<PAGE> 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, 2000
( ) TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission File Number: 0-23054
HOTELWORKS.COM, INC.
--------------------------------------------------------------------------------
(exact name of registrant as specified in its charter)
New York 11-3096379
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Alhambra Circle, Coral Gables, FL 33134
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(305) 774-3200
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant (1) has filed all reports to be filed by section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
(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: 14,812,867 as of August 9, 2000.
<PAGE> 2
HOTELWORKS.COM, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and December 31, 1999.................................................................................. 3
Condensed Consolidated Statements of Operations for the three
months ended June 30, 2000 and 1999 and the six months
ended June 30, 2000 and 1999........................................................................... 4
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the six months ended June 30, 1999.......................................................... 5
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 2000 and 1999 ................................................................... 6
Notes to Condensed Consolidated Financial Statements .................................................. 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................................................. 11-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................. 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................................................... 15
Signatures....................................................................................................... 16
</TABLE>
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS UNDER THE SECURITIES LITIGATION
REFORM ACT OF 1995.
Except for historical information contained herein, the Report on Form 10-Q
contains forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995 which involve certain risks and uncertainties. The
Company's actual results or outcomes may differ materially from those
anticipated. In assessing forward-looking statements contained herein, readers
are urged to carefully read those statements. When used in the Report on Form
10-Q, the words "estimate," "anticipate," "expect," "believe" and similar
expressions are intended to identify forward-looking statements.
2
<PAGE> 3
HOTELWORKS.COM, INC. and SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
Unaudited
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,930 $ 4,560
Accounts receivable, less allowance for doubtful accounts
of $1,706 and $1,743 34,590 28,301
Costs and estimated earnings in excess of billings 169 276
Deposits with vendors 12,944 7,051
Income taxes receivable 511 3,907
Prepaid and other current assets 944 1,187
-------- --------
Total current assets 57,088 45,282
-------- --------
Property and equipment, net 5,550 5,195
Goodwill and other intangibles, net 10,839 11,038
Other assets 122 86
Non-current assets of discontinued operations 148 180
-------- --------
Total other assets 16,659 16,499
-------- --------
$ 73,747 $ 61,781
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 2,735 $ 2,902
Accounts payable 22,968 21,248
Accrued and other liabilities 4,660 5,550
Billings in excess of costs and estimated earnings 2,646 142
Customer deposits 21,814 12,018
Loans payable 15,835 15,835
Net current liabilities of discontinued operations 3,786 3,542
-------- --------
Total current liabilities 74,444 61,237
Long-term debt 175 68
-------- --------
Total liabilities $ 74,619 $ 61,305
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.01 par value, $25 stated
value, 5,000,000 shares authorized, none issued and outstanding -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
14,812,867 and 14,659,067 shares issued and outstanding 148 147
Additional paid-in capital 59,895 59,613
Retained earnings (deficit) (60,915) (59,284)
-------- --------
Total stockholders' equity (872) 476
-------- --------
$ 73,747 $ 61,781
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 53,235 $ 57,789 $ 93,760 $ 114,648
Cost of revenues 49,384 53,096 86,763 105,756
--------- --------- --------- ---------
Gross profit 3,851 4,693 6,997 8,892
Selling, general and administrative
expenses 4,178 5,482 8,138 9,895
--------- --------- --------- ---------
Loss from operations (327) (789) (1,141) (1,003)
Other income (expense):
Interest income 106 291 378 542
Interest and other expense (447) (518) (867) (942)
--------- --------- --------- ---------
Loss from continuing operations
before provision for income taxes (668) (1,016) (1,630) (1,403)
Provision (benefit) for income taxes 1 (441) 1 (611)
