- -----------
$ 5,315,324 $ 5,195,180
----------- -----------
9. LOANS PAYABLE
In March 1998, the Company obtained an unsecured line of credit with
HSBC Bank USA ("HSBC"). This line expired on September 30, 1999, with
outstanding borrowings of $9,885,000 and was refinanced in December 2000, into a
new three-year term note with the Company, a new five-year note with the
Company's subsidiary, HRB and $1 million of preferred stock. In July 1998, the
Company obtained an unsecured line of credit with Bank of America N.A. (formerly
Nations Bank). This line expired on September 30, 1999, with outstanding
borrowings of $5,950,000 and was refinanced in September, 2000 into two new
three-year notes with the Company's subsidiary, Bekins. Both unsecured lines
charged interest at the bank's prime rate.
The weighted average interest rates for 2000, 1999 and 1998 on the
loans outstanding during the year were 9.17%, 8.45% and 8.20%, respectively.
10. LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
-----------------------------
2000 1999
---------- ----------
Overadvance term loan with Bank of America N.A. issued by Bekins. Payable in $5,300,000 $ --
quarterly installments of $75,000 with the final balance due September, 2003
Interest is payable monthly at the bank's prime lending rate (9.50% at
December 31, 2000)
Revolving note with Bank of America N.A. issued by Bekins. Interest only with 1,500,000 --
balance due September 2003. Interest is payable monthly at the bank's prime
lending rate (9.50% at December 31, 2000)
Promissory note with HSBC Bank issued by the Company. Payable in monthly 4,015,781 --
installments of $50,000 with the final balance (remaining principal plus
accrued interest) due December, 2003. Interest is payable at maturity at the
bank's prime lending rate (9.50% at December 31, 2000)
Term loan with Bank of America N.A. issued by Bekins. Payable in quarterly 918,000 1,386,000
installments of $117,000 with the final balance due on April 1, 2001. Interest
is payable monthly at the bank's prime lending rate (9.50% at December 31,
2000)
F-18
28
DECEMBER 31,
------------------------------
2000 1999
----------- ----------
Mortgage note payable with Bank of America N.A. issued by Bekins related to 1,385,000 1,509,000
the building owned. Payable in quarterly installments of $31,000 with the
final balance due on April 1, 2001. Interest is payable monthly at the bank's
prime lending rate (9.50% at December 31, 2000)
Settlement agreement with West Atlantic Corp., payable in varying annual 85,000 --
installments of $12,000 to $15,000 through November, 2006. This obligation is
non-interest bearing
Capital lease obligations issued by the Company covering various office 172,072 --
equipment bearing interest at fixed rates of 9.60% to 16.62% with varying
payments through February, 2003
Capital lease obligations issued by Bekins covering various office furniture 7,000 14,000
and equipment bearing interest at fixed rates of 6.75% to 10.50% with varying
payments through December 2001
Capital lease obligations issued by LPC covering computer and office equipment 38,933 61,294
bearing interest at fixed rates of 8% to 10%, with payments through October
2004
----------- ----------
$13,421,786 $2,970,294
----------- ----------
In September 2000, the Company's wholly-owned subsidiary, 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. Both new facilities are secured by the assets and stock of
Bekins. Under the Agreement, Bekins is prohibited from paying any dividends on
its stock to the Parent Company except for reimbursement of certain allocated
overhead and administrative expenses. In conjunction with this Agreement, Bank
of America, N.A. dismissed its legal action against the Company. In March 2001,
Bekins sold for $2,265,500 its warehouse facility in Orlando, Florida, the net
proceeds of which were used to repay the mortgage in full and reduce the
remaining balance on the term loan to $107,000. In accordance with the
Agreement, the remaining balance of the term loan was transferred to the
overadvance term loan and the term loan was retired.
In December 2000, the Company executed an Amended and Restated Loan
Agreement with HSBC Bank USA ("HSBC"). This Agreement consists of two debt
instruments ("HWS note, HRB note") and $1 million of 8% convertible preferred
stock, which were used to pay off the Company's defaulted unsecured line of
credit with HSBC. The Company signed a three-year promissory note (HWS note)
with HSBC in the principal amount of $4,300,000 with a $300,000 principal
payment paid signing and ongoing monthly principal payments of $50,000. Interest
on the note accrues at the bank's prime rate and is due at maturity along with
the remaining principal balance. The note is secured by the assets of the Parent
Company and the capital stock of the Leonard Parker Company, Parker Reorder
Online and Hospitality Restoration and Builders. The Company's discontinued
subsidiary, HRB, assigned a portion of its contract right in a disputed
receivable with a former customer to HSBC in the form of a five-year $4,585,000
promissory note, bearing interest at the bank's prime rate (see Note 13 c). This
HRB note is secured solely by its interest in the receivable and any collections
are to be divided between HRB and HSBC according to a prescribed formula. At
maturity of the HRB note, the Company has the option of extending the term for
an additional twelve months, at which time, if the disputed receivable has not
been resolved, title in full of the contract right along with the related debt
F-19
29
passes to HSBC. The preferred stock issued to HSBC under this Agreement was
valued at $1 million on the date of issuance based on the then outstanding debt
balance and is convertible into a total of 1 million shares of the Company's
common stock. The note with HSBC Bank contains a covenant to submit audited
financial statements to the Bank within 105 days of year-end. Due to the late
filing of this Form 10-K, the Company is not in compliance with this covenant.
The Company will cure this default upon the filing of this Form 10-K.
