1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: JUNE 30, 2001
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission File Number: 0-23054
HOTELWORKS.COM, INC.
(exact name of registrant as specified in its charter)
NEW YORK 11-3096379
- ------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
201 ALHAMBRA CIRCLE, MIAMI, FL 33134
- ------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
(305) 774-3200
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) has filed all reports to be filed by section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
[X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUER
State the number of shares outstanding of each of the issuer's classes of common
stock as of the latest practicable date: 15,112,867 as of August 8, 2001.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000...........................................................................3
Condensed Consolidated Statements of Operations for the three
and six months ended June 30, 2001 and 2000.....................................................4
Condensed Consolidated Statement of Stockholders'
Equity for the six months ended June 30, 2001...................................................5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2001 and 2000 ............................................................6
Notes to Condensed Consolidated Financial Statements ........................................7-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations..........................................................................................12-16
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................................17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................17
Item 6. Exhibits and Reports on Form 8-K.......................................................................17
Signatures.......................................................................................................18
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES LITIGATION
REFORM ACT OF 1995.
Except for historical information contained herein, the Report on Form 10-Q
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 which involve certain risks and uncertainties. The
Company's actual results or outcomes may differ materially from those
anticipated. Certain factors that might cause such a difference are set forth in
the Company's Form 10-K for the year ended December 31, 2000. In assessing
forward-looking statements contained herein, readers are urged to carefully read
those statements. When used in the Report on Form 10-Q, the words "estimate,"
"anticipate," "expect," "believe" and similar expressions are intended to
identify forward-looking statements. 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.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
UNAUDITED
ASSETS
Cash and cash equivalents $ 1,088 $ 4,977
Accounts receivable, net of allowance for doubtful accounts of
$1,862 and $1,743 25,292 33,677
Deposits with vendors 8,600 10,762
Income taxes refundable 286 490
Prepaid and other current assets 399 447
-------- --------
Total current assets 35,665 50,353
Property and equipment, net 3,052 5,315
Goodwill, net 10,438 10,639
Other assets 11 102
Non-current assets of discontinued operations 80 94
-------- --------
$ 49,246 $ 66,503
======== ========
LIABILITIES AND CAPITAL DEFICIT
Accounts payable $ 20,077 $ 26,988
Accrued expenses and other liabilities 3,478 5,085
Billings in excess of costs and estimated earnings 541 1,294
Customer deposits 12,596 14,136
Current portion of long-term debt 995 3,166
Net current liabilities of discontinued
operations 6,775 7,367
-------- --------
Total current liabilities 44,462 58,036
Long-term debt 9,685 10,256
-------- --------
Total liabilities 54,147 68,292
-------- --------
Commitments and contingencies
CAPITAL DEFICIT
8% convertible preferred stock, $.01 par value, $1 stated value,
5,000,000 shares authorized, 1,000,000 and 1,000,000 shares
issued and outstanding 1,000 1,000
Common stock, $.01 par value, 50,000,000 shares authorized,
15,112,867 and 14,912,867 shares issued and outstanding 151 149
Additional paid-in capital 60,082 60,019
Deficit (66,134) (62,957)
-------- --------
Total capital deficit (4,901) (1,789)
-------- --------
$ 49,246 $ 66,503
======== ========
See notes to condensed consolidated financial statements.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Unaudited
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2001 2000 2001 2000
-------- -------- -------- --------
Revenues $ 30,458 $ 54,265 $ 62,534 $ 95,820
Cost of revenues 28,050 50,414 57,848 88,823
-------- -------- -------- --------
Gross profit 2,408 3,851 4,686 6,997
Selling, general and administrative
expenses 3,555 4,178 7,509 8,138
-------- -------- -------- --------
Loss from operations (1,147) (327) (2,823) (1,141)
Other income (expense):
Interest income 79 106 153 378
Interest expense (198) (447) (467) (867)