--------- --------- --------- ---------
Loss from continuing operations (669) (575) (1,631) (792)
Discontinued operations:
Income from discontinued operations -- 16 -- 777
--------- --------- --------- ---------
Net loss $ (669) $ (559) $ (1,631) $ (15)
========= ========= ========= =========
Basic earnings per common share:
Loss from continuing operations $ (0.05) $ (0.05) $ (0.11) $ (0.07)
Discontinued operations:
Income from discontinued operations -- -- -- 0.06
--------- --------- --------- ---------
Net loss $ (0.05) $ (0.05) $ (0.11) $ (0.01)
========= ========= ========= =========
Diluted earnings per common share:
Income (loss) from continuing operations $ (0.05) $ (0.04) $ (0.11) $ (0.07)
Discontinued operations:
Income from discontinued operations -- -- -- 0.06
--------- --------- --------- ---------
Net loss $ (0.05) $ (0.04) $ (0.11) $ (0.01)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 14,813 13,350 14,795 13,322
========= ========= ========= =========
WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 14,813 13,350 14,795 13,322
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(in thousands)
Unaudited
<TABLE>
<CAPTION>
Preferred Stock Common Stock
----------------------- -----------------------
Addt'l Retained Total
Number of Stated Number of Par Paid in Earnings Stockholders'
Shares Value Shares Value Capital (Deficit) Equity
--------- -------- --------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 2000 -- -- 14,659 $ 147 $ 59,613 $(59,284) $ 476
Exercise of stock options
and warrants -- -- 154 1 282 -- 283
Net loss -- -- -- -- -- (1,631) (1,631)
-------- -------- -------- -------- -------- -------- --------
BALANCE, JUNE 30, 2000 -- -- 14,813 $ 148 $ 59,895 $(60,915) $ (872)
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
HOTELWORKS.COM, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
<TABLE>
<CAPTION>
Six Months ended
June 30,
---------------------------
2000 1999
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITES:
Net loss $(1,631) $ (792)
Adjustments to reconcile net loss to
net cash provided by (used in) operating
activities:
Depreciation and amortization 676 1,162
Income from operations of discontinued
businesses -- 777
(Increase) decrease in current assets:
Accounts receivable, net (6,289) (3,609)
Costs and estimated earnings in excess
of billings 107 (647)
Deposits with vendors (5,893) (4,522)
Income taxes receivable 3,396 --
Prepaid and other current assets 243 (316)
Increase in other assets (36) (21)
Increase (decrease) in current liabilities:
Accounts payable 1,720 (3,519)
Accrued and other liabilities (890) 522
Billings in excess of costs and estimated
earnings 2,504 401
Customer deposits 9,796 7,438
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
OF CONTINUING OPERATIONS 3,703 (3,126)
------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
OF DISCONTINUED OPERATIONS 276 (4,538)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities -- 8,500
Purchase of property and equipment (832) (888)
------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
OF CONTINUING OPERATIONS (832) 7,612
------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES
OF DISCONTINUED OPERATIONS -- 2,792
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on long-term debt 302 --
Proceeds from borrowings on loans payable -- 4,910
Repayment of long term debt (362) (321)
Proceeds from exercise of stock options 283 --
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES OF
CONTINUING OPERATIONS 223 4,589
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,370 7,329
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 4,560 2,179
------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,930 $ 9,508
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Income taxes $ 35 $ 120
Interest $ 837 $ 694
NON-CASH INVESTING & FINANCING ACTIVITIES:
Preferred stock dividends accrued $ -- $ 90
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE> 7
HOTELWORKS.COM, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: CONSOLIDATION
The condensed consolidated financial statements of Hotelworks.com, Inc. and
subsidiaries, formerly known as Hospitality Worldwide Services, Inc. (the
"Company") and related notes thereto as of June 30, 2000 and for the three
months and six months ended June 30, 2000 and 1999 are presented as unaudited,
but in the opinion of management include all adjustments necessary to present
fairly the information set forth therein. These adjustments consist solely of
normal recurring adjustments. The condensed consolidated balance sheet
information for December 31, 1999 was derived from the audited consolidated
financial statements included in the Company's Form 10-K. These interim
condensed consolidated financial statements should be read in conjunction with
that report. The interim results are not necessarily indicative of the results
for any future period.
