<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended.............................................September 30, 1997
Commission File Number...................................................0-17838
Hudson Hotels Corporation
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 16-1312167
- --------------------------------------------------------------------------------
State or other jurisdiction of I.R.S. Employer
in corporation or organization Identification No.
One Airport Way, Suite 200, Rochester, New York 14624
- -----------------------------------------------------------------------------
(Address or principal executive offices) (Zip Code)
(716) 436-6000
- -----------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------------- --------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 16, 1997 the Registrant had issued and outstanding 5,153,162
shares of its $.001 par value common stock.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
1997 1996 1997 1996
------------- ------------- ------------- -------------
OPERATING REVENUES:
Hotel operations.................................. $ 9,897,830 $ 3,626,930 $ 27,004,219 $ 6,735,704
Management fees................................... 289,371 270,914 697,127 752,995
Royalties......................................... 242,804 184,654 543,927 450,776
Other............................................. 40,527 91,816 212,132 747,837
------------- ------------- ------------- -------------
Total operating revenues........................ 10,470,532 4,174,314 28,457,405 8,687,312
------------- ------------- ------------- -------------
OPERATING COSTS AND EXPENSES
Direct............................................ 6,454,899 2,765,859 17,778,884 4,800,565
Corporate......................................... 763,792 433,832 1,990,516 1,393,547
------------- ------------- ------------- -------------
Total operating costs and expenses before
depreciation and amortization................. 7,218,691 3,199,691 19,769,400 6,194,112
------------- ------------- ------------- -------------
Income from operations before depreciation and
amortization.................................. 3,251,841 974,623 8,688,005 2,493,200
DEPRECIATION AND AMORTIZATION....................... 977,258 225,197 2,888,966 475,390
------------- ------------- ------------- -------------
Income from operations.......................... 2,274,583 749,426 5,799,039 2,017,810
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Gain on sale of franchise rights.................. -- 358,725 -- 358,725
Interest income................................... 46,744 84,903 135,685 238,724
Interest expense.................................. (2,065,862) (492,937) (6,109,941) (911,804)
------------- ------------- ------------- -------------
Total other expense............................. (2,019,118) (49,309) (5,974,256) (314,355)
------------- ------------- ------------- -------------
Income (Loss) from continuing operations, before
income taxes, minority interest and equity on
net losses of affiliates...................... 255,465 700,117 (175,217) 1,703,455
PROVISION (BENEFIT) FROM INCOME TAXES............... 119,555 302,840 (72,780) 490,837
------------- ------------- ------------- -------------
Income (Loss) from continuing operations, before
minority interest and equity on net losses of
affiliates.................................... 135,910 397,277 (102,437) 1,212,618
MINORITY INTEREST................................... (27,195) 38,360 (80,160) (363,378)
EQUITY IN INCOME OF AFFILIATES...................... 65,610 18,624 73,428 63,762
------------- ------------- ------------- -------------
NET INCOME (LOSS)................................... $ 174,325 $ 454,261 $ (109,169) $ 913,002
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET INCOME (LOSS) PER COMMON SHARE--PRIMARY......... $ 0.03 $ 0.10 $ (0.04) $ 0.21
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
NET INCOME PER COMMON SHARE-- FULLY DILUTED......... N/A $ 0.09 N/A $ 0.19
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS 1997
---------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................................... $ 2,112,203
Cash--restricted................................................................................ 2,158,047
Accounts receivable--trade...................................................................... 847,679
Inventories..................................................................................... 374,295
Prepaid expenses and other...................................................................... 418,078
Accounts and notes receivable--Affiliates....................................................... 192,826
Receivable from sale of franchise rights--current............................................... 288,112
--------------
Total current assets.......................................................................... 6,391,240
--------------
INVESTMENTS IN PARTNERSHIP INTERESTS.............................................................. 1,900,010
--------------
INVESTMENT IN LAND................................................................................ 780,822
--------------
REAL ESTATE DEVELOPMENT........................................................................... 3,382,613
--------------
PROPERTY AND EQUIPMENT, NET....................................................................... 82,769,917
--------------
DEFERRED TAX ASSET................................................................................ 450,229
--------------
OTHER ASSETS:
Beach club, net................................................................................. 2,996,476
Deferred financing costs, net................................................................... 2,389,101
Mortgage and note receivable--affiliate......................................................... 1,100,000
Deposits........................................................................................ 1,482,706
Intangibles and other assets.................................................................... 104,629
Receivable from sale of franchise rights--long term............................................. 454,546
--------------
Total other assets............................................................................ 8,527,458
--------------
Total assets.................................................................................. $ 104,202,289
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' INVESTMENT 1997
- ---------------------------------------- --------------
<S> <C>
CURRENT LIABILITIES:
Line of credit.................................................................................. $ 512,536
Accounts payable--trade......................................................................... 2,243,569
Accrued payroll and related taxes............................................................... 231,703
Accrued interest................................................................................ 489,376
Other accrued expenses.......................................................................... 1,864,057
Current portion of long-term debt............................................................... 3,147,608
Deferred revenue--beach club.................................................................... 93,894
Accounts payable--non-affiliate................................................................. 74,648
--------------
Total current liabilities..................................................................... 8,657,391
--------------
LONG-TERM DEBT.................................................................................... 80,064,186
--------------
DEFERRED REVENUE--LAND SALE....................................................................... 185,055
--------------
LIMITED PARTNERS' INTEREST IN CONTROLLED PARTNERSHIPS............................................. 1,099,232
--------------
SHAREHOLDERS' INVESTMENT:
Preferred stock................................................................................. 295
Common stock.................................................................................... 5,164
Additional paid-in capital...................................................................... 17,079,589
Warrants outstanding............................................................................ 50,000
Accumulated deficit............................................................................. (2,897,372)
--------------
14,237,676
--------------
Less: 10,000 shares of common stock in treasury, at cost.......................................... (41,251)
--------------
Total shareholders' investment................................................................ 14,196,425
--------------
Total liabilities and shareholders' investment................................................ $ 104,202,289
--------------
--------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL ADDITIONAL
SERIES A PAID-IN PAID-IN
PREFERRED CAPITAL COMMON CAPITAL WARRANTS ACCUMULATED TREASURY
STOCK PREFERRED STOCK COMMON OUTSTANDING DEFICIT STOCK TOTAL
----------- ------------ ----------- ------------- ----------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December
31, 1996........ $ 295 $ 1,560,705 $ 4,788 $ 14,394,040 $ 50,000 $ (2,692,713) $ -- $ 13,317,115
Net Loss.......... -- -- -- -- -- (109,169) -- (109,169)
Purchase of
treasury
stock........... -- -- -- -- -- -- (41,251) (41,251)
Exercise of stock
options......... -- -- 231 1,039,358 -- -- -- 1,039,589
Issuance of common
stock for
investor
relation
services........ -- -- 145 (145) -- -- -- --
Other............. -- -- -- 85,631 -- -- -- 85,631
Cash dividends
paid on
preferred
stock........... -- -- -- -- -- (95,490) -- (95,490)