-------- -------- -------- --------
Loss from operations before provision
for income taxes (1,266) (668) (3,137) (1,630)
Provision for income taxes -- 1 -- 1
-------- -------- -------- --------
Net (loss) $ (1,266) $ (669) $ (3,137) $ (1,631)
======== ======== ======== ========
Basic and diluted (loss) per common
share $ (0.09) $ (0.05) $ (0.21) $ (0.11)
======== ======== ======== ========
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING, BASIC AND DILUTED 15,113 14,813 15,002 14,795
======== ======== ======== ========
See notes to condensed consolidated financial statements.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(in thousands)
Unaudited
PREFERRED STOCK COMMON STOCK
------------------- ------------------ ADDT'L TOTAL
NUMBER STATED NUMBER PAR PAID IN CAPITAL
OF SHARES VALUE OF SHARES VALUE CAPITAL DEFICIT DEFICIT
--------- ----- --------- ----- ------- ------- -------
BALANCE, JANUARY 1, 2001 1,000 $1,000 14,913 $149 $ 60,019 $(62,957) $(1,789)
Stock issued in settlements -- -- 200 2 63 -- 65
Net loss -- -- -- -- -- (3,137) (3,137)
Preferred dividends accrued
-- -- -- -- -- (40) (40)
----- ------ ------ ---- -------- -------- -------
BALANCE, JUNE 30, 2001 1,000 $1,000 15,113 $151 $ 60,082 $(66,134) $(4,901)
===== ====== ====== ==== ======== ======== =======
See notes to condensed consolidated financial statements.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
SIX MONTHS ENDED JUNE 30,
--------------------------
2001 2000
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(3,137) $(1,631)
Adjustments to reconcile net (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization 673 676
Provision (recovery) for bad debts (25) 269
(Increase) decrease in current assets:
Accounts receivable 8,409 (6,558)
Costs and estimated earnings in excess of billings -- 107
Deposits with vendors 2,162 (5,893)
Income taxes refundable 205 3,396
Prepaid and other current assets 48 243
(Increase) decrease in other assets 92 (36)
Increase (decrease) in current liabilities:
Accounts payable (6,911) 1,720
Accrued expenses and other liabilities (1,583) (890)
Billings in excess of costs and estimated earnings (753) 2,504
Customer deposits (1,540) 9,796
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF CONTINUING OPERATIONS (2,360) 3,703
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES OF DISCONTINUED OPERATIONS (578) 276
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property and equipment 2,077 --
Purchases of property and equipment (286) (832)
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES OF CONTINUING OPERATIONS 1,791 (832)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt -- 302
Repayment of long-term debt (2,742) (362)
Proceeds from exercise of stock options and warrants -- 283
------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,742) 223
------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (3,889) 3,370
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,977 4,560
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,088 $ 7,930
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes 22 35
Interest 348 837
Cash received during the period for:
Income tax refunds 198 3,390
NON-CASH ACTIVITIES:
Preferred stock in-kind dividend accrued 40 --
Stock issued in settlements 65 --
See notes to condensed consolidated financial statements.
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HOTELWORKS.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1: CONSOLIDATION
The condensed consolidated financial statements of Hotelworks.com, Inc. and
subsidiaries (the "Company") and related notes thereto as of June 30, 2001 and
for the three and six months ended June 30, 2001 and 2000 are presented as
unaudited, but in the opinion of management include all adjustments necessary to
present fairly the information set forth therein. These adjustments consist
solely of normal recurring adjustments. The condensed consolidated balance sheet
information for December 31, 2000 was derived from the audited consolidated
financial statements included in the Company's Form 10-K. These interim
condensed consolidated financial statements should be read in conjunction with
that report. The interim results are not necessarily indicative of the results
for any future period. Certain prior period balances have been reclassified in
the condensed consolidated financial statements in order to provide a
presentation consistent with the current period.
NOTE 2: GOING CONCERN
The Company's condensed consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
liquidity of the Company was severely affected during 1999, 2000 and the first
half of 2001 by significant losses from continuing operations and discontinued
operations, which has resulted in a significant deterioration of the
stockholders' equity of the Company. In addition, the Company projects negative
cash flows from operations in 2001. These circumstances raise substantial doubt
about the Company's ability to continue as a going concern.