NOTE 2: DISCONTINUED OPERATIONS
In September, 1999, the Company announced a strategic initiative to reposition
the core supply and distribution businesses into a business-to-business
e-commerce company, and to divest itself of its renovation business and real
estate investment and asset management business. In December, 1998, the Company
decided to discontinue its hotel development business. As a result, for 1999,
the Company has reflected the operating results associated with the divested
businesses, as well as the estimated losses on disposal, as discontinued
operations on the consolidated statements of operations. Results of these
operations, were as follows (in thousands):
<TABLE>
<CAPTION>
Three Months ended Six Months ended
June 30, 1999 June 30, 1999
------------------ ----------------
<S> <C> <C>
Renovation Business:
Revenues $ 8,121 $ 20,164
Income from operations, net of taxes $ 187 $ 1,165
Real Estate Investment and Asset Management Business:
Revenues $ 131 $ 131
Loss from operations, net of taxes $ (171) $ (388)
Total Discontinued Operations:
Revenues $ 8,252 $ 20,295
Income from operations, net of taxes $ 16 $ 777
</TABLE>
7
<PAGE> 8
The remaining assets and liabilities of the discontinued operations as of
June 30, 2000 and December 31, 1999, as presented in the accompanying condensed
consolidated balance sheets, are as follows (in thousands):
<TABLE>
<CAPTION>
Real Estate
Investment & Asset Hotel
June 30, 2000: Renovation Management Development Total
---------- ------------------ ----------- --------
<S> <C> <C> <C> <C>
Accounts receivable $ 22,334 $ -- $ -- $ 22,334
Allowance for doubtful accounts (20,404) -- -- (20,404)
Accounts payable (2,571) -- -- (2,571)
Accrued and other liabilities (2,145) (1,000) -- (3,145)
-------- -------- -------- --------
Net current liabilities (2,786) (1,000) -- (3,786)
-------- -------- -------- --------
Property and equipment, net 49 -- 29 78
Other assets 38 -- 32 70
-------- -------- -------- --------
Net non-current assets $ 87 $ -- $ 61 $ 148
-------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
Real Estate
Investment & Asset Hotel
December 31, 1999: Renovation Management Development Total
---------- ------------------ ----------- --------
<S> <C> <C> <C> <C>
Accounts receivable $ 23,536 $ -- $ -- $ 23,536
Allowance for doubtful accounts (20,904) -- -- (20,904)
Prepaids and other current
assets, net 753 -- -- 753
Accounts payable (3,428) -- -- (3,428)
Accrued and other liabilities (2,468) (1,000) (31) (3,499)
-------- -------- -------- --------
Net current liabilities (2,511) (1,000) (31) (3,542)
-------- -------- -------- --------
Property and equipment, net 74 -- 34 108
Other assets 38 -- 34 72
-------- -------- -------- --------
Net non-current assets $ 112 $ -- $ 68 $ 180
-------- -------- -------- --------
</TABLE>
Net current liabilities of discontinued operations at June 30, 2000 and December
31, 1999, include renovation accounts receivable and costs and estimated
earnings in excess of billings which include disputed change orders and
estimated net claims, which involve negotiations with customers and in some
cases has resulted or may result in additional litigation. The Company believes
that it has established contractual or legal bases for pursuing recovery of
disputed change orders and claims and it is management's intention to pursue
these matters and litigate, if necessary, until a decision or settlement is
reached. Disputed change orders and claims involve the use of estimates and it
is reasonably possible that revisions to the estimated recoverable amounts could
be made within the next year. The settlement of these amounts depends on
individual circumstances and negotiations with the counter party, accordingly,
the timing of the collection will vary and may extend beyond one year.
The Company anticipates ceasing the remaining renovation operations in 2000.
However, the resolution date as to certain disputed receivables with customers
related to specific renovation projects which have been substantially completed
is uncertain. The Company anticipates disposing of its real estate investments,
and concurrently ceasing the real estate asset management and advisory
operations in 2000. The Company ceased its hotel development business in April
1999.
8
<PAGE> 9
In May 2000, the Company entered into an agreement to restructure its
involvement in the ING Joint Venture. As a result of the restructuring, the
Company exchanged mutual releases with ING Realty Partners, its joint venture
partner, which released the Company from future obligations to the joint
venture. The principal asset of the ING Joint Venture is its ownership of the
Radisson O'Hare (former Clarion Quality) Hotel in Chicago, Illinois. In 1999,
the Company wrote off its investment in the ING Joint Venture, and as such this
agreement did not have a material impact on the current year financial
statements.