----- ------------ ----------- ------------- ----------- ------------- ---------- -------------
BALANCE, September
30, 1997........ $ 295 $ 1,560,705 $ 5,164 $ 15,518,884 $ 50,000 $ (2,897,372) $ (41,251) $ 14,196,425
</TABLE>
Stock balances at December 31, 1996:
Common stock: 4,787,462 shares; Preferred stock: 294,723 shares
Stock balances at September 30, 1997:
Common stock: 5,153,162 shares; Preferred stock: 294,723 shares
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss)................................................................... $ (109,169) $ 913,002
Adjustments to reconcile net income/(loss) to net cash from operating activities:
Deferred tax provision............................................................ (72,780) 150,830
Depreciation and amortization..................................................... 2,888,966 475,390
Gain on sale of land.............................................................. (28,812) --
Minority interest in operations................................................... 80,160 363,378
Non-cash consulting............................................................... 85,633 19,591
Equity in operations.............................................................. (73,428) (63,762)
Capital distributions from unconsolidated partnership interests................... 77,385 57,185
(Increase) decrease in assets:
Accounts receivable--trade........................................................ (404,687) (332,102)
Inventories....................................................................... (172,595) (59,310)
Prepaid expenses.................................................................. 156,251 (6,410)
Increase (decrease) in liabilities:
Accounts payable.................................................................. 383,967 163,615
Accrued payroll and related taxes................................................. 42,310 12,907
Other accrued expenses............................................................ 676,706 54,848
Accrued interest.................................................................. 37,408 (42,854)
Deferred revenue--beach club...................................................... (776,008) (823,859)
Deferred consulting............................................................... (112,504) (300,000)
Customer deposits................................................................. -- 238,875
Deferred franchise revenue........................................................ (28,000) (41,000)
------------ ------------
Net cash from operating activities................................................ 2,650,803 780,324
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997 AND 1996
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land/real estate development....................................... $ (101,338) $ (1,895,998)
Increase in restricted cash....................................................... (642,168) --
Cash collected on sale of land.................................................... 399,659 --
Change in affiliates accounts and notes receivable................................ 133,174 137,481
Purchase of equipment............................................................. (1,685,538) (211,405)
Change in other assets............................................................ (14,365) (2,223,070)
Deposits.......................................................................... (843,712) (200,000)
Cash acquired relating to purchase of Hudson properties........................... -- 413,791
Change in non-affiliate accounts receivable....................................... 203,656 (422,756)
------------- -------------
Net cash used in investing activities........................................... (2,550,632) (4,401,957)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.......................................................... -- 7,500,000
Repayment of mortgages............................................................ (380,342) (252,013)
Distributions to limited partners................................................. (80,000) (140,544)
Purchase of treasury stock........................................................ (41,251) (3,953,042)
Proceeds from stock options exercised............................................. 1,039,211 4,000
Dividends paid.................................................................... (95,490) (95,490)
Borrowings on line of credit, net................................................. 512,536 1,110,000
------------- -------------
Net cash from financing activities.............................................. 954,664 4,172,911
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS........................................... 1,054,835 551,278
CASH AND CASH EQUIVALENTS--beginning of period...................................... 1,057,368 766,428
------------- -------------
CASH AND CASH EQUIVALENTS--end of period............................................ $ 2,112,203 $ 1,317,706
------------- -------------
------------- -------------
OTHER INFORMATION:
Cash paid during the period for:
Interest........................................................................ $ 6,072,533 $ 910,824
Income taxes.................................................................... $ 31,279 $ 208,269
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1997
(unaudited)
1. Basis of Presentation
In the opinion of Management, the interim financial statements
included herewith reflect all adjustments which are necessary for a
fair statement of the results for the interim periods presented. All
significant intercompany transactions and accounts have been
eliminated in consolidation.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full
year.
The accounting policies followed by the Company are set forth in Note
2 to the Company's financial statements in the December 31, 1996
10-KSB.
Other footnote disclosures normally included in the financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. The Company believes the
disclosures made are adequate to make the information presented not
misleading; however, these consolidated financial statements should be
read in conjunction with the financial statements and notes included
in the Company's December 31, 1996 10-KSB.
2. The Company
Hudson Hotels Corporation (the "Company") was organized as Microtel
Franchise and Development Corporation to develop and franchise a
national chain of economy limited service lodging facilities
("Microtels"), using the service mark "MICROTEL", which offers
downsized rooms with higher quality furnishings at rates below those
available at competing national lodging chains. The Company was
incorporated in New York State on June 5, 1987.
On October 5, 1995, the Company signed an exclusive Joint Venture
Agreement with US Franchise Systems, Inc., in which US Franchise
Systems, Inc. purchased worldwide franchising and administration for
the Microtel franchise chain. As a result of the Joint Venture
Agreement, the Company has focused its efforts on developing, building
and managing various hotel products, including Microtels, which has
been the Company's strength since it acquired Hudson Hotels
Corporation in 1992. During 1996, the Company embarked upon a
significant expansion and development program, which includes several
acquisitions and development of four Microtel Inns through a joint
venture partnership.
At December 31, 1995, the Company changed its fiscal year from March
31 to December 31. This fiscal year coincides with individual hotel
property, partnership and joint venture investment year ends and
simplifies the Company's accounting and reporting.
The Company operates in the industry segment of hotel development,
management and ownership. The Company has shifted the majority of its
focus from a management fee and royalty fee driven business to a hotel
operating company. As a result, the Company subjects its revenues and
earnings to cycles typical to hotel operation, with stronger results
expected in the second and third calendar quarters.
<PAGE>
3. Litigation
On October 26, 1990, a complaint was filed in Palm Beach County
Circuit Court, Florida, by Seagate Beach Quarters, Inc., a Florida
corporation (Bearing Case #90-12358-AB), seeking damages plus interest
and costs, against Rochester Community Savings Bank, ("RCSB"), a New
York based bank, Shore Holdings, Inc. ("SHORE"), a subsidiary of RCSB
and naming Hudson as a co-defendant. On December 6, 1990, Delray
Beach Hotel Properties Limited, a Florida limited partnership
controlled by Hudson Hotels, purchased the Seagate Hotel and Beach
Club from RCSB's subsidiary, SHORE. The purchase contract included an
indemnification of Hudson Hotels against any action resulting from
previously negotiated contracts between RCSB's subsidiaries and
third-parties. Case #90-12358-AB contained allegations that RCSB's
subsidiary, SHORE Holdings, defaulted in its obligations under a
Contract for Purchase and Sale, dated August 16, 1990, and failed to
go forward with the transaction due to alleged tortious negotiations
between RCSB and Hudson. On March 17, 1994, the Court granted Summary
Judgment in favor of RCSB and Hudson Hotels which judgment was
appealed by Seagate. The Fourth District Court of Appeal in Florida
affirmed the summary judgment on RCSB and reversed the summary
judgment granted in favor of Hudson, remanding the action to Circuit
Court for further consideration. On August 15, 1994, Seagate
proceeded to trial against SHORE in case #90-12358-AB. During the
course of the trial, Seagate took a voluntary dismissal of their
action against SHORE. On September 8, 1994, Seagate refiled its
lawsuit against SHORE and joined Delray Beach Hotel Properties
Limited, through its general partner, Delray Beach Hotel Corp.