Management has taken the following steps in 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 by reducing overhead and labor costs,
(c) reduced its selling, general and administrative expenses from $22.7 million
in 1999 to $16.4 million in 2000 to a budgeted amount of $14.3 million in 2001,
and (d) sold its Orlando warehouse in March 2001, the proceeds of which were
used to payoff the mortgage note and substantially all of term loan with Bank of
America.
NOTE 3: 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.
The remaining assets and liabilities of the discontinued operations as of June
30, 2001 and December 31, 2000, as presented in the accompanying consolidated
balance sheets, are as follows (in thousands):
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JUNE 30, 2001: REAL ESTATE
INVESTMENT &
ASSET HOTEL
RENOVATION MANAGEMENT DeVELOPMENT TOTAL
-------- ----------- ----------- --------
Accounts receivable $ 19,304 $ -- $ -- $ 19,304
Allowance for doubtful accounts (19,072) -- -- (19,072)
Prepaids and other current assets, net -- -- -- --
Accounts payable (1,277) -- -- (1,277)
Accrued and other liabilities (98) (1,000) (47) (1,145)
Debt (4,585) -- -- (4,585)
-------- ------- ---- --------
Net current liabilities $ (5,728) $(1,000) $(47) $ (6,775)
-------- ------- ---- --------
Property and equipment, net $ 22 $ -- $ 18 $ 40
Other assets 19 -- 21 40
-------- ------- ---- --------
Net non-current assets $ 41 $ -- $ 39 $ 80
-------- ------- ---- --------
DECEMBER 31, 2000: REAL ESTATE
INVESTMENT &
ASSET HOTEL
RENOVATION MANAGEMENT DeVELOPMENT TOTAL
-------- ----------- ----------- --------
Accounts receivable $ 19,484 $ -- $ -- $ 19,484
Allowance for doubtful accounts (19,072) -- -- (19,072)
Prepaids and other current assets, net 110 -- -- 110
Accounts payable (1,549) -- -- (1,549)
Accrued and other liabilities (707) (1,000) (48) (1,755)
Debt (4,585) -- -- (4,585)
-------- ------- ---- --------
Net current liabilities $ (6,319) $(1,000) $(48) $ (7,367)
-------- ------- ---- --------
Property and equipment, net $ 30 $ -- $ 24 $ 54
Other assets 19 -- 21 40
-------- ------- ---- --------
Net non-current assets $ 49 $ -- $ 45 $ 94
-------- ------- ---- --------
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Net current liabilities of discontinued operations at June 30, 2001 and December
31, 2000, 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
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.
NOTE 4: DEBT
In March 2001, the Company's wholly-owned subsidiary, Bekins Distribution
Services, Inc. ("Bekins"), sold for $2,265,500 its warehouse facility in
Orlando, Florida, the net proceeds of which were used to repay its mortgage with
Bank of America, N.A. in full and reduce the remaining balance on the term loan
with Bank of America, N.A. to $107,000. In accordance with the Amended and
Restated Loan Agreement signed in September 2000, the remaining balance of the
term loan was transferred to the overadvance term loan and the term loan was
retired.
In connection with the Company's Amended and Restated Loan Agreement with HSBC
Bank USA ("HSBC"), the Company executed a three-year promissory note with HSBC.
The note contains a covenant requiring the Company to submit quarterly financial
statements to HSBC within 45 days of quarter-end. Due to the late filing of the
Form 10-Q for the quarter ended March 31, 2001, the Company was not in
compliance with this covenant. The Company cured the default upon the filing of
the Form 10-Q. Additionally, HSBC has notified the Company that they will not
call the note as a result of this violation.
NOTE 5: OPERATING SEGMENTS
The Company's operating segments are based on the separate lines of business
acquired over the past several years which provide different services to the
hospitality industry, namely purchasing, reorder and logistics services. The
purchasing business provides "project-managed" procurement of furniture,
fixtures and equipment for new and refurbished properties. The reorder business
provides reordering of operating supplies and equipment for daily use in hotels.