NOTE 3: COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income." This statement establishes standards for
reporting and display of comprehensive income and its components in a separate
financial statement. Comprehensive income includes net income, as reported by
the Company, plus other comprehensive income, which includes cumulative foreign
translation adjustments and unrealized gains and losses on marketable securities
that are available-for-sale. The differences between net income as reported and
comprehensive income is immaterial for the three and six months ended June 30,
2000 and 1999.
NOTE 4: 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. 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 2) 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 year to conform to the revised
segment reporting. Segment data is as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------- -------------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales to Customers:
Purchasing $ 44,596 $ 74,433 $ 88,114 $ 43,883
Reorder 2,968 3,843 7,547 6,252
Logistics 6,384 9,350 11,780 20,282
Corporate -- -- -- --
--------- --------- --------- ---------
$ 53,235 $ 57,789 $ 93,760 $ 114,648
Inter-segment Sales:
Purchasing $ -- $ -- $ -- $ --
Reorder 971 846 1,729 2,326
Logistics -- -- -- --
Corporate -- -- -- --
--------- --------- --------- ---------
$ 971 $ 846 $ 1,729 $ 2,326
Income (loss) from Operations:
Purchasing $ 446 $ 780 $ 1,069 $ 1,359
Reorder (600) (745) (1,086) (1,447)
Logistics 468 427 201 1,490
Corporate (641) (1,251) (1,325) (2,405)
--------- --------- --------- ---------
$ (327) $ (789) $ (1,141) $ (1,003)
</TABLE>
The Company's revenue and assets principally relate to the United States
operations, with immaterial amounts related to foreign operations.
For the three and six months ended June 30, 2000, one customer, a high-ranking
government official of the United Arab Emirates, accounted for 11% and 10%,
respectively, of the Company's revenues. For the three months ended June 30,
1999, two customers, a high-ranking government official of the United Arab
Emirates and a major entertainment company, accounted for 14% and 13%,
respectively, of the Company's revenues. For the six months
9
<PAGE> 10
ended June 30, 1999, no customers accounted for over 10% of the Company's
revenues.
NOTE 5: EARNINGS PER SHARE
The following table reconciles the components of basic and diluted earnings per
common share for income from continuing operations for the three and six months
ended June 30, 2000 and 1999 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Numerator:
Loss from
continuing operations $ (669) $ (575) $ (1,631) $ (792)
Preferred stock dividends -- (45) -- (90)
-------- -------- -------- --------
Loss available
to common stockholders
from continuing
operations - Basic (669) (620) (1,631) (882)
Effect of dilutive securities
Preferred stock dividends -- 45 -- 90
-------- -------- -------- --------
Loss available to common
stockholders from continuing
operations - Diluted $ (669) $ (575) $ (1,631) $ (792)
======== ======== ======== ========
Denominator:
Weighted average common
shares outstanding - Basic 14,813 13,350 14,795 13,322
Effect of dilutive securities
Stock-based compensation plans (a) (a) (a) (a)
Convertible preferred stock (a) (a) (a) (a)
-------- -------- -------- --------
Weighted average common and
common equivalent shares
outstanding - Diluted 14,813 13,350 14,795 13,322
======== ======== ======== ========
</TABLE>
(a) antidilutive.
10
<PAGE> 11
ITEM 2. HOTELWORKS.COM, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company believes that historical comparisons of revenue levels, gross profit
levels and gross profit percentages may not be meaningful on a period to period
basis because revenue recognition methodologies vary across the Company's
businesses. The Company recognizes revenues and the associated earnings of fixed
fee service contracts under the percentage of completion method. Under this
method, the Company recognizes earnings relating to the portion of the total
earnings anticipated from a contract which the efforts expended bears to the
estimated efforts over the life of the contract. Earnings for variable fee
service contracts are generally recognized upon completion of the associated
service. In addition, in the purchasing and reorder business, the Company
performs its services either acting as a principal, for which it functions in a
manner similar to a purchaser and reseller of merchandise, or as an agent. As an
agent, revenues include solely the service fee income and the cost of the
contracts includes labor and other direct costs associated with the contract and
those indirect costs related to contract performance. As a principal, the
revenues and costs of contracts also include the cost of the associated
merchandise purchased for the customer, which are recognized when the
merchandise is shipped directly from the vendor to the customer.