Additionally, the Bank has advised the Company that they will not call the note
as a result of this violation.
The Company does have exposure to market risks associated with changes
in interest rates given that the Company maintains long term debt facilities
which have variable interest rates.
The following represents aggregate annual principal payments on
long-term debt, for the years ended December 31:
2001 $3,165,880
2002 979,369
2003 9,227,807
2004 18,730
2005 and after 30,000
-------------
$13,421,786
-------------
11. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
2000 1999 1998
------- ----------- -----------
CONTINUING OPERATIONS
Current:
Federal $ -- ($2,721,337) ($ 963,592)
State and Local 77,000 (574,118) 608,133
------- ----------- -----------
Total Current 77,000 (3,295,455) (355,459)
------- ----------- -----------
Deferred:
Federal -- 151,377 (73,674)
State and Local -- 40,249 (18,130)
------- ----------- -----------
Total Deferred -- 191,626 (91,804)
------- ----------- -----------
Total 77,000 (3,103,829) (447,263)
------- ----------- -----------
OPERATIONS OF DISCONTINUED BUSINESSES
Current:
Federal -- -- 4,080,714
State and Local -- -- 229,985
------- ----------- -----------
Total Current -- -- 4,310,699
------- ----------- -----------
Deferred:
Federal -- 2,947,618 (2,925,453)
State and Local -- 783,722 (719,733)
------- ----------- -----------
Total Deferred -- 3,731,340 (3,645,186)
------- ----------- -----------
Total -- 3,731,340 665,513
------- ----------- -----------
F-20
30
2000 1999 1998
------- ----------- -----------
LOSS ON DISPOSAL OF DISCONTINUED BUSINESSES
Current:
Federal -- -- --
State and Local -- -- --
------- ----------- -----------
Total Current -- -- --
------- ----------- -----------
Deferred:
Federal -- 483,624 (47,280)
State and Local -- 128,588 (11,820)
------- ----------- -----------
Total Deferred -- 612,212 (59,100)
----------- -----------
-----------
Total -- 612,212 (59,100)
------- ----------- -----------
Total Current Provision (Benefit) 77,000 (3,295,455) 3,955,240
Total Deferred Provision (Benefit) -- 4,535,178 (3,796,090)
------- ----------- -----------
Total Provision $77,000 $ 1,239,723 $ 159,150
------- ----------- -----------
The current provision for income taxes in 2000 primarily represents state
and local taxes arising in jurisdictions in which a consolidated tax return
cannot be filed. The current benefit for income taxes in 1999 primarily
represents the benefit associated with the Company's ability to carryback 1999
tax losses to prior years for federal, state and local tax purposes. The
deferred provision in 1999 primarily represents the valuation allowance against
the Company's previously recorded deferred tax assets. The Company has also
provided a valuation allowance against deferred tax assets arising in 2000 and
1999, representing future deductible expenses, given the Company's current tax
position.
The following is a reconciliation of the Company's income tax provision
(benefit) based on the statutory rate and the actual provision for continuing
operations:
2000 1999 1998
----------- ----------- ---------
Statutory federal income tax at 34% ($1,317,731) ($7,258,674) ($855,385)
Current state and local taxes, net of federal tax benefit 50,820 (588,743) 389,402
Nondeductible goodwill amortization and expenses 56,995 2,261,036 223,748
Prior year provision adjustment -- -- (205,028)
Net deferred state and local taxes on deferred tax assets (164,232) -- --
Increase in valuation allowance on deferred tax assets 1,451,148 2,482,552 --
----------- ----------- ---------
$ 77,000 ($3,103,829) ($447,263)
----------- ----------- ---------
At December 31, 2000 and 1999, the Company has approximately
$31,158,000 and $10,689,000, respectively, of federal net operating loss
carryforwards expiring through 2020. Realization of approximately $21,570,000
and $20,119,000 net deferred tax assets at December 31, 2000 and 1999,
respectively, resulting primarily from net operating loss carryforwards and
allowance for doubtful accounts, is not considered more likely than not and
accordingly, a valuation allowance has been recorded for the full amount of such
assets.
F-21
31
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 the tax effect of each at
December 31, 2000 and 1999 are as follows:
2000 1999
------------ ------------
DEFERRED INCOME TAX LIABILITY (ASSET)
Warrant expense $ (17,735) $ (827,220)
Allowance for doubtful accounts (8,322,481) (11,747,380)
Investment reserves and write-offs -- (1,907,379)
Operating losses during phase-out period (100,815) (199,038)
Depreciation and amortization expense 96,184 25,000
Rent expense (34,945) (42,870)
Net operating loss carryforward (12,279,985) (4,208,897)
Rebate income (236,472) (236,261)
Legal expenses (413,826) (586,716)
Other - accrued expenses (259,767) (387,933)
------------ ------------
Total (21,569,842) (20,118,694)
Valuation allowance 21,569,842 20,118,694
------------ ------------
Net $ 0 $ 0
------------ ------------
12. RELATED PARTY TRANSACTIONS
(a) In connection with the Apollo Joint Venture on April 10, 1997, the Company
and Resource Holdings, an entity affiliated with a director of the Company,
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 a monthly retainer of $10,000 per month. No
distributions were received by the Company from Apollo in 2000, 1999 or
1998. The financial advisory agreement was terminated in April 1999.
(b) Officer and Employee Loans. At various times at the direction of certain
former officers, but without Board of Director approval, the Company
provided short-term loans to various officers and employees of the Company
bearing interest at 12%. Loans provided during 2000, 1999, and 1998
amounted to $0, $39,500 and $3,590,000, respectively. The balance owed to
the Company was $9,125 and $289,500 at December 31, 2000 and 1999,
respectively. In 1998, the Company provided a loan of $3,200,000 to
Watertone Holdings LP, a firm managed by Watermark. This loan was repaid in
full in 1998 without interest. Watermark is affiliated with Robert Berman,
the former Chief Executive Officer and Chairman of the Board, and certain
former employees of the Company.