The logistics business provides warehousing, transportation and installation
services to the hospitality industry and other related fields, including retail
merchandising. Segment data is as follows (in thousands):
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Sales to Customers:
Purchasing $ 26,120 $ 44,913 $ 52,226 $ 76,493
Reorder 740 2,968 1,619 7,547
Logistics 3,598 6,384 8,689 11,780
Corporate -- -- -- --
-------- -------- -------- --------
$ 30,458 $ 54,265 $ 62,534 $ 95,820
======== ======== ======== ========
Inter-segment Sales:
Purchasing $ -- $ -- $ -- $ --
Reorder -- -- -- --
Logistics 1,777 971 2,638 1,729
Corporate -- -- -- --
-------- -------- -------- --------
$ 1,777 $ 971 $ 2,638 $ 1,729
======== ======== ======== ========
Income (loss) from Operations (A):
Purchasing $ (495) $ 378 $ (1,415) $ 941
Reorder (105) (522) (314) (939)
Logistics (17) 468 (44) 201
Corporate (530) (651) (1,050) (1,344)
-------- -------- -------- --------
$ (1,147) $ (327) $ (2,823) $ (1,141)
======== ======== ======== ========
(A) Subsequent to the filing of the Company's Form 10-Q for the quarter ended
March 31, 2001, the Company reallocated certain 2001 selling, general and
administrative expenses between segments to more accurately match the expense
with the appropriate segment. This reallocation was recorded retroactive to
January 1, 2001.
The Company's revenue and assets predominately relate to the United States
operations.
For the three and six months ended June 30, 2001, the following customers
accounted for over 10% of the Company's revenues:
THREE MONTHS SIX MONTHS
------------ ----------
Lodging and Condominium Developer 42.3% 24.3%
Florida Resort and Convention Hotel * 11.3%
Lodging and Hotel Development Company * 10.2%
- ------------
* Less than 10%.
For the three and six months ended June 30, 2000, one customer, a high-ranking
government official of the United Arab Emirates, accounted for 10.8% and 10.1%,
respectively, of the Company's revenues.
NOTE 6: EARNINGS PER SHARE
The following table reconciles the components of basic and diluted earnings per
common share for loss from continuing operations for the three and six months
ended June 30, 2001 and 2000 (in thousands):
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THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------ ------------------------
2001 2000 2001 2000
-------- -------- -------- --------
Numerator:
Loss from continuing operations $ (1,266) $ (669) $ (3,137) $ (1,631)
Preferred stock dividends (20) -- (40) --
-------- -------- -------- --------
Loss available to common stockholders
from continuing operations - basic (1,286) (669) (3,137) (1,631)
Effect of dilutive securities
preferred stock dividends (20) -- (40) --
-------- -------- -------- --------
Loss available to common stockholders
from continuing operations - diluted (1,266) (669) (3,177) (1,631)
======== ======== ======== ========
Denominator:
Weighted average common shares
outstanding - basic 15,113 14,813 15,002 14,795
Effect of dilutive securities (a)
Stock-based compensation plans -- -- -- --
Convertible preferred stock -- -- -- --
-------- -------- -------- --------
Weighted average common and common
equivalent shares outstanding -
dilutive 15,113 14,813 15,002 14,795
======== ======== ======== ========
(a) Antidilutive
NOTE 7: COMMITMENTS AND CONTINGENCIES
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. This Agreement
was renegotiated under a new Agreement signed in July 2001 whereby the former
officer would pay a total of $650,000 to the Company payable $100,000 at signing
(received by the Company in July, 2001) with seven monthly payments of $75,000
and a final payment of $25,000 in March 2002. Additionally, the Agreement called
for the former officer's continued cooperation with the Company's investigation
and stipulated a consent judgment in the Company's favor in an initial amount of
$1,000,000. However, in the event that the former officer fails to make the
scheduled payments, then the full $1,000,000 judgment is in effect, less
payments to date. In exchange, the Company agreed to a limited release to the
former officer and has dismissed its outstanding litigation upon receipt of the
initial payment.