THREE MONTHS ENDED JUNE 30, 2000 vs. THREE MONTHS ENDED JUNE 30, 1999
Revenues for the three months ended June 30, 2000 decreased to $53,235,000 as
compared to $57,789,000 for the three months ended June 30, 1999. The decrease
was concentrated in the logistics business where revenues were recorded in the
second quarter of 1999 on a large one-time contract that did not repeat in 2000.
Cost of revenues for the quarter ended June 30, 2000 decreased to $49,384,000 as
compared to $53,096,000 for the second quarter of 1999 primarily due to the
lower revenues.
Gross profit for the second quarter of 2000 was $3,851,000 or 7.2% of revenues,
compared to $4,693,000 or 8.1% of revenues for the same period last year. The
drop in gross profit percent is mostly due to the purchasing and logistics
businesses, where the sales mix tended toward lower margin contracts in the
current quarter.
Selling, general and administrative ("S,G&A") expenses decreased from $5,482,000
in the three months ended June 30, 1999 to $4,178,000 in the current year's
quarter. The decrease was primarily the result of the consolidation of offices
accomplished in 1999 and the related reduction in administrative and corporate
headcount. S,G&A expenses include $99,000 and $157,000 of goodwill amortization
for the quarters ending June 30, 2000 and 1999, respectively. As a percent of
revenue, S,G&A expenses declined from 9.5% in last year's second quarter to 7.8%
in the current quarter.
The loss from operations for the quarter ended June 30, 2000 was $327,000
compared to a loss of $789,000 for the quarter ended June 30, 1999. The decrease
in the loss was primarily due to the reduction in S,G&A expenses discussed
above.
Interest income dropped in the current quarter due to a decrease in the level of
investible funds. Interest and other expense decreased due to a decline in the
level of interest bearing debt.
Due to the losses sustained in the three months ended June 30, 2000 and the lack
of any additional carryback opportunity, no significant provision or benefit for
income taxes was recorded. The amount recorded as a benefit in the second
quarter of 1999 represents a current benefit for a carryback claim for federal,
state and local income taxes.
Based on the above factors, the loss from continuing operations increased from a
loss of $575,000 in the three months ended June 30, 1999 to a $669,000 loss in
the current three month period. The basic loss per share was unchanged at $0.05
due to an increase in the weighted average common shares outstanding.
11
<PAGE> 12
SIX MONTHS ENDED JUNE 30, 2000 vs. SIX MONTHS ENDED JUNE 30, 1999
Revenues for the six months ended June 30, 2000 totaled $93,760,000 compared to
$114,648,000 for the six months ended June 30, 1999. The revenue decrease was
concentrated in two business lines, logistics and purchasing. For logistics,
significant revenue was recorded in the first six months of 1999 on a large
one-time contract that did not repeat in 2000. For the purchasing business, the
drop in revenue was partly the result of timing in shipments on projects where
the Company acts as a principal. Projects that were expected to ship in the
first half of 2000 were postponed until later in 2000. Additionally, shipments
on several large contracts were concentrated in the first half of 1999.
Cost of revenues declined in the first six months of 2000 to $86,763,000
compared to $105,756,000 for the comparable period last year due primarily to
lower revenues.
Gross profit for the first half of 2000 was $6,997,000 or 7.5% of revenues,
compared to $8,892,000 or 7.8% of revenues.
Selling, general and administrative ("S,G&A") expenses decreased from $9,895,000
in the six months ended June 30, 1999 to $8,138,000 in the current year's first
six months. The decrease was primarily the result of the consolidation of
offices accomplished in 1999 and the related reduction in administrative and
corporate headcount. S,G&A expenses include $199,000 and $313,000 of goodwill
amortization for the six months periods ending June 30, 2000 and 1999,
respectively. As a percent of revenue, S,G&A expenses have increased from 8.6%
in the first six months last year to 8.7% in the first six months of the current
year.