(c) In February 1998, the Company, through HWS REAG, purchased the assets of
Watermark's real estate advisory business for consideration of $1,500,000
in cash. In September 1999, the Company and Watermark entered into a
Termination Agreement pursuant to which Watermark paid $885,000 to the
Company in December 1999.
F-22
32
(d) During 1999 and 1998, the Company provided renovation and procurement
services to the Apollo Joint Venture and ING Joint Venture in which the
Company had an ownership interest. The following revenues and gross profit,
have been reflected in discontinued operations in the consolidated
financial statements.
YEAR ENDED DECEMBER 31, 1999 DECEMBER 31, 1998
------------------- --------------------- ------------------
Revenues $16,065,121 $22,806,617
Cost of revenues 14,790,131 21,684,241
----------- -----------
Gross profit $ 1,274,990 $ 1,122,376
----------- -----------
Amounts receivable from the joint ventures were $2,100,077 at December 31, 1999.
(e) The Company entered into an Agreement with the Chairman of the Board of the
Company effective July 1, 2001 to provide general consulting services to
the Company for a one-year period for an aggregate compensation amount of
$250,000. The Company prepaid the $250,000 in 2000 and has reflected this
amount in accounts receivable, net in the consolidated balance sheet at
December 31, 2000.
13. COMMITMENTS AND CONTINGENCIES
(A) LEASE COMMITMENTS
The Company leases office space in New York, Los Angeles, St. Louis and
Coral Gables which expire at various dates through 2009. In conjunction with the
acquisition of Bekins in January 1998, the Company assumed a ground lease on a
warehouse in Orlando, Florida which expires in 2085, with a minimum annual
payment of $6,489 and assumed a lease on warehouse space in Las Vegas, Nevada
through October 2001.
The Orlando, Florida warehouse was sold and the ground lease assigned in
March 2001, for $2,265,500, the net proceeds of which were used to repay the
related mortgage in full and pay off substantially all of the term loan with
Bank of America, N.A. (see Note 10). In anticipation of a sale, Bekins entered
into a lease on warehouse space in Orlando in February 2000.
The aggregate future minimum lease payments due under operating leases, are as
follows:
DECEMBER 31
-----------
2001 $1,808,525
2002 1,880,594
2003 1,675,856
2004 1,582,349
2005 1,416,192
Thereafter 4,179,239
-------------
$ 12,542,755
-------------
Rent expense for 2000, 1999 and 1998 was $1,833,164, $2,401,536 and
$2,101,282, respectively.
(B) EMPLOYMENT AGREEMENTS
The Company currently has employment agreements with four members of
management personnel that expire from December 2001 to August 2002 at an
aggregate annual compensation of $610,275.
(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.
F-23
33
In June 1999, Hospitality Restoration & Builders, Inc., a wholly owned
subsidiary of the Company ("HRB"), filed a lawsuit in the Supreme Court, New
York County against Servico, Inc. ("Servico"), six (6) Servico hotel subsidiary
corporations, Servico's successor, Lodgian, Inc., and Impac Hotel Group. In
general, the lawsuit alleged that Servico alleged that Servico breached its
obligations to HRB under agreements pursuant to which HRB was to renovate
certain hotel properties located in New York, Texas and Illinois. It was also
claimed that Servico fraudulently induced HRB to perform work. HRB has asserted
in the action that it suspended its work at these hotels due to Servico's
failure to pay for certain completed work. Following HRB's suspension of work,
Servico terminated HRB as the contractor at all the hotels. HRB is seeking
damages in excess of $14.5 million. As a result of motions made by Servico, the
actions related to the Texas and Illinois properties were dismissed for lack of
jurisdiction and the claims based on fraud were also dismissed. HRB has
subsequently filed actions against Servico in Texas and Illinois. With respect
to the New York properties, Servico has counterclaimed against HRB to recover
damages in excess of $19.0 million. The Company believes that it has meritorious
defenses against Servico's counterclaims and that the outcome of this matter
will not have a material adverse effect on the Company, however, because of the
uncertainties inherant in the litigation process it is unable to predict the
outcome and an adverse outcome in this action could have a material adverse
effect on the Company.
On February 3, 2000, Servico Rolling Meadows, Inc. ("Servico RM"),
filed a lawsuit in the United States District Court for the Northern District of
Illinois against HRB. In general, the lawsuit alleges that HRB furnished
defective work and failed to complete work required under an agreement to
renovate a hotel located in Rolling Meadows, Illinois. Servico RM is seeking
damages in excess of $2.1 million. In response to this action, on March 10,
2000, HRB filed an answer in which it denied Servico RM's claims and asserted
counterclaims against Servico RM for breach of contract and fraud, among other
claims. HRB is seeking damages in an amount in excess of $2.8 million against
Servico RM in connection with this counterclaim. To date, Servico RM has not
answered or otherwise responded to HRB's claims and formal discovery has not yet
been initiated. The Company believes that it has meritorious defenses against
Servico's counterclaims and that the outcome of this matter will not have a
material adverse effect on the Company, however, because of the uncertainties
inherant in the litigation process it is unable to predict the outcome and an
adverse outcome in this action could have a material adverse effect on the
Company.