(bearing Case #94-6961-AF). The new case against SHORE was brought
essentially on the same facts as stated above. The claim against
Delray Beach Hotel Properties Limited was identical to the conspiracy
and tortious interference with a business relationship claim currently
existing against Hudson Hotels. On January 27, 1995, the Court issued
an Order dismissing the Amended Complaint as to Delray Beach Hotel
Properties Limited. The Circuit Court has consolidated the case
against Hudson Hotels (Case #90-12358-AB) and the case against SHORE
(Case #94-6961-AF) and it is anticipated those suits will go to trial
during 1998.
On February 11, 1993, a complaint was filed in the Western District of
New York, United States District Court, by John Miranda, Susan Miranda
and Christopher Miranda, seeking damages and costs against Quality Inn
International, Choice Hotels International, and naming Hudson as a
co-defendant. The requested relief in this case, John Miranda and
Susan Miranda and Christopher Miranda vs. Quality Inns International
Inc., Choice Hotels International Inc., Ridge Road Hotel Properties,
Ridge Road Hotel Properties d/b/a Comfort Inn, a/k/a Comfort Inn West,
Hudson Hotels Corp., and Jennifer L. Ansley, as Executrix of the
Estate of Loren G. Ansley, was based on allegations that John Miranda,
while staying at the Comfort Inn, stepped on a needle, and claims
negligence and lack of due care on the part of the defendants. This
case is being diligently defended by the insurance carrier of Ridge
Road Hotel Properties and Hudson. The Company believes that it has
adequate insurance for any potential loss.
After taking into consideration legal Counsel's evaluation of all such
actions, management is of the opinion that the outcome of each such
proceeding or claim which is pending, or known to be threatened (as
described above), will not have a significant effect on the Company's
financial statements.
On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's
former investment bankers, filed a complaint in New York State Supreme
Court against the Company alleging breach of contract and damages of
$906,250 relating to the Company's rescission of a warrant granted to
them in connection with the investment advisory agreement. In
February 1994, the Board of Directors of the Company determined that
Ladenburg had been otherwise adequately compensated for such services
as were actually performed, and voted to rescind the warrant. The
Company has answered the complaint, denying the relevant allegations
and asserting several affirmative defenses.
Each party has moved for summary judgement in this case, and
arguments were based on those motions in October 1997. Decision on
the summary judgement motion is pending. Discovery in the case has
commenced and is continuing. The ultimate outcome of the litigation
cannot presently be determined. Accordingly, no provision for any
liability that may result has been made in the financial statements.
<PAGE>
4. SUMMARIZED FINANCIAL INFORMATION--INVESTMENTS IN PARTNERSHIP INTERESTS
The following is a summary of condensed financial information for the
partnership (Watertown Hotel Properties II, L.P.) which the Company exercises
control for the nine month period ended September 30, 1997, and a combined
summary of condensed financial information for the partnerships which the
Company does not control for the nine month period ended September 30, 1997.
<TABLE>
<CAPTION>
WATERTOWN HOTEL
PROPERTIES II, UNCONSOLIDATED
L.P. PARTNERSHIPS
---------------- --------------
<S> <C> <C>
Property and equipment, net of accumulated depreciation........................ $ -- $ 31,284,051
Current assets................................................................. 10,342 3,161,388
Notes and mortgage receivable--noncurrent...................................... 1,100,000 --
Other assets................................................................... -- 1,080,655
---------------- --------------
TOTAL ASSETS............................................................... 1,110,342 35,526,094
---------------- --------------
Mortgage and notes payable--current............................................ -- 1,671,671
Other current liabilities...................................................... -- 1,080,030
Mortgage/Notes payable--noncurrent............................................. -- 25,030,217
---------------- --------------
TOTAL LIABILITIES.......................................................... -- 27,781,918
---------------- --------------
NET ASSETS..................................................................... $ 1,110,342 $ 7,744,176
---------------- --------------
---------------- --------------
Net Revenues................................................................... $ -- $ 8,890,176
Operating Expenses............................................................. 1,530 4,867,485
---------------- --------------
Income (Loss) from Operations.................................................. (1,530) 4,022,691
Other Income (Expense), Net.................................................... 82,500 (3,421,882)
---------------- --------------
NET INCOME..................................................................... $ 80,970 $ 600,809
---------------- --------------
---------------- --------------
</TABLE>
<PAGE>
5. Long Term Debt
Future minimum repayments under long-term debt are as follows:
<TABLE>
<S> <C>
Remainder 1997 $ 3,147,608
1998 4,086,027
1999 4,145,975
2000 4,215,720
2001 and thereafter 67,616,464
-----------
TOTAL $83,211,794
-----------
-----------
</TABLE>
6. Line of Credit
In July 1997, the Company and a subsidiary signed two working
capital demand line credit notes with two commercial banks, with
an interest rate between prime plus 1/2% and 1 1/2%, for a total
of $1,400,000. Amounts borrowed are collateralized by a hotel
property which the Company owns in Virginia Beach, Virginia and
land in Tonawanda, New York. At September 30, 1997, $512,536 was
borrowed under the terms of these lines.
7. Commitments and Contingencies
The Company has various operating lease arrangements for
automobiles and office space. Total rent expense under operating
leases amounted to $115,124 and $112,823 for the nine month
period ending September 30, 1997 and 1996, respectively. Future
minimum lease payments under operating leases are approximately:
1997 remainder - $36,122; 1998 - $90,014; 1999 - $6,998.
The Company is required to remit monthly royalty fees from 2% to
4% of gross room revenue, plus additional monies for marketing
assessments and reservation fees to its franchisors, Choice
Hotels International, Marriott Corp. and Cricket Inn based on
franchise agreements which extend from ten to fifteen years.
Some of these agreements specify restrictions on transferability
of franchise and liquidated damages upon termination of franchise
agreement due to the franchisee's default. Total fees were
$782,208 and $40,274 for the nine months ended September 30, 1997
and 1996, respectively.
As an equity partner in various hotel partnerships, the Company
has guaranteed portions of mortgages payable relating to the
partnerships. The guarantees range from 50% to 200% of the
outstanding mortgages payable to banks. Amounts guaranteed by
the Company related to the partnerships' mortgages payable were
approximately $3.6 million at September 30, 1997.