The loss from operations for the six months ended June 30, 2000 was $1,141,000
compared to a loss of $1,003,000 for the six months ended June 30, 1999. The
increase in the loss in the current period was due to the factors cited above.
Interest income decreased in the current year due to a drop in investible funds.
Interest and other expense was relatively stable between the periods.
Due to the losses sustained in the six months ended June 30, 2000 and the lack
of any additional carryback opportunity, no significant provision or benefit for
income taxes was recorded in 2000. The amount recorded as a benefit in the first
six months of 1999 represents a current benefit for a carryback claim for
federal, state and local income taxes.
Based on the above factors, the loss from continuing operations increased from a
loss of $792,000 in the six months ended June 30, 1999 to a $1,631,000 loss in
the current six month period. Basic loss per share from continuing operations
increased from a $0.07 loss in last year's first six months to a loss of $0.11
in the current period.
The operating results associated with the discontinued operations reflect income
of $777,000 in the six months ended June 30, 1999 primarily due to income earned
by the renovation business.
12
<PAGE> 13
HOTELWORKS.COM, INC., AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's condensed consolidated financial statements have been presented on
the basis that it is a going concern, which contemplates the realization of
assets and the satisfaction of liabilities in the normal course of business. The
liquidity of the Company was severely affected during 1999 by significant losses
from continuing operations and discontinued operations. In addition, the
Company's major debt and line of credit facilities are in default and the
Company projects negative cash flows from operations in 2000. These
circumstances raise substantial doubt about the Company's ability to continue as
a going concern.
The Company's term loan and mortgage note payable were in default as of June 30,
2000 and the Company's unsecured line of credit facilities, which matured in
September 1999, were not repaid and are currently in default (See Part II, Item
1, Legal Proceedings). Accordingly, all of these debt facilities are currently
due and payable. The Company anticipates selling a warehouse facility, the
proceeds of which will be used to repay the term loan and mortgage note payable.
The Company is also involved in active, on-going negotiations with the banks
that provided the line of credit facilities with respect to a refinancing of the
facilities or an extension of the expiration date. There is no assurance that
the Company will be able to successfully negotiate these facilities at terms
favorable to the Company.
The Company's 2000 budget projects a net cash flow deficit from operations of
approximately $1.4 million and cash requirements related to the development of
its Internet web-based reorder system of approximately $1.9 million. The net
cash flow deficit from operations for 2000 primarily relates to continued losses
of the Parker Reorder business and corporate expenses. Management believes that
given its working capital position (exclusive of short-term debt obligations) as
of June 30, 2000 of $1.2 million, including anticipated tax refunds of
approximately $500,000 relating to the Company's ability to carryback current
year tax losses to prior years for federal, state and local tax purposes, their
review of the on-going businesses' gross margins and related expenses, and their
ability to defer certain capital expenditures and other current payment
obligations, if necessary, that sufficient funds will be available to cover any
operating cash flow deficits over the next twelve months, but will not be
sufficient to repay the debt obligations of the Company which are currently in
default. Accordingly, there is no assurance that the Company will have
sufficient funds available to it to satisfy all of its obligations over the next
twelve months.
Net cash provided by operating activities of continuing operations was
$3,703,000 for the six months ended June 30, 2000 compared to net cash used of
$3,126,000 for the six months ended June 30, 1999. In the current period, cash
provided by an increase in customer deposits and billings in excess of costs
exceeded cash used by an increase in accounts receivable and vendor deposits.
Net cash provided by operating activities of discontinued operations was
$276,000 for the first six months of 2000 as compared to net cash used of
$4,538,000 for the first six months of 1999.
Net cash used in investing activities of continuing operations for the six
months ended June 30, 2000 was $832,000 compared to net cash provided of
$7,612,000 for the six months ended June 30, 1999. The primary source of
investing cash for the 1999 period was the sale of marketable securities.
For discontinued operations, net cash provided by investing activities for the
current six months was $0, compared to net cash provided of $2,792,000 for the
first six months of 1999. In 1999, the Company received a repayment of a
mortgage receivable.