On or about February 23, 2000, HRB filed a lawsuit in the District
Court of Harris County, Texas against Servico Houston, Inc. ("Servico Houston").
In general, the lawsuit alleges that Servico breached its obligations to HRB
under an agreement pursuant to which HRB was to renovate a hotel located in
Houston, Texas and also fraudulently induced HRB to perform work at this hotel.
HRB claims in this lawsuit that it suspended work at this hotel because it was
not paid for completed work. Following its suspension, HRB was terminated as the
contractor. HRB is seeking damages in an amount equal to the sum of at least
$2,568,480 plus statutory interest. Servico Houston has answered, denied
responsibility for any damages and counterclaimed to recover damages in the
total amount of $2,822,856. The Company believes that it has meritorious
defenses against Servico's counterclaims and that the outcome of this matter
will not have a material adverse effect on the Company, however, because of the
uncertainties inherant in the litigation process it is unable to predict the
outcome and an adverse outcome in this action could have a material adverse
effect on the Company.
In June, 1998, an action (the "State Action") was brought against the
Company by West Atlantic Corp. ("West Atlantic") in the Supreme Court of the
State of New York. The State Action alleged that the Company retained West
Atlantic pursuant to an agreement to perform certain marketing and selling
services for the Company. The State Action further alleged that fees were
allegedly earned and not paid under the Agreement and sought damages relating to
an alleged breach of contract, damages with respect to alleged "significant
benefits to the Company" and damages relating to breach of the duties of good
faith and fair dealing. In November 2000, the Company and West Atlantic executed
a settlement agreement. In connection therewith, the parties executed mutual
releases, the Company agreed to pay to West Atlantic a total of $115,000 over
six years and West Atlantic dismissed the State Action with prejudice. In
connection with the State Action, the Company brought claims in federal and
state court against Tova Schwartz, the former President and Chief Executive
Officer of the Company's predecessor, seeking indemnification against the West
Atlantic claims in the State Action, as well as compensatory damages and
punitive damages for fraud, among other things. The state and federal actions
claim that, among other things, Ms. Schwartz failed to disclose to the Company
the existence of the Agreement and West Atlantic's claims thereunder, when the
Company purchased from Ms. Schwartz certain shares of Common Stock of the
Company which she then held, sold its lighting business to her and provided her
with other severance benefits. Ms. Schwartz asserted counterclaims against the
F-24
34
Company in the State Action, and she also joined Howard Anders and Robert
Berman, former employees of the Company, as fourth-party defendants in the State
Action. Ms. Schwartz asserted counterclaims against the Company in the federal
action, and joined Mr. Anders, Mr. Berman and Alan Friedberg, a former employee
of the Company, as additional counterclaim defendants in the federal action. The
Company has concluded that, pursuant to the Company's By-Laws, Messrs. Anders
and Berman are entitled to indemnification from the Company with respect to the
state and federal actions. The Company has concluded that, pursuant to the
Company's By-Laws, Messrs. Anders and Berman are entitled to indemnification
from the Company with respect to the state and federal actions. In September
2000, the Company and Messrs. Anders and Berman entered into a stipulation with
Ms. Schwartz pursuant to which they dismissed without prejudice all claims and
counterclaims between them in the federal action. That stipulation was
so-ordered by the court on November 2, 2000. As part of this disposition, the
parties executed a separate side-agreement (not filed with the court) pursuant
to which the Company agreed that Ms. Schwartz will not be precluded from raising
a statute of limitations defense in the event the Company re-files against her
the claims that were the subject of the federal action. In or about May 2001,
the parties executed a stipulation of discontinue with respect to the third-and
fourth-party actions under the stipulation, all claims and defenses in the
third-and fourth-party actions are dismissed without prejudice pending the
outcome of Ms. Schwartz's legal malpractice action against the Company's former
counsel, Olshan Grundman Frome & Rosenzweig, and Robert Friedman, Esq.
(collectively "Olshan"), arising out of Olshan's advice to the Company in
connection with the Company's August 1995 transaction with AGF Interior Services
(the "Olshan Action"). As part of the disposition of the third-and fourth-party
actions, the parties agreed to toll the statute of limitations as to all claims
in those actions until one year from the date that the Olshan Action is finally
concluded. In the event that the Olshan Action is resolved in Olshan's favor,
the parties to the third-and fourth-party actions will each dismiss with
prejudice their claims against the other parties to those actions. The
stipulation was submitted to the court for its review and signature on June 7,
2001. The Company admitted no wrongdoing in connection with the dismissals of
state and federal actions.
After the resignations of a number of former directors and officers of
the Company in the fall of 1999, the Company retained counsel to assist in
conducting an investigation into various matters. In the course of the
investigation, the Company discovered, among other things, that approximately
$2.1 million of fraudulent charges had been submitted to and paid by the Company
during 1998 and 1999. Those funds have been returned to the Company by a former
officer of the Company, but the Company has not yet recovered any interest or
related costs. Management believes that it has identified the financial extent
of the fraudulent activities. The financial results for the fourth quarter of
1999 reflect the recovery. The Company has not restated any prior period
financial statements as management has determined that the impact was not
material in any period. The Company believes that other former directors,
officers and employees may have been involved in the fraudulent activities, that
there may have been breaches of fiduciary duties and other inappropriate
actions, and that the Company may be able to recover damages from those
individuals. The Company intends to pursue all available and appropriate
remedies and to make any appropriate referrals to law enforcement and
administrative agencies. In May 2001, the Company reached an Agreement to settle
its litigation against one of the former officers of the Company. The Agreement
provided for a cash payment by the former officer to the Company of $650,000
within 60 days and the former officer's continued cooperation with the Company's
investigation. In exchange, the Company agreed to a limited release to the
former officer and to dismiss its outstanding litigation upon receipt of the
payment called for under the Agreement.