In November 1994, the Company provided a $250,000 cash deposit to
secure a ten year operating lease and management contract of a
full-service hotel located in Canandaigua, New York from L, R, R
& M L.L.C. In June 1996, the Company provided an additional
$200,000 cash deposit which extends the lease term an additional
eighteen months and provides additional security on the
renovations performed from November 1995 through May 1996. Also,
during 1996, the Company earned a $250,000 fee for managing the
reconstruction project. One of the minority owners of L, R, R &
M, L.L.C., is a greater than 5% shareholder who is not involved
in the management or operation of the Company. Base rent is
equal to one-twelfth of 2% of the outstanding principal balance
under the credit facilities per month, plus amounts payable by
the Landlord under the credit facilities monthly. The Company is
also obligated to pay/or have due additional monthly rent/or
abatement on positive/negative earnings based on 15% of the
leased operation's adjusted net revenues, as defined in the lease
agreement.
<PAGE>
The deposit shall be returned to the Company in the event the
Landlord sells the premises based on 25% of the net proceeds of
such sale, as defined in the lease agreement. Future minimum
lease payments under this operating lease are approximately:
remainder of 1997 - $228,500; 1998 - $914,000; 1999 - $914,000;
2000 - $914,000; thereafter $3,503,667.
The Company assumed a ground lease for the land on which a hotel
was acquired by the Company in 1996 in Statesville, North
Carolina. The initial term of this lease commenced in February
1984 and expires April 30, 2005. The Company renewed the lease
at its option, for three additional ten-year periods ending April
30, 2035. The annual rental during the final ten years of the
initial term and each extension is the greater of $22,000 plus
one-half percent of gross room rentals from the Statesville hotel
during the 1991 lease year of the lease term or four percent of
gross room rentals from the Statesville hotel during each lease
year.
The Company has a right of first refusal to buy the land subject
to the ground lease from the lessor during the lease term subject
to the first refusal rights of Roses Department Stores, Inc., or
its successors.
Rent expense on the ground lease was $16,500 and $-0- for the
nine month period ended September 30, 1997 and 1996,
respectively.
The future minimum ground lease rental payments, assuming no
gross room rentals during the initial lease term and no increases
in the consumer price index, are as follows for the years ended
December 31:
<TABLE>
<S> <C>
Remainder of 1997 $5,500
1998 22,000
1999 22,000
2000 22,000
2001 22,000
Thereafter 73,333
--------
$166,833
--------
--------
</TABLE>
8. Income Taxes
Income taxes are provided in accordance with Statement of
Financial Accounting Standard No. 109, "Accounting for Income
Taxes", which requires an asset and liability approach to
financial accounting and reporting for income taxes. The
Statement requires that deferred income taxes be provided to
reflect the impact of "temporary differences" between the amount
of assets and liabilities for financial reporting purposes and
such amounts as measured by current tax laws and regulations. A
valuation allowance is established, when necessary, to reduce
deferred tax assets to the amount expected to be realized.
Deferred tax assets include loss carryforwards and deferred
revenue. Deferred tax liability represents the gross up relating
to the purchase of Hudson.
At September 30, 1997, the Company has net operating loss
carryforwards for income tax purposes of approximately $1,420,000
which may be used to offset future taxable income. These loss
carryforwards will begin to expire in 2003.
9. Receivables/Payables with Affiliates
The Company has advanced affiliated entities the following as of
September 30, 1997:
<TABLE>
<S> <C>
Microtel Partners 1995-I, L.P. $142,178
Airport Hotel Properties, L.P. 10,000
Other 40,648
--------
$192,826
--------
--------
</TABLE>
<PAGE>
10. Joint Venture Agreement
On October 5, 1995, the Company signed an exclusive joint venture
agreement with US Franchise Systems, Inc. in which USFS assumed
worldwide franchising and administration for the Microtel hotel
chain.
The Company in return will receive $4 million over a three year
period in exchange for the exclusive franchise rights of the
Microtel name and various consulting services; $2 million was
paid at closing, another $1 million was paid at the first
anniversary and $500,000 each will be paid at the second and
third anniversary. In addition to the lump sum payment, the
Company will receive royalty payments from properties franchised
by USFS. Royalty payments will consist of 1% of gross room
revenues from hotels 1-100; .75% from hotels 101-250; and .5%
above 250 units. In addition, the Company issued USFS 100,000
warrants exercisable at $8.375.
The Company has retained the right to franchise and construct an
additional twenty-three (23) Microtel properties and ten (10)
"Suites" properties (if offered by USFS), and to receive all
royalties on the fifty (50) Microtels (30 existing and 20 new
ones to be undertaken by the Company) and ten (10) Suites.
During 1996, US Franchise Systems, Inc. completed an initial
public offering with proceeds to that entity of approximately
$37,000,000. As a result, it was determined that the future
collectibility was not in doubt and the balance of the deferred
revenue was recognized at December 31, 1996.
11. Shareholders' Investment
In April 1997, the Company engaged an entity to provide the
Company with investor relations services over a five (5) year
period. In addition to issuing 145,000 common shares as payment
for such services, the Company issued options to the entity to
purchase 525,000 shares of common stock at prices ranging from
$5.00 to $9.00. The options expire over a two (2) year period.
The issuance of common stock and related expense associated with
the option grants are expensed over the expected period in which
services will be performed.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following discussion and analysis should be read in conjunction
with Selected Financial Data (item 6); Management's Discussion and
Analysis of Financial Condition and Results of Operations (item 7);
and Accountant's Report, Financial Statements and Notes to Financial
Statements (item 8) of the Company's December 31, 1996 Annual Report
on Form 10-KSB.
RESULTS OF OPERATIONS
Three months ended September 30, 1997, compared to the three months
ended September 30, 1996:
Total operating revenues increased $6,296,218, or 151% to $10,470,532
for 1997, reflecting changes in revenue categories, as discussed
below.
HOTEL OPERATIONS were $9,897,830 for the three months ended September
30, 1997, an increase of $6,270,900, or 173 %, from the three months
ended September 30, 1996. Hotel operations consist of the following:
<TABLE>
Three Months Ended
September 30, 1997 September 30, 1996
<S> <C> <C>
------------------ ------------------
Hotel room revenue $8,191,814 $2,342,237
Beach club revenue 319,988 321,596
Food and beverage revenue 1,111,110 849,831
Other 274,918 113,266
----------------- ------------------
Total $9,897,830 $3,626,930
----------------- ------------------
----------------- ------------------
</TABLE>
Hotel room revenues for the three month period ended September 30,
1997 increased $5,849,577 from the three month period ended September
30, 1996. The increase is a result of the acquisition of seventeen
(17) hotels during the second half of 1996. Five (5) of the hotels
were acquired July 31, 1996, with the remaining twelve (12) being
acquired on November 27, 1996. Operating revenues (which includes
hotel room revenue, beach club revenue and food and beverage revenue)
for the Seagate Hotel and Beach Club are included prior to the
acquisition on July 31, 1996, as a result of the Company being the
controlling partner in the limited partnership. Occupancy and average
daily room rate were 75.1% and $56.69, respectively, for the three
months ended September 30, 1997.