13
<PAGE> 14
Net cash provided by financing activities of continuing operations was $223,000
for the six months ended June 30, 2000 as compared to net cash provided of
$4,589,000 for the six months ended June 30, 1999. The primary financing source
for 1999 was borrowings under the Company's lines of credit.
The American Stock Exchange ("Exchange") has advised the Company that it has
fallen below the threshold requirements for listing on the Exchange.
Representatives of the Company and the Exchange have met to discuss whether the
Company will be able to satisfy those requirements or obtain a waiver of the
requirements that it does not satisfy. The Exchange may then commence
proceedings to delist the Company's securities. The Company will have an
opportunity to oppose any such delisting through administrative procedures. If
the Company's securities are delisted, its ability to raise capital and the
liquidity of its securities would be adversely affected.
New Accounting Pronouncements
In March, 2000 the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 44 (Interpretation 44), Accounting for Certain Transactions
Involving Stock Compensation. Interpretation 44 provides criteria for the
recognition of compensation expense in certain stock-based compensation
arrangements that are accounted for under Accounting Principles Board Opinion
No. 25, Accounting for Stock-Based Compensation. Interpretation 44 is effective
July 1, 2000, with certain provisions that are effective retroactively to
December 15, 1998 and January 12, 2000. Interpretation 44 is not expected to
have an impact on the Company's consolidated financial statements.
Inflation
Inflation and changing prices during the current year did not significantly
affect the major markets in which the Company conducts its business. In view of
the moderate rate of inflation, its impact on the Company's business has not
been significant.
Year 2000
The Year 2000 issue resulted from computer programs and circuitry that do not
differentiate between the year 1900 and the year 2000 because they were written
using two- rather than four-digit dates to define the applicable year. If not
corrected, many computer applications and date-sensitive devices could have
failed or created erroneous results before, on or after January 1, 2000. The
Year 2000 issue affected virtually all companies and organizations, including
the Company.
During 1999, the Company developed and implemented a plan to assure Year 2000
readiness to avoid significant Year 2000 failures. The Company completed its
implementation and testing of its plan in November, 1999 and to-date in 2000 has
experienced no significant Year 2000 failures, either in its own computer
operations or those of its major customers or vendors. The Company also does not
anticipate any material Year 2000 failures going forward.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Although the Company does maintain offices outside the United States and does
conduct certain transactions in foreign currencies, the Company does not believe
that it has material exposure to risks associated with foreign currency
fluctuations related to its operations given the terms of its contracts with
customers. The Company does not use derivative financial instruments in its
operations. The Company does have exposure to market risks associated with
changes in interest rates given that the Company does maintain lines of credit
and long-term debt facilities which have variable interest rates.
14
<PAGE> 15
PART II OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
On April 19, 2000, Bank of America, N.A. filed an action against the Company in
the Circuit Court of the County of St. Louis, State of Missouri, seeking to
recover the unpaid principal of a promissory note, together with interest
thereon and related costs, in the approximate aggregate amount of $6,000,000.
The Company is negotiating a restructuring of its loan with Bank of America and
has retained counsel to defend the action. If Bank of America obtains a judgment
against the Company in the amount sought, the Company will not be able to
satisfy the judgment.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11 Computation of earnings per share (Incorporated herein by
reference to Note 5 to the Company's Consolidated Financial
Statements).
27 Financial Data Schedule.
(b) Reports on Form 8-K
Form 8-K dated April 27, 2000, filed with the Commission on April 27,
2000, reporting item 4, Changes in Registrant's Certifying Accountant.
Form 8-K dated June 26, 2000, filed with the Commission on June 30,
2000, reporting Item 4, Changes in Registrant's Certifying Accountant.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOTELWORKS.COM, INC.
By: /s/ Douglas A. Parker
----------------------------------
DOUGLAS A. PARKER
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND DIRECTOR
By: /s/ John F. Wilkens
----------------------------------
JOHN F. WILKENS
VICE PRESIDENT - TREASURER
(PRINCIPAL FINANCIAL OFFICER, PRINCIPAL
ACCOUNTING OFFICER)
Dated: August 11, 2000
16