14. MAJOR CUSTOMERS
During 2000, no customers accounted for over 10% of the Company's
continuing revenues. During 1999, one customer, a high-ranking government
official of the United Arab Emirates, accounted for 13% of the Company's
continuing revenues. The largest customer of the Company for 1998, a major
lodging company, accounted for 14% of the Company's continuing revenues.
F-25
35
15. (CAPITAL DEFICIT) STOCKHOLDERS' EQUITY
In January 1997, in connection with the acquisition of the Leonard
Parker Company and Parker Reorder, the Company issued 200,000 shares of 6%
Convertible Preferred Stock ("LPC Preferred"). The holders of LPC Preferred were
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. The dividends for 1998
were accrued at December 31, 1998 and paid in 1999, and the dividends for 1999
were accrued at December 31, 1999 and paid in 2000. The LPC Preferred was
convertible into the Company's Common Stock based upon a prescribed formula in
the purchase agreement. 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 were converted into an aggregate of 1,269,399
shares of Common Stock in September and October 1999.
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
provision in the purchase agreement, 639,512 additional shares of Common Stock
were issued by the Company in January 1999.
As an inducement to enter into the Joint Venture Agreement with Apollo,
the Company issued to Apollo a seven-year warrant to purchase up to 750,000
shares of Common Stock at $8.115 per share. The warrant was initially
exercisable as to 250,000 shares and became exercisable as to the remaining
500,000 shares in increments of 100,000 shares for every $7,500,000 of
incremental renovation revenue and purchasing fees earned by the Company from
the Apollo Joint Venture. In October 2000, as part of the Company's agreement to
restructure its involvement in the Apollo Joint Venture, the Company issued
100,000 shares of Common Stock to Apollo and all the warrants previously issued
were returned to the Company and cancelled. The cost associated with the
warrants for the 250,000 shares initially exercisable were expensed as warrant
expense in 1997. The costs associated with the warrants for the 100,000 share
increments earned by Apollo were recognized as an additional cost of the related
renovation and procurement contract. In 1999 and 1998, the Company recognized
expenses related to these warrants of $381,525 and $213,555, respectively, all
of which are included in discontinued operations in the accompanying
Consolidated Statement of Operations.
In December 2000, the Company executed an Amended and Restated Loan
Agreement with HSBC Bank. In connection with this Agreement, the Company issued
1 million shares of 8% Convertible Preferred Stock ("HSBC Preferred") valued at
$1.00 per share for a total value of $1 million (the then outstanding debt
balance). The HSBC Preferred are convertible into the Company's Common Stock at
a ratio of 1:1 or into a total of 1 million shares of Common Stock. During the
first two years after the date of this Agreement, the dividend is payable in
additional shares of Convertible Preferred Stock. After two years, the dividend
is payable either in additional shares of Convertible Preferred Stock or cash,
at the option of the Company. Dividends are payable on a semi-annual basis,
commencing June 30, 2001.
16. STOCK OPTION PLANS
At December 31, 2000, the Company has three stock option plans. The
Company accounts for its stock option plans under the intrinsic value based
method, such that 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.
In December 1999, the Company's Board of Directors adopted, and the
stockholders approved, the 1999 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, as well as
to secure for the Company and its stockholders the benefits arising from stock
ownership by its outside directors. The Company can issue options for up to
2,500,000 shares under the Plan. With respect thereto, options to purchase a
total of 820,500 shares have been granted. 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". Incentive stock options are
F-26
36
granted at the fair market value of the stock while non-qualified stock options
must be granted at no less than 75% of the fair market value of the stock. The
term and vesting period for each option granted is determined by the Stock
Option Committee, which is composed of two or more outside members of the Board
of Directors, provided the maximum length of the term of each option granted
will be no more than ten years. Each outside director who becomes an outside
director after December 15, 1999, 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 Plan on April 1 of
each year, beginning on April 1, 2000, each outside director shall be granted an
option to purchase 10,000 shares of Common Stock. Options granted to outside
directors vest over three years and shall be exercisable in three equal annual
installments beginning on the first anniversary of the date of grant.
The Company is required to provide pro forma information regarding
income from continuing operations 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, under which compensation cost would be measured at the
grant date based on the fair value of the awards and recognized over the vesting
period. 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: no dividends paid;
expected volatility of 98%; risk-free interest rate of 5.54%; and expected lives
of 5.8 years. No options were granted in 1999. For options granted in 2000, the
following weighted average assumptions were used: no dividends paid; expected
volatility of 70%; risk-free interest rate of 6.55%; and expected lives of 3
years.
Under the fair value based method, the Company's income from continuing
operations and earnings per share would have been the pro forma amounts
indicated below.