The beach club revenue relates to the operation of the beach club at
the Seagate Hotel and Beach Club, remained consistent from the three
month period ended September 30, 1996.
Food and beverage revenue was $1,111,110 for the three month period
ended September 30, 1997, compared to $849,831 for the three month
period ended September 30, 1996, an increase of $261,279, or 31%. The
increase is primarily the result of the Canandaigua Inn on the Lake
generating additional business after being closed for a five month
period in 1996, as the facility underwent major renovations and
reopened June 1996.
The increase in Other is a result of the acquisition of seventeen (17)
hotels in 1996; 62% of Other represents telephone revenue, with the
remaining percentage being vending and movie revenues.
ROYALTIES for the three month period ended September 30, 1997 have
increased $58,150 over the three month period ended September 30,
1996, an increase of 31%. The increase is attributable to thirty (30)
franchised Microtels in operation, as opposed to twenty six (26)
during the same three month period in 1996. In addition, the Company
has been receiving royalties from US Franchise Systems, Inc. in
accordance with the Joint Venture Agreement (see Note 10). Currently,
US Franchise Systems, Inc. has franchised 28 Microtel Inns.
<PAGE>
As a result of the Company's joint venture with US Franchise Systems,
Inc. (see Note 9), the Company has retained the right to franchise,
construct and collect franchise placement fees on an additional
twenty-two (22) Microtel properties and ten (10) "suite" properties
and retain all royalties on the fifty (50) Microtels (28 existing and
22 new ones to be undertaken by the Company) and ten (10) suites. The
Company will also receive royalty payments in the future from US
Franchise Systems, Inc., for franchises they open, along with
consulting payments over the next two years.
Overall, MANAGEMENT FEES for the three month period ended September
30, 1997 remained consistent with the same three month period ended
September 30, 1996. The Company's ownership position in hotels
managed, is summarized below:
<TABLE>
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Owned 17 5
Managed with financial interest 10 9
Other managed 5 4
------------------ ------------------
32 18
------------------ ------------------
------------------ ------------------
</TABLE>
Management fees of approximately $442,000 were generated by the
seventeen (17) owned hotels for the three months ended September 30,
1997, which were eliminated for consolidation purposes.
OTHER represents consulting fees of $37,500 as part of our joint
venture with US Franchise Systems, Inc., under which the Company will
be receiving fees for various consulting services over the next two
years (see Note 10), and other miscellaneous revenue totaling $3,027.
The Company plans to continue its rapid revenue growth by implementing
the following strategies: (i) enhance operating performance of its
existing hotels owned or under management (ii) develop and building
Microtels Inns on sites acquired and (iii) opportunistic acquisition
of existing hotels.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel
revenues, less direct expenses; departmental expenses, undistributed
expenses, property occupancy costs and insurance costs) for the three
months ended September 30, 1997 was 34.8%, compared to 23.7% for the
three months ended September 30, 1996. The increase is primarily due
to the acquisition of seventeen (17) hotel properties (five of which
were acquired on July 31, 1996, and the remaining twelve acquired on
November 27, 1996). Also, the Canandaigua Inn on the Lake reopened
and resumed operations in June 1996 and incurred significant start-up
expenses. The direct costs and expenses for the Seagate Hotel and
Beach Club are included prior to the acquisition on July 31, 1996, as
a result of the Company being the controlling partner in the limited
partnership.
CORPORATE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses
increased $329,960 from prior year. The increase is primarily a
result of the following: (1) professional fees increased for the
three month period as a result of Company growth, (2) payroll expense
increased as a result of pay increases, bonuses and the addition of
four employees, and (3) recording non-cash investor relations expense
for services performed.
DEPRECIATION AND AMORTIZATION for the period ended September 30, 1997
increased $752,061, or 334% , over the three month period ended
September 30, 1996. The increase is a result of the acquisition of
five (5) hotels on July 31, 1996, and twelve (12) hotels on November
27, 1996. One of the five (5) hotels purchased on July 31, 1996, the
Seagate Hotel and Beach Club, is included in the operating results of
the Company during the three month period ended September 30, 1996, as
a result of the Company's ownership interest in the partnership.
<PAGE>
OTHER INCOME (EXPENSE) - Interest income is $46,744, of which $27,500,
or 59%, is generated by interest on the mortgage receivable from
Watertown Hotel Properties II, L.P. Another $17,054 relates primarily
to interest earned by the Company on the outstanding balance owed the
Company by US Franchise Systems, Inc. Of the $2,065,862 in total
interest expense, 65% relates to the mortgage held on the hotels
acquired in 1996. The remaining represents interest on the Company's
outstanding convertible debentures, mezzanine financing, notes payable
relating to purchase of hotels, Tonawanda bond issue and line of
credit.
MINORITY INTEREST for the three month period ended September 30, 1996
represents the elimination of the minority partners interest in
operations of Delray Beach Hotel Properties Limited and Watertown
Hotel Properties II, L.P., and the minority interest for the three
month period ended September 30, 1997 represents the elimination of
the minority partners interest in Watertown Hotel Properties II, L.P.
EQUITY IN INCOME OF AFFILIATES represents the net income incurred from
the Company's equity investment in various hotels. On July 31, 1996,
the Company acquired the remaining interest of Delray Beach Hotel
Properties Limited and has included its results of operations from the
acquisition date, without the elimination of the minority partners
interest.
INCOME TAXES - The provision for income taxes for the three month
period ended September 30, 1997, represents federal and state income
tax generated by the net income before tax of $293,880. The provision
includes tax expense/benefit from the valuation of deferred tax assets
and liabilities. The provision for income taxes of $302,840 for the
three month period ended September 30, 1996 represents federal and
state tax expense on income before tax of $757,101.
NET INCOME - As a result of the above factors, net income decreased
$279,936 from the three month period ended September 30, 1996 to a net
income of $174,325 for the three month period ended September 30,
1997. The net income per common share of $0.03, compared with a net
income per common share of $.10 for the three month period ended
September 30, 1996.
Nine months ended September 30, 1997, compared to the nine months
ended September 30, 1996:
Total operating revenues increased $19,770,093, or 228 % to
$28,457,405 for 1997, reflecting changes in revenue categories, as
discussed below.