Except for the changes stated above, there has been no change in the status of
the Company's material outstanding litigation as disclosed in the Company's Form
10-K for the year ended December 31, 2000.
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HOTELWORKS.COM, INC., AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
DESCRIPTION OF BUSINESS
OVERVIEW
The Company believes that historical comparisons of revenue levels, gross profit
levels and gross profit percentages may not be meaningful on a period to period
basis because revenue recognition methodologies vary across the Company's
businesses. The Company recognizes revenues and the associated earnings of fixed
fee service contracts under the percentage of completion method. Under this
method, the Company recognizes earnings relating to the portion of the total
earnings anticipated from a contract which the efforts expended bears to the
estimated efforts over the life of the contract. Earnings for variable fee
service contracts are generally recognized upon completion of the associated
service. In addition, in the purchasing and reorder business, the Company
performs its services either acting as a principal, for which it functions in a
manner similar to a purchaser and reseller of merchandise, or as an agent. As an
agent, revenues include solely the service fee income and the cost of the
contracts includes labor and other direct costs associated with the contract and
those indirect costs related to contract performance. As a principal, the
revenues and costs of contracts also include the cost of the associated
merchandise purchased for the customer, which are recognized when the
merchandise is shipped directly from the vendor to the customer.
RESULTS OF OPERATIONS: THREE MONTHS ENDED JUNE 30, 2001 vs. THREE MONTHS ENDED
JUNE 30, 2000.
Revenues for the three months ended June 30, 2001 were $30,458,000 compared to
$54,265,000 for the three months ended June 30, 2000. Sales in the purchasing
business declined from $44.9 million in 2000 to $26.1 million in 2001 primarily
as a result of the economic downturn and pricing pressures in the hotel industry
where development and renovation of hotel properties decreased. Sales in the
reorder business dropped from $3.0 million to $740,000 due primarily to the loss
of a significant customer in May 2000 and the conversion of a large percentage
of business with the largest remaining customer from principal to agent status,
whereby the merchandise sales and cost are no longer recorded on the Company's
books. The economic slowdown has also negatively impacted the logistics business
where revenue dropped from $6.4 million in the second quarter of 2000 to $3.6
million in the current quarter. Hotel and retail customers have scaled back
their expansion plans thereby reducing the available work for logistics.
Further, there has been a drop in hotel and casino development in Las Vegas
where the Company maintains a warehouse and staff.
Cost of revenues for the quarter ended June 30, 2001 decreased to $28,050,000 as
compared to $50,414,000 for the second quarter of 2000 due primarily to lower
revenues across all business segments.
Gross profit for the second quarter of 2001 was $2,408,000 or 7.9% of revenues,
compared to $3,851,000 or 7.1% of revenues for the second quarter of 2000. The
decrease in gross profit dollars was primarily attributable to the drop in
revenues. In gross profit percentages, the logistics business accounted for most
of the increase as operational efficiencies generated higher gross profits on
transportation and installation projects.
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Selling, general and administrative ("S,G&A") expenses decreased from $4,178,000
in the second quarter of 2000 to $3,555,000 in the second quarter of 2001. The
drop in S,G&A dollars was primarily the result of employee layoffs and expense
reductions in response to the economic downturn and the resulting drop in
revenues. As a percent of revenues, S,G&A expenses for the quarter ended June
30, 2001 were 11.7% as compared to 7.7% for the second quarter of 2000. The
increase in the percent for the current year quarter was due to the decrease in
revenues discussed above.
The loss from operations for the quarter ended June 30, 2001 was $1,147,000
compared to a loss of $327,000 for the quarter ended June 30, 2000. The increase
in the loss in the current quarter was due to the factors cited above.