2000 1999 1998
---------- ---------- ----------
Loss from continuing operations (in thousands):
As reported $ (3,876) $ (18,245) $ (2,069)
Pro forma (4,680) (19,846) (3,443)
Basic loss per share from continuing operations:
As reported (0.26) (1.35) (0.19)
Pro forma (0.31) (1.46) (0.31)
Diluted loss per share from continuing operations:
As reported (0.26) (1.35) (0.19)
Pro forma (0.31) (1.46) (0.31)
F-27
37
The following table contains information on stock options for the three
year period ended December 31, 2000:
WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- -----------------
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
Granted -- --
Exercised (40,000) 1.28
Canceled (819,416) 6.46
---------- ----
Outstanding, December 31, 1999 864,000 6.62
Granted 820,500 2.96
Exercised (153,800) 2.27
Canceled (220,700) 5.08
---------- ----
Outstanding, December 31, 2000 1,310,000 5.10
---------- ----
Exercisable at December 31, 2000 662,175 5.83
Exercisable at December 31, 1999 535,996 5.19
Exercisable at December 31, 1998 864,650 3.67
---------- ----
EXERCISE PRICE LESS EXERCISE PRICE EQUAL
THAN MARKET TO MARKET
------------------- --------------------
Weighted-average fair value of:
Options granted in 1998 -- $7.14
Options granted in 1999 -- --
Options granted in 2000 -- $2.96
The following table summarizes information about stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------------------------------- --------------------------------
AMOUNT WEIGHTED RANGE OF WEIGHTED AMOUNT WEIGHTED
OUTSTANDING AVERAGE EXERCISE PRICE AVERAGE EXERCISABLE AVERAGE
REMAINING EXERCISE PRICE EXERCISE PRICE
CONTRACTUAL
LIFE (YEARS)
------------------------------------------------------------------------- --------------------------------
798,000 8.58 $1.94-3.00 $2.95 285,974 $2.96
225,000 1.03 6.125-6.75 6.67 225,000 6.67
287,000 6.58 8.94-12.00 9.86 151,201 10.00
------------------- --------------- -------------------- ---------------- --------------- ----------------
1,310,000 6.85 $1.94-12.00 5.10 662,175 5.83
F-28
38
17. EARNINGS PER SHARE
The following table reconciles the components of basic and diluted
earnings per common share for loss from continuing operations for the years
ended December 31, 2000, 1999 and 1998:
2000 1999 1998
------------ ------------ ------------
NUMERATOR:
Loss from continuing operations ($ 3,875,679) ($18,245,213) ($ 2,068,574)
Preferred stock dividends (3,507) (135,000) (270,000)
------------ ------------ ------------
Loss available to common stockholders from (3,879,186) (18,380,213) (2,338,574)
continuing operations - Basic
------------ ------------ ------------
Effect of dilutive securities (a):
Preferred stock dividends -- -- --
------------ ------------ ------------
Loss available to common stockholders from ($ 3,879,186) ($18,380,213) ($ 2,338,574)
continuing operations - Diluted
------------ ------------ ------------
DENOMINATOR:
Weighted average common shares outstanding - 14,815,908 13,665,465 12,092,437
Basic
------------ ------------ ------------
Effect of dilutive securities (a):
Stock-based compensation plans -- -- --
Contingently issuable shares -- -- --
Convertible preferred stock -- -- --
------------ ------------ ------------
Weighted average common and common equivalent 14,815,908 13,665,465 12,092,437
shares outstanding - Diluted
------------ ------------ ------------
Basic loss per common share from continuing ($ 0.26) ($ 1.35) ($ 0.19)
operations
Diluted loss per common share from continuing ($ 0.26) ($ 1.35) ($ 0.19)
operations
(a) The common stock equivalent shares for the years ended December 31, 2000,
1999 and 1998 were as follows: 0 shares, 211,449 shares and 738,984
shares, respectively, for the stock-based compensation plans; 0 shares,
14,211 shares and 395,600 shares, respectively, for the contingently
issuable shares; and 0 shares, 710,324 shares and 1,020,474 shares,
respectively, for the convertible preferred stock. The common stock
equivalents for these securities were not included in the calculation of
diluted loss per common share because the effect would be antidilutive.
F-29
39
18. 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 purchasing business through LPC provides
"project-managed" procurement of furniture, fixtures and equipment for new
and refurbished properties. The reorder business, operating through Parker
Reorder, provides reordering of operating supplies and equipment for daily
use in hotels. The logistics business through Bekins provides warehousing,
transportation and installation services to the hospitality industry and
other related fields, including retail merchandising. Due to the strategic
repositioning of the Company's lines of business, the Company has changed
the composition of its reportable segments. The Company's renovation
business and real estate investment and asset management business have
been classified as discontinued operations (Note 4) and are no longer
reported as part of segment reporting. In addition, the previously
reported purchasing segment has been segregated into the purchasing
business and the reorder business. The Company has restated the prior
years to conform to the revised segment reporting.