HOTEL OPERATIONS were $27,004,219 for the nine months ended September
30, 1997, an increase of $20,268,515, or 301%, from the nine months
ended September 30, 1996. Hotel operations consist of the following:
<TABLE>
Nine Months Ended
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Hotel room revenue $22,281,320 $3,795,357
Beach club revenue 986,560 1,050,758
Food and beverage revenue 2,763,095 1,729,366
Other 973,244 160,223
----------------- -------------------
Total $27,004,219 $6,735,704
----------------- -------------------
----------------- -------------------
</TABLE>
Hotel room revenues for the nine month period ended September 30, 1997
increased $18,485,963 from the nine month period ended September 30,
1996. The increase is a result of the acquisition of seventeen (17)
hotels during the second half of 1996. Five (5) of the hotels were
acquired July 31, 1996, with the remaining twelve (12) being acquired
on November 27, 1996. In addition, the Canandaigua Inn on the Lake
was open only four months during the nine month period ended September
30, 1996, as the facility underwent major renovations during the first
five months. Operating revenues (which includes hotel room revenue,
beach club revenue and food and beverage revenue) for the Seagate
Hotel and Beach Club are included prior to the acquisition on July 31,
1996, as a result of the Company being the controlling partner in the
limited partnership. Occupancy and average daily room rate were 68.7%
and $56.24, respectively, for the nine months ended September 30,
1997.
<PAGE>
The beach club revenue relates to the operation of the beach club at
the Seagate Hotel and Beach Club, which decreased $64,198, or 6%, from
the nine month period ended September 30, 1996, as a result of a
reduction in new member dues (initiation fees).
Food and beverage revenue was $2,763,095 for the nine month period
ended September 30, 1997, compared to $1,729,366 for the nine month
period ended September 30, 1996, an increase of $1,033,729, or 60%.
The increase is primarily the result of the Canandaigua Inn on the
Lake being closed, as the facility underwent major renovations and
reopened June 1996.
The increase in Other is a result of the acquisition of seventeen (17)
hotels in 1996; 59% of Other represents telephone revenue, with the
remaining percentage being vending and movie revenues.
ROYALTIES for the nine month period ended September 30, 1997 have
increased $93,151 over the nine month period ended September 30, 1996,
an increase of 21%. The increase is attributable to thirty (30)
franchised Microtels in operation, as opposed to twenty six (26)
during the same nine month period in 1996. In addition, the Company
has been receiving royalties from US Franchise Systems, Inc. in
accordance with the Joint Venture Agreement (see Note 10). Currently,
US Franchise Systems, Inc. has franchised 28 Microtel Inns.
As a result of the Company's joint venture with US Franchise Systems,
Inc. (see Note 10), the Company has retained the right to franchise,
construct and collect franchise placement fees on an additional
twenty-two (22) Microtel properties and ten (10) "suite" properties
and retain all royalties on the fifty (50) Microtels (28 existing and
22 new ones to be undertaken by the Company) and ten (10) suites. The
Company will also receive royalty payments in the future from US
Franchise Systems, Inc., for franchises they open, along with
consulting payments over the next two years.
Overall, MANAGEMENT FEES for the nine month period ended September 30,
1997 remained consistent with the same nine month period ended
September 30, 1996. During the nine month period ended September 30,
1997, the Company obtained one (1) management contract, compared with
three (3) for the nine month period ended September 30, 1996. The
Company's ownership position in hotels managed, is summarized below:
<TABLE>
September 30, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Owned 17 5
Managed with financial interest 10 9
Other managed 5 4
----------------- ------------------
32 18
----------------- ------------------
----------------- ------------------
</TABLE>
Management fees of approximately $1,232,000 were generated by the
seventeen (17) owned hotels for the nine months ended September 30, 1997,
which were eliminated for consolidation purposes.
OTHER represents development fees of $10,000 for the construction of
one (1) hotel; consulting fees of $112,500 as part of our joint
venture with US Franchise Systems, Inc., under which the Company will
be receiving fees for various consulting services over the next two
years (see Note 10), and the sale of real estate totaling $28,812,
franchise placement fees of $55,500 for two (2) franchise sales
(Greenville, South Carolina and Springfield, Missouri) and other
miscellaneous income of $5,320.
The Company plans to continue its rapid revenue growth by implementing
the following strategies: (i) enhance operating performance of its
existing hotels owned or under management (ii) develop and building
Microtels Inns on sites acquired and (iii) opportunistic acquisition
of existing hotels.
<PAGE>
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel
revenues, less direct expenses; departmental expenses, undistributed
expenses, property occupancy costs and insurance costs) for the nine
months ended September 30, 1997 was 34.2%, compared to 28.7% for the
nine months ended September 30, 1996. The increase is a result of
operating only one (1) hotel, the Seagate Hotel and Beach Club, for
the seven month period ended July 31, 1996. The 1997 results include
the acquisition of seventeen (17) hotel properties (five of which were
acquired on July 31, 1996, and the remaining twelve acquired on
November 27, 1996). The direct costs and expenses for the Seagate
Hotel and Beach Club are included prior to the acquisition on July 31,
1996, as a result of the Company being the controlling partner in the
limited partnership.
CORPORATE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses
increased $596,969 from prior year. The increase is primarily a
result of the following: (1) professional fees increased for the nine
month period as a result of Company growth, (2) payroll expense
increased as a result of pay increases, bonuses and the addition of
four employees, and (3) recording non-cash investor relations expense
for services performed.
DEPRECIATION AND AMORTIZATION for the nine month period ended
September 30, 1997 increased $2,413,576, or 508% , over the nine month
period ended September 30, 1996. The increase is a result of the
acquisition of five (5) hotels on July 31, 1996, and twelve (12)
hotels on November 27, 1996. One of the five (5) hotels purchased on
July 31, 1996, the Seagate Hotel and Beach Club, is included in the
operating results of the Company during the nine month period ended
September 30, 1996, as a result of the Company's ownership interest in
the partnership.
OTHER INCOME (EXPENSE) - Interest income is $135,685, of which
$82,500, or 61%, is generated by interest on the mortgage receivable
from Watertown Hotel Properties II, L.P. Another $50,911 relates
primarily to interest earned by the Company on the outstanding balance
owed the Company by US Franchise Systems, Inc. Of the $6,109,941 in
total interest expense, 64% relates to the mortgage held on the hotels
acquired in 1996. The remaining represents interest on the Company's
outstanding convertible debentures, mezzanine financing, notes payable
relating to the purchase of hotels, Tonawanda bond issue and line of
credit.
MINORITY INTEREST for the nine month period ended September 30, 1996
represents the elimination of the minority partners interest in
operations of Delray Beach Hotel Properties Limited and Watertown
Hotel Properties II, L.P., and the minority interest for the nine
month period ended September 30, 1997 represents the elimination of
the minority partners interest in Watertown Hotel Properties II, L.P.
EQUITY IN INCOME OF AFFILIATES represents the net income incurred from
the Company's equity investment in various hotels. On July 31, 1996,
the Company acquired the remaining interest of Delray Beach Hotel
Properties Limited and has included its results of operations from the
acquisition date, without the elimination of the minority partners
interest.