Interest expense decreased from $447,000 in the three months ended June 30, 2000
to $198,000 in the three months ended June 30, 2001. The decrease was due to a
drop in interest rates as the majority of the Company's long-term debt is
subject to variable interest rates, the refinancing of the debt with HSBC Bank
USA in December 2000 whereby the debt currently accruing interest dropped by
approximately $5.5 million and the repayment of the Bekins' mortgage note and
term debt with Bank of America in March 2001. Interest income decreased
primarily due to the drop in funds available for investment.
Due to the losses sustained in the three months ended June 30, 2001 and 2000 and
the lack of any additional carryback opportunity, no provision or benefit for
income taxes was recorded.
Based on the above factors, the loss from operations increased from a loss of
$669,000 in the three months ended June 30, 2000 to a $1,266,000 loss in the
current three month period. Basic and diluted loss per share from operations
increased from a $0.05 loss in last year's second quarter to a loss of $0.09 in
the current quarter.
RESULTS OF OPERATIONS: SIX MONTHS ENDED JUNE 30, 2001 vs. SIX MONTHS ENDED
JUNE 30, 2000
Revenues for the six months ended June 30, 2001 were $62,534,000 compared to
$95,820,000 for the six months ended June 30, 2000. Sales in the purchasing
business decreased from $76.5 million in the prior year to $52.2 million in the
current year primarily as a result of the economic downturn and pricing
pressures in the hotel industry where development and renovation of hotel
properties declined. Sales in the reorder business dropped from $7.5 million in
2000 to $1.6 million in 2001 due primarily to the loss of a significant customer
in May 2000 and the conversion of a large percentage of the business with the
largest remaining customer from principal to agent status, whereby the
merchandise sales and cost are no longer recorded on the Company's books. Sales
in the logistics business declined from $11.8 million in 2000 to $8.7 million in
2001, also as a result of the economic downturn where hotel and retail customers
have scaled back their expansion plans. Additionally, the Company has been
negatively impacted by the drop in hotel and casino development in Las Vegas
where a warehouse and staff are maintained.
Cost of revenues for the six months ended June 30, 2001 were $57,848,000
compared to $88,823,000 for the six months ended June 30, 2000. The decrease was
due primarily to lower revenues.
Gross profit for the six months ended June 30, 2001 was $4,686,000 compared to
$6,997,000 for the six months ended June 30, 2000. The decrease in gross profit
dollars was primarily due to the drop in revenues. As a percent of revenues,
gross profit for 2001 was 7.5% compared to 7.3% for 2000.
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S,G&A expenses decreased from $8,138,000 in the six months ended June 30, 2000
to $7,509,000 in the six months ended June 30, 2001. The drop in S,G&A dollars
was primarily the result of employee layoffs and expense reductions in response
to the economic downturn and the resulting drop in revenues. As a percent of
revenues, S,G&A expenses for the current six months were 12.0% as compared to
8.5% for the prior six months. The increase in the percent for the current
period was due to the decrease in revenues discussed above.
The loss from operations for the six months ended June 30, 2001 was $2,823,000
compared to a loss of $1,141,000 for the six months ended June 30, 2000. The
increase in the loss in the current period was due to the factors noted above.
Interest expense decreased from $867,000 in the six months ended June 30, 2001
to $467,000 in the six months ended June 30, 2000. The decrease was due to a
drop in interest rates as the majority of the Company's long-term debt is
subject to variable interest rates, the refinancing of the debt with HSBC Bank
USA in December 2000 whereby the debt currently accruing interest dropped by
approximately $5.5 million and the repayment of the Bekins' mortgage note and
term debt with Bank of America in March 2001. Interest income decreased
primarily due to the drop in funds available for investment.
Due to the losses sustained in the six months ended June 30, 2001 and 2000 and
the lack of any additional carryback opportunity, no provision for a benefit for
income taxes was recorded.