2000 1999 1998
------------- ------------- -------------
SALES TO CUSTOMERS
Purchasing $ 180,652,770 $ 177,233,213 $ 148,520,654
Reorder 10,772,132 17,046,504 5,807,316
Logistics 24,930,985 29,145,105 22,416,623
Corporate -- -- --
------------- ------------- -------------
$ 216,355,887 $ 223,424,822 $ 176,744,593
------------- ------------- -------------
INTER-SEGMENT SALES
Purchasing $ 803 $ 2,544,306 18,543,669
Reorder -- -- --
Logistics 5,693,015 4,543,032 3,610,377
Corporate -- -- --
------------- ------------- -------------
$ 5,693,818 $ 7,087,338 $ 22,154,046
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS
Purchasing $ 1,068,504 ($ 1,632,081) $ 3,299,112
Reorder (2,118,422) (12,278,965) (3,076,160)
Logistics 1,265,000 (846,940) 1,377,000
Corporate (2,760,912) (5,719,698) (4,656,934)
------------- ------------- -------------
($ 2,545,830) ($ 20,477,684) ($ 3,056,982)
------------- ------------- -------------
DEPRECIATION AND AMORTIZATION
Purchasing $ 358,244 $ 415,376 $ 361,781
Reorder 162,726 736,196 700,692
Logistics 605,000 667,000 537,000
Corporate 225,798 390,134 68,312
------------- ------------- -------------
$ 1,351,768 $ 2,208,706 $ 1,667,785
------------- ------------- -------------
INTEREST INCOME
Purchasing $ 402,085 $ 565,304 $ 492,554
Reorder 98,607 -- --
Logistics 20,000 4,000 1,000
Corporate 22,318 333,449 803,691
------------- ------------- -------------
$ 543,010 $ 902,753 $ 1,297,245
------------- ------------- -------------
F-30
40
2000 1999 1998
----------- ------------ ------------
INTEREST EXPENSE
Purchasing $ 16,059 170,234 39,779
Reorder 270 -- --
Logistics 486,000 284,000 353,000
Corporate 1,293,530 1,319,877 363,321
----------- ------------ ------------
$ 1,795,859 $ 1,774,111 $ 756,100
----------- ------------ ------------
TOTAL ASSETS AT YEAR END
Purchasing $46,371,038 $ 32,862,748 $ 44,734,461
Reorder 2,147,605 5,009,992 12,497,819
Logistics 16,352,612 16,067,410 17,051,060
Discontinued Operations 93,835 180,067 31,846,334
----------- ------------ ------------
Segment Total 64,965,090 54,120,217 106,129,674
Unallocated:
Cash and cash equivalents 131,877 2,456,771 1,283,411
Marketable securities -- -- 8,500,000
Income taxes refundable 490,302 3,906,804 --
Deferred taxes -- -- 4,535,178
Other 915,501 1,297,373 1,906,569
----------- ------------ ------------
$66,502,770 $ 61,781,165 $122,354,832
----------- ------------ ------------
CAPITAL EXPENDITURES
Purchasing $ 20,238 $ 140,766 $ 603,780
Reorder 243,316 301,927 1,905,308
Logistics 464,000 701,000 454,000
Corporate 344,759 561,786 193,795
----------- ------------ ------------
$ 1,072,313 $ 1,705,479 $ 3,156,883
----------- ------------ ------------
All transactions between reportable segments are accounted for on an
arms length basis and are eliminated in consolidation. Sales to customers
include sales to related parties.
The Company's revenue and assets predominately relate to the United
States operations. For the years ended December 31, 2000, 1999 and 1998, the
purchasing business recorded revenues of approximately $13,400,000, $38,993,000
and $4,462,000, respectively on shipments to Dubai, United Arab Emirates.
F-31
41
19. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (a)
2000 QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------- ---------------- ----------------- ----------------- -----------------
Revenues $ 41,555 $ 54,265 $ 65,284 $ 55,252
Gross profit 3,146 3,851 3,829 3,020(e)
Loss from continuing operations (962) (669) (288) (1,957)(e)
Income from discontinued operations -- -- -- 205
Net loss (962) (669) (288) (1,752)
Basic loss per common share: (b)
Loss from continuing operations (0.07) (0.05) (0.02) (0.13)
Net loss (0.07) (0.05) (0.02) (0.12)
Diluted loss per common share: (b)
Loss from continuing operations (0.07) (0.05) (0.02) (0.13)
Net loss (0.07) (0.05) (0.02) (0.12)
1999 QUARTER ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ---------------------------------------------- ---------------- ----------------- ----------------- -----------------
Revenues $ 57,687 $ 58,617 $ 53,668 $ 53,453
Gross profit 4,200 4,693 1,304 1,275
Loss from continuing operations (297) (661) (16,252) (d) (1,035)
Income (loss) from discontinued 841 100 (31,105) (9,595)
Net income (loss) 545 (560) (47,357)(d) (10,632)
Basic earnings (loss) per common share:
(b)
Loss from continuing operations (0.02) (0.05) (1.22) (0.07)
Net income (loss) 0.04 (0.04) (3.55) (0.73)
Diluted earnings (loss) per common
share: (b)
Loss from continuing operations (0.02) (0.05) (1.22) (0.07)
Net income (loss) 0.04 (0.04) (3.55) (0.73)
- --------------
(a) All amounts except per share data presented in thousands.
(b) The quarterly per share amounts are computed independently of annual
amounts.
(c) 1999 quarterly amounts have been restated to reflect discontinued
operations.
(d) Includes asset impairment charge of $9,017,000.
(e) Decrease from previous quarters due primarily to the timing of fee income
in the purchasing business.
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42
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
HOTELWORKS.COM, INC.
CONDENSED BALANCE SHEET
ASSETS
2000
------------
Cash and cash equivalents $ 114,922
Income taxes refundable 483,802
Prepaids and other current assets 104,988
------------
Total current assets 703,712
Property and equipment, net 786,770
Investment in subsidiaries (13,825,954)
Receivables from related parties 18,461,604
Other assets 52,152
------------
$ 6,178,284
------------
LIABILITIES AND CAPITAL DEFICIT
Accounts payable $ 1,185,066
Accrued and other liabilities 450,735
Current portion of long-term debt 683,931
Income taxes payable 1,011,399
Net current liabilities of discontinued operations 1,047,627
------------
Total current liabilities 4,378,758
Long-term debt 3,588,922
------------
Total liabilities 7,967,680
Commitments and contingencies
Total capital deficit (1,789,396)
------------
$ 6,178,284
------------
The "Notes to Consolidated Financial Statements of Hotelworks.com, Inc. and
Subsidiaries" are an integral part of these statements. See accompanying "Notes
to Condensed Financial Information of Registrant".