INCOME TAXES - The benefit for income taxes for the nine month period
ended September 30, 1997, represents federal and state income tax
benefit generated by the net loss before tax of $181,949. The
provision includes tax expense/benefit from the valuation of deferred
tax assets and liabilities. The provision for income taxes of
$490,837 for the nine month period ended September 30, 1996 represents
federal and state tax expense on income before tax of $1,403,839.
<PAGE>
NET INCOME/LOSS - As a result of the above factors, net income
decreased $1,022,171 from the nine month period ended September 30,
1996 to a net loss of $109,169 for the nine month period ended
September 30, 1997. The net loss per common share of $.04, compared
with a net income per common share of $.21 for the nine month period
ended September 30, 1996.
Capital Resources and Liquidity
At September 30, 1997, the Company had a $1,400,000 working capital
demand line note with two commercial banks which bear interest at
rates between prime plus 1/2% and 1 1/2%. Amounts borrowed are
collateralized by a hotel property which the Company owns and
unencumbered land located in Tonawanda, New York. At September 30,
1997, $512,536 was borrowed under the terms of these lines (see Note
6).
At September 30, 1997, the Company had $2,112,203 of cash and cash
equivalents compared with $1,317,708 at September 30, 1996.
The Company is required to maintain certain levels of escrowed cash in
order to comply with the terms of its debt agreements. All cash is
trapped for application against required escrows for debt, tax,
insurance and capital asset reserves. A substantial portion of the
escrowed cash funds are released several times monthly for application
against current liabilities. The balance held in escrow on September
30, 1997 and 1996 was $2,158,047 and $-0-, respectively.
Net cash from operating activities increased $1,870,479 to $2,650,803
at September 30, 1997 from net cash from operating activities of
$780,324 at September 30, 1996. The net increase is primarily the
result of the acquisition of seventeen (17) hotel properties five (5)
of which were acquired on July 31, 1996, and the remaining twelve (12)
acquired on November 27, 1996.
Net cash used in investing activities decreased by $1,851,325 from
September 30, 1996 to September 30, 1997. Net cash from investing
activities for the nine months ended September 30, 1997, reflects
amounts placed into escrow as required by the loan agreements, capital
improvements to the seventeen (17) hotels acquired in 1996 and
deposits submitted for the acquisition of three (3) hotels and nine
(9) hotels.
Net cash from financing activities decreased by $3,218,247 to $954,664
at September 30, 1997. Net borrowing on the line of credit decreased
to $512,536 for the 1997 nine month period, compared to $1,110,000 for
the 1996 nine months. The decrease is primarily the result of the
Company using the line of credit in 1996 for the
acquisition/development of real estate. In addition, the Company
received cash proceeds of $1,039,211 from the exercise of options for
the 1997 nine months, compared to $4,000 for the 1996 nine months.
EBITDA increased to $8,688,005 during the 1997 nine months, an
increase of 248% over the 1996 nine months. EBITDA is defined as
earnings before interest expense, income taxes, depreciation,
amortization, minority interest and equity of affiliates. The Company
believes this definition of EBITDA provides a meaningful measure of
its ability to service debt. The increase is a result of the
acquisition of seventeen (17) hotel properties (five (5) of which were
acquired on July 31, 1996, and the remaining twelve (12) acquired on
November 27, 1996).
Funds on hand, internally generated future cash flows and funds
available on the Company's secured demand notes are expected to be
sufficient to meet capital requirements, as well as operating expenses
and debt service requirements through at least the third quarter of
1997. From time to time, the Company will continue to evaluate the
necessity of other financing alternatives.
In February, 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128 - Earnings
Per Share ("SFAS No. 128"), which will be effective for the Company's
fiscal year ended December 31, 1997. SFAS No. 128 is intended to
simplify the earnings per share computation and make it more
comparable from company to company. The adoption of SFAS No. 128 is
not expected to have a significant impact on the Company's earnings
per share, as currently determined.
<PAGE>
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Management's Discussion
and Analysis of Financial Condition and Results of
Operations and Capital Resources and Liquidity are
"forward-looking statements" intended to qualify for the
safe harbors from liability established by the Private
Securities Litigation Reform Act of 1996. These
forward-looking statements can generally be identified as
such because the context of the statement will include words
such as the company "believes", "anticipates", "expects", or
words of similar meaning. Similarly, statements that
describe the Company's future plans, objectives or goals are
also forward-looking statements. Such forward-looking
statements are subject to certain risks, assumptions and
uncertainties which are described in close proximity to such
statements and which could cause actual results to differ
materially from those currently anticipated. Shareholders,
potential investors and other readers are urged to consider
these risks, assumptions and uncertainties carefully in
evaluating the forward-looking statements are cautioned not
to place undue reliance on such forward-looking statements.
The forward-looking statements made herein are only made as
of the date of this form 10-QSB and the Company undertakes
no obligation to publicly update such forward-looking
statements to reflect subsequent events or circumstances.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 26, 1990, a complaint was filed in Palm Beach County
Circuit Court, Florida, by Seagate Beach Quarters, Inc., a
Florida corporation (Bearing Case #90-12358-AB), seeking damages
plus interest and costs, against Rochester Community Savings
Bank, ("RCSB"), a New York based bank, Shore Holdings, Inc.
("SHORE"), a subsidiary of RCSB and naming Hudson as a
co-defendant. On December 6, 1990, Delray Beach Hotel Properties
Limited, a Florida limited partnership controlled by Hudson
Hotels, purchased the Seagate Hotel and Beach Club from RCSB's
subsidiary, SHORE. The purchase contract included an
indemnification of Hudson Hotels against any action resulting
from previously negotiated contracts between RCSB's subsidiaries
and third-parties. Case #90-12358-AB contained allegations that
RCSB's subsidiary, SHORE Holdings, defaulted in its obligations
under a Contract for Purchase and Sale, dated August 16, 1990,
and failed to go forward with the transaction due to alleged
tortious negotiations between RCSB and Hudson. On March 17,
1994, the Court granted Summary Judgment in favor of RCSB and
Hudson Hotels which judgment was appealed by Seagate. The Fourth
District Court of Appeal in Florida affirmed the summary judgment
on RCSB and reversed the summary judgment granted in favor of
Hudson, remanding the action to Circuit Court for further
consideration. On August 15, 1994, Seagate proceeded to trial
against SHORE in case #90-12358-AB. During the course of the
trial, Seagate took a voluntary dismissal of their action against
SHORE. On September 8, 1994, Seagate refiled its lawsuit against
SHORE and joined Delray Beach Hotel Properties Limited, through
its general partner, Delray Beach Hotel Corp. (bearing Case
#94-6961-AF). The new case against SHORE was brought essentially
on the same facts as stated above. The claim against Delray
Beach Hotel Properties Limited was identical to the conspiracy
and tortious interference with a business relationship claim
currently existing against Hudson Hotels. On January 27, 1995,
the Court issued an Order dismissing the Amended Complaint as to
Delray Beach Hotel Properties Limited. The Circuit Court has
consolidated the case against Hudson Hotels (Case #90-12358-AB)
and the case against SHORE (Case #94-6961-AF) and it is
anticipated those suits will go to trial during 1998.
