10-Q 1 e10-q.txt HOTELWORKS.COM 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. 2 HOTELWORKS.COM, INC. AND SUBSIDIARIES TABLE OF CONTENTS

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 3 HOTELWORKS.COM, INC. and SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share amounts)

See notes to condensed consolidated financial statements. 3 4 HOTELWORKS.COM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) Unaudited

See notes to condensed consolidated financial statements. 4 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

See notes to condensed consolidated financial statements. 5 6 HOTELWORKS.COM, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Unaudited

See notes to condensed consolidated financial statements. 6 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):

7 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):

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 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):

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 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):

(a) antidilutive. 10 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 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 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 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 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 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

HOTELWORKS COM INC 10-Q