Based on the above factors, the loss from operations increased from a loss of
$1,631,000 in the six months ended June 30, 2000 to a $3,137,000 loss in the
current six month period. Basic and diluted loss per share from operations
increased from a $0.11 loss in last year's first six months to a loss of $0.21
in the current six months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's condensed consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
liquidity of the Company was severely affected during 1999, 2000 and 2001 by
significant losses from continuing operations and discontinued operations, which
has resulted in a significant deterioration of the stockholders' equity of the
Company. In addition, the Company projects negative cash flows from operations
in 2001. These circumstances raise substantial doubt about the Company's ability
to continue as a going concern.
Management has taken the following steps in 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 by reducing overhead and labor costs,
(c) reduced its selling, general and administrative expenses from $22.7 million
in 1999 to $16.4 million in 2000 to a budgeted amount of $14.3 million in 2001,
and (d) sold its Orlando warehouse in March 2001, the proceeds of which were
used to payoff the mortgage note and substantially all of term loan with Bank of
America.
In March 2001, the Company's wholly-owned subsidiary, Bekins Distribution
Services, Inc. ("Bekins"), sold for $2,265,500 its warehouse facility in
Orlando, Florida, the net proceeds of which were used to repay its mortgage with
Bank of America, N.A. in full and reduce the remaining balance on the term loan
with Bank of America, N.A. to $107,000. In accordance with the Amended and
Restated Loan Agreement signed in September 2000, the remaining balance of the
term loan was transferred to the overadvance term loan and the term loan was
retired.
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In connection with the Company's Amended and Restated Loan Agreement with HSBC
Bank USA ("HSBC"), the Company executed a three-year promissory note with HSBC.
The note contains a covenant requiring the Company to submit quarterly financial
statements to HSBC within 45 days of quarter-end. Due to the late filing of the
Form 10-Q for the quarter ended March 31, 2001, the Company was not in
compliance with this covenant. The Company cured the default upon the filing of
the Form 10-Q for the quarter ended March 31, 2001. Additionally, HSBC has
notified the Company that they will not call the note as a result of this
violation.
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. The net cash flow deficit from operations for the first two quarters of
2001 primarily relate to losses in the Company's purchasing business and
corporate expenses. As of June 30, 2001, the Company had available approximately
$1.1 million in cash. As noted in this Form 10-Q, the Company's recurring losses
from operations raise substantial doubt about the Company's ability to continue
as a going concern. Although management has taken measures to improve profit and
cash flows, including review of its on-going businesses' gross margins and
related employee layoffs expense reductions, the receipt of settlement payments
from former officers and customers, proceeds from the sale of Bekins' Orlando
warehouse, and steps taken to defer certain capital expenditures and other
current payment obligations, there can be no assurance that the measures taken
will allow the Company to achieve profitability or positive cash flows. Even
with these measures, it is likely that the Company will need additional capital
to continue its operations. If the Company fails to secure additional capital,
either through financing or other methods, the Company may reduce its operations
or delay payment of its obligations. The occurrence of any or all of these
events would have a material adverse effect on the Company's business,
prospects, operating results and financial condition. The financial statements
included herein do not include any adjustments that might result from the
outcome of these uncertainties.
Net cash used by operating activities of continuing operations for the six
months ended June 30, 2001 was $2,360,000 compared to net cash provided of
$3,703,000 for the six months ended June 30, 2000. During the current period,
cash was primarily used to fund the net loss of the Company. The cash generated
by the decrease in accounts receivable and vendor deposits was substantially
offset by the cash used by the decrease in accounts payable and customer
deposits. These accounts dropped in the current period due primarily to the
economic slowdown whereby the hotel industry delayed and in some instances
cancelled renovation projects and new construction.
Net cash used in operating activities of discontinued operations was $578,000
for the six months ended June 30, 2001 compared to net cash provided of $276,000
in the six months ended June 30, 2000. The use of cash in 2001 primarily relates
to expenses for litigation as claims against former customers of the renovation
business are pursued.
Net cash provided by investing activities was $1,791,000 for the six months
ended June 30, 2001 compared to net cash used of $832,000 for the six months
ended June 30, 2000. For the first six months of 2001, cash was provided by the
sale of the Bekins warehouse in March 2001 offset by $286,000 of property and
equipment purchases. The use of cash in 2000 related entirely to purchases of
property and equipment.