On February 11, 1993, a complaint was filed in the Western
District of New York, United States District Court, by John
Miranda, Susan Miranda and Christopher Miranda, seeking damages
and costs against Quality Inn International, Choice Hotels
International, and naming Hudson as a co-defendant. The
requested relief in this case, John Miranda and Susan Miranda and
Christopher Miranda vs. Quality Inns International Inc., Choice
Hotels International Inc., Ridge Road Hotel Properties, Ridge
Road Hotel Properties d/b/a Comfort Inn, a/k/a Comfort Inn West,
Hudson Hotels Corp., and Jennifer L. Ansley, as Executrix of the
Estate of Loren G. Ansley, was based on allegations that John
Miranda, while staying at the Comfort Inn, stepped on a needle,
and claims negligence and lack of due care on the part of the
defendants. This case is being diligently defended by the
insurance carrier of Ridge Road Hotel Properties and Hudson. The
Company believes that it has adequate insurance for any potential
loss.
After taking into consideration legal Counsel's evaluation of all
such actions, management is of the opinion that the outcome of
each such proceeding or claim which is pending, or known to be
threatened (as described above), will not have a significant
effect on the Company's financial statements.
On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's
former investment bankers, filed a complaint in New York State
Supreme Court against the Company alleging breach of contract and
damages of $906,250 relating to the Company's rescission of a
warrant granted to them in connection with the investment
advisory agreement. In February 1994, the Board of Directors of
the Company determined that Ladenburg had been otherwise
adequately compensated for such services as were actually
performed, and voted to rescind the warrant. The Company has
answered the complaint, denying the relevant allegations and
asserting several affirmative defenses. Each party has moved for
summary judgement in this case and arguments were based on those
motions in October 1997. Decision on the summary judgement
motion is pending. The ultimate outcome of the litigation cannot
presently be determined. Accordingly, no provision for any
liability that may result has been made in the financial
statements.
<PAGE>
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.
HUDSON HOTELS CORPORATION
-----------------------------------
(Registrant)
Date: 10/26/97 /s/ Bruce A. Sahs
-----------------------------------
Bruce A. Sahs, Executive Vice
President and Chief Operating
Officer
Date: 10/26/97 /s/ Taras M. Kolcio
-----------------------------------
Taras M. Kolcio, Chief Financial
Officer
<PAGE>
Item 2. Change in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit No. Description
- ---------- -----------
11 Statement re: computation of per share earnings
27 Financial Data Schedule
B. Form 8-K: N/A
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER COMMON SHARE
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
---------------------- ----------------------
9/30/97 9/30/96 9/30/97 9/30/96
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY
- -------
Net earnings applicable to common stock:
Net earnings/(loss)....................................... $ 174,325 $ 454,261 $ (109,169) $ 913,002
Deduct preferred stock dividends paid..................... (31,830) (31,830) (95,490) (95,490)
---------- ---------- ---------- ----------
Net earnings/(loss) applicable to common stock................ $ 142,495 $ 422,431 $ (204,659) $ 817,512
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average number of common shares and common
equivalents outstanding:
Weighted average common shares outstanding................ 5,082,101 4,036,619 4,943,591 3,509,115
Additional shares assuming conversion of options and
warrants................................................ 336,587 407,153 482,175
---------- ---------- ---------- ----------
Weighted average number of common shares and common
equivalents outstanding................................. 5,418,688 4,443,772 4,943,591 3,991,290
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Primary earnings/(loss) per share............................. $ 0.03 $ 0.10 $ (0.04) $ 0.21
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
FULLY DILUTED*
- --------------
Net earnings applicable to common stock on a fully diluted
basis:
Net earnings applicable to common stock per above......... $ 142,495 $ 422,431 $ 817,512
Add net interest expense related to convertible
debentures.............................................. 84,375 76,464 15,464
Add dividends on convertible preferred stock.................. 31,830 31,830 95,490
---------- ---------- ----------
Net earnings applicable to common stock on a fully diluted
basis....................................................... $ 258,700 $ 530,725 $ 928,466
---------- ---------- ----------
---------- ---------- ----------
Total shares for fully diluted:
Shares used in calculating primary earnings per share..... 5,418,688 4,443,772 3,991,290
Additional shares to be issued under full dilution using
ending market price..................................... 825 -- --
Additional shares to be issued under full conversion of
convertible debentures.................................. 1,000,000 931,111 703,704
Additional shares to be issued under full conversion of
preferred stock......................................... 294,723 294,723 294,723
---------- ---------- ----------
Total shares for fully diluted............................ 6,714,236 5,669,604 4,989,717
---------- ---------- ----------
---------- ---------- ----------
Fully diluted earnings per share.............................. $ 0.04 $ 0.09 $ 0.19
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
* This calculation is submitted in accordance with Securities Exchange Act of
1934 Release No. 9083, although not required by footnote 8, paragraph 40, of
APB No. 15 because it results in anti-dilution. In addition, common
equivalent shares are not considered in the computation of earnings per
common share for March 31, 1997, as the impact would be antidilutive.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet, Consolidated Statement of Operations, Consolidated
Statements of Changes in Shareholders' Investment, Consolidated Statements of
Cash Flows and Notes to Consolidated Statements, and is qualified
in its entirety by reference to such financial statements and notes to
Consolidated Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 4,270,250
<SECURITIES> 0<F1>
<RECEIVABLES> 847,679
<ALLOWANCES> 0
<INVENTORY> 374,295
<CURRENT-ASSETS> 6,391,240
<PP&E> 86,105,607
<DEPRECIATION> 3,335,690
<TOTAL-ASSETS> 104,202,289
<CURRENT-LIABILITIES> 8,657,388
<BONDS> 83,211,794
0
295
<COMMON> 5,164
<OTHER-SE> 14,190,969
<TOTAL-LIABILITY-AND-EQUITY> 104,202,289
<SALES> 28,457,405
<TOTAL-REVENUES> 28,457,405
<CGS> 19,769,400
<TOTAL-COSTS> 19,769,400
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,109,941
<INCOME-PRETAX> (175,217)
<INCOME-TAX> (72,780)
<INCOME-CONTINUING> (102,437)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (109,169)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> 0
<FN>
<F1> If information required by the applicable schedule is not included in the
underlying financial data because it is either immaterial or inapplicable, the
value "0" (zero) will be responded to that item.
</FN>
</TABLE>