F-33
43
HOTELWORKS.COM, INC.
CONDENSED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000
SCHEDULE I
Revenues $ --
Expenses:
Selling, general and administrative 2,760,912
-----------
Loss from operations before equity in net income of subsidiaries (2,760,912)
Equity in net income of subsidiaries 233,445
-----------
Loss from operations (2,527,467)
Interest expense, net 1,271,212
-----------
Loss from continuing operations before income taxes (3,798,679)
Income tax provision 77,000
-----------
Loss from continuing operations (3,875,679)
Gain on disposal of discontinued businesses 204,671
-----------
Net loss $(3,671,008)
-----------
The "Notes to Consolidated Financial Statements of Hotelworks.com, Inc. and
Subsidiaries" are an integral part of these statements. See accompanying "Notes
to Condensed Financial Information of Registrant".
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HOTELWORKS.COM, INC.
CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 2000
SCHEDULE I
OPERATING ACTIVITIES:
Net loss $ (3,671,008)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 204,415
Equity in net income of subsidiaries (236,445)
Gain on disposal of discontinued businesses (204,671)
(Increase) decrease in current assets:
Prepaids and other current assets 543,071
Income tax refundable 3,423,002
Receivables from related parties 5,754,408
Other assets 11,780
Increase (decrease) in current liabilities:
Accounts payable (77,664)
Accrued and other liabilities (792,966)
------------
Net cash provided by operating activities of continuing operations 4,953,922
------------
Net cash (used in) operating activities of discontinued operations (200,588)
------------
INVESTING ACTIVITIES:
Dividends from subsidiaries 3,740,604
Purchases of property and equipment (344,759)
------------
Net cash provided by investing activities of continuing operations 3,395,845
------------
FINANCING ACTIVITIES:
Repayment of loans payable (14,835,000)
Repayment of long-term debt (411,657)
Payment of preferred stock dividends (135,000)
Borrowings on long-term debt 4,684,510
Proceeds from exercise of stock options and warrants 312,453
------------
Net cash used in financing activities (10,384,694)
------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (2,235,515)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,350,437
------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 114,922
------------
The "Notes to Consolidated Financial Statements of Hotelworks.com, Inc. and
Subsidiaries" are an integral part of these statements. See accompanying "Notes
to Condensed Financial Information of Registrant".
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45
Notes to Condensed Financial Information of Registrant:
1. Basis of Presentation
Pursuant to the rules and regulations of the Securities and Exchange Commission,
the Condensed Financial Statements of the Registrant do not include all of the
information and notes normally included with financial statements prepared in
accordance with generally accepted accounting principles. It is, therefore,
suggested that these Condensed Financial Statements be read in conjunction with
the Consolidated Financial Statements and Notes thereto.
In the parent-company-only financial statements, the Company's investment in
subsidiaries is stated at cost plus/minus equity in undistributed
earnings/losses of subsidiaries since the date of acquisition. The Company's
share of net income/loss of its unconsolidated subsidiaries is included in
consolidated income/loss using the equity method. Since the Company is committed
to providing further financial support to its subsidiaries, the Company has
recognized losses of its subsidiaries in excess of its investment in
subsidiaries amounting to $30,788,000.
2. Dividends from Subsidiaries
Cash dividends paid to Hotelworks.com from the Company's consolidated
subsidiaries were $3,740,604 in 2000.
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46
HOTELWORKS.COM, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(UNAUDITED WITH RESPECT TO 1999 AND 1998)
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO BALANCE AT END
DESCRIPTION PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS(1) OF PERIOD
- ------------------------------------------- ------------- ------------- --------------- ------------- ----------------
CONTINUING OPERATIONS:
Allowance for doubtful accounts
1998 $ 142,595 $ 668,922 $ -- $ (131,528) $ 679,989
1999 679,989 1,632,922 -- (569,547) 1,743,364
2000 1,743,364 764,562 -- (505,875) 2,002,051
Allowance or deferred tax assets
1998 -- -- -- -- --
1999 -- 20,118,694 -- -- 20,118,694
2000 20,118,694 1,451,148 -- -- 21,569,842
DISCONTINUED OPERATIONS:
RENOVATION BUSINESS:
Reserves for loss on disposal,
including operating losses during
phase-out period
1998 -- -- -- -- --
1999 -- 9,236,894 -- (6,330,837) 2,906,057
2000 2,906,057 -- -- (1,731,057) 1,175,000
HOTEL DEVELOPMENT BUSINESS:
Reserves for loss on disposal,
including operating losses during
phase-out period
1998 -- 150,000 -- -- 150,000
1999 150,000 1,670,204 -- (1,820,204) --
2000 -- -- -- -- --
REAL ESTATE INVESTMENT AND ASSET
MANAGEMENT BUSINESS:
Reserves for loss on disposal,
including losses during phase-out
period
1998 -- -- -- -- --
1999 -- 5,650,570 -- (713,071) 4,937,499
2000 4,937,499 -- -- (4,937,499) --
- ------------
(1) Charges to the accounts are for the purposes for which the reserves were
created.
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