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Net cash used in financing activities for the first six months of 2001 was
$2,742,000 compared to cash provided of $223,000 in the first six months of
2000. The use of cash in 2001 related to payments on long-term debt, primarily
the use of the warehouse sale proceeds by Bekins to payoff their mortgage with
Bank of America, N.A. and to substantially reduce the balance of their term loan
with Bank of America, N.A. For 2000, the proceeds from stock option and warrant
exercises and borrowings on long-term debt exceeded the repayments of long-term
debt by $223,000.
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. The Company
filed its Form 10-K on June 21, 2001, (as amended on July 13, 2001) however, the
Company's Form 10-Q for the quarter ended March 31, 2001 was also not filed on a
timely basis. The Company filed its Form 10-Q for the quarter ended March 31,
2001 on July 23, 2001. 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.
NEW ACCOUNTING PRONOUNCEMENT
In June 2001, the Financial Accounting Standards Board finalized FASB Statements
No. 141, BUSINESS COMBINATIONS (SFAS 141), and No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (SFAS 142). SFAS 141 requires the use of the purchase method
of accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS 141
also requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. SFAS 141
applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS 142, that the Company reclassify the carrying
amounts of intangible assets and goodwill based on the criteria in SFAS 141.
SFAS 142 requires, among other things, that companies no longer amortize
goodwill, but instead test goodwill for impairment at least annually. In
addition, SFAS 142 requires that the Company identify reporting units for the
purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS 142. SFAS 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all goodwill and other
intangible assets recognized at that date, regardless of when those assets were
initially recognized. SFAS 142 requires the Company to complete a transitional
goodwill impairment test six months from the date of adoption. The Company is
also required to reassess the useful lives of other intangible assets within the
first interim quarter after adoption of SFAS 142.
The Company's previous business combinations were accounted for using the
purchase method. As of June 30, 2001, the net carrying amount of goodwill is
$10,438,000. Amortization expense during the six-month period ended June 30,
2001 was $201,000. Currently, the Company is assessing but has not yet
determined how the adoption of SFAS 141 and SFAS 142 will impact its financial
position and results of operation.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although the Company does maintain small offices outside the United States and
does conduct immaterial transactions in foreign currencies, the Company does not
believe that it has material exposure to risks associated with foreign currency
fluctuations related to its operations given the terms of its contracts with
customers. The Company does not use derivative financial instruments in its
operations. The Company does have exposure to market risks associated with
changes in interest rates given that the Company does maintain long-term debt
facilities which have variable interest rates. If short-term interest rates
averaged 1% more in the six months ended June 30, 2001, the Company's interest
expense and net loss would have increased by approximately $60,000.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. This Agreement
was renegotiated under a new Agreement signed in July 2001 whereby the former
officer would pay a total of $650,000 to the Company payable $100,000 at signing
(received by the Company in July, 2001) with seven monthly payments of $75,000
and a final payment of $25,000 in March 2002. Additionally, the Agreement called
for the former officer's continued cooperation with the Company's investigation
and stipulated a consent judgment in the Company's favor in an initial amount of
$1,000,000. However, in the event that the former officer fails to make the
scheduled payments, then the full $1,000,000 judgment is in effect, less
payments to date. In exchange, the Company agreed to a limited release to the
former officer and has dismissed its outstanding litigation upon receipt of the
initial payment.
Except for the changes stated above, there has been no change in the status of
the Company's material outstanding litigation as disclosed in the Company's Form
10-K for the year ended December 31, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of earnings per share (Incorporated herein by reference to
Note 6 to the Company's Condensed Consolidated Financial Statements).
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOTELWORKS.COM, INC.
/s/ DOUGLAS A. PARKER
---------------------------------------
Douglas A. Parker
Chief Executive Officer, President and
Director
/s/ JOHN F. WILKENS
---------------------------------------
John F. Wilkens
Vice President - Treasurer (principal
financial officer, principal accounting
officer)
Dated: August 10, 2001
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