<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.....................................March 31, 1997
Commission File Number.......................................0-17838
Hudson Hotels Corporation
- -----------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 16-1312167
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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
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(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 April 30, 1997 the Registrant had issued and outstanding 4,787,462
shares of its $.001 par value common stock.
The Index of Exhibits filed with the Reports
is found at page 17.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(unaudited)
- ---------------------------------------------------------------------------
1997 1996
----- -----
OPERATING REVENUES:
Hotel operations $ 7,961,357 $ 1,661,827
Management fees -
Nonaffiliate 99,494 48,076
Affiliate 58,457 188,793
Royalties 133,825 107,541
Franchise placement income -- 75,000
Sale of land 28,812 --
Development fees -- 25,000
Consulting fees 37,500 200,000
Miscellaneous 2,281 586
------------ -------------
Total operating revenues 8,321,726 2,306,823
OPERATING COSTS AND EXPENSES
Direct 5,396,050 929,299
Corporate 578,460 476,638
------------ -------------
Total operating costs and expenses
before depreciation and amortization 5,974,510 1,405,937
------------ -------------
Income from operations before
depreciation and amortization 2,347,216 900,886
DEPRECIATION AND AMORTIZATION 927,454 122,155
------------ -------------
Income from operations 1,419,762 778,731
OTHER INCOME (EXPENSE):
Interest income 44,382 87,975
Interest expense (1,993,837) (205,389)
------------ -------------
Total other expense (1,949,455) (117,414)
Income (Loss) from continuing
operations, before income taxes,
minority interest and equity on
net losses of affiliates (529,693) 661,317
PROVISION (BENEFIT) FROM INCOME TAXES (220,964) 81,681
------------ -------------
Income (loss) from continuing
operations, before minority interest
and equity on net losses of affiliates (308,729) 579,636
MINORITY INTEREST (25,740) (371,183)
EQUITY IN LOSSES OF AFFILIATES (7,194) (3,946)
------------ -------------
NET INCOME (LOSS) $(341,663) $204,507
------------ -------------
------------ -------------
NET INCOME (LOSS) PER COMMON SHARE
- PRIMARY $ (.08) $ .05
------------ -------------
------------ -------------
The accompanying notes to consolidated financial
statements are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997
(unaudited)
- ---------------------------------------------------------------------------
ASSETS 1997
- ------ ----
CURRENT ASSETS:
Cash and cash equivalents $ 1,357,324
Cash - restricted 1,690,099
Accounts receivable - trade 681,704
Inventories 191,312
Prepaid expenses and other 320,281
Accounts and notes receivable -
Affiliates 189,536
Nonaffiliate 446,442
Receivable from sale of franchise rights - current 288,112
-------------
Total current assets 5,164,810
-------------
INVESTMENTS IN PARTNERSHIP INTERESTS 1,940,000
-------------
INVESTMENT IN LAND 780,822
-------------
REAL ESTATE DEVELOPMENT 3,339,324
-------------
PROPERTY AND EQUIPMENT, NET 83,115,554
-------------
DEFERRED TAX ASSET 598,413
-------------
OTHER ASSETS:
Beach Club, Net 3,099,646
Deferred financing costs, net 2,482,521
Mortgage and note receivable -
Affiliate 1,100,000
Deposit 736,826
Intangibles and other assets 43,903
Receivable from sale of franchise rights - long term 454,546
-------------
Total other assets 7,917,442
-------------
Total assets $102,856,365
-------------
-------------
The accompanying notes to consolidated financial
statements are an integral part of these consolidated balance sheets.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31, 1997
(unaudited)
- ---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT 1997
- ---------------------------------------- ----
CURRENT LIABILITIES:
Accounts payable - trade $ 2,381,391
Accrued payroll and related taxes 230,803
Accrued interest 449,727
Other accrued expenses 1,443,283
Current portion of long-term debt 3,359,496
Deferred revenue - Beach Club 595,840
Deferred consulting 75,000
Deferred franchise revenue 28,000
-------------
Total current liabilities 8,563,540
-------------
LONG-TERM DEBT 80,064,186
-------------
DEFERRED REVENUE - LAND SALE 185,055
-------------
LIMITED PARTNERS' INTEREST IN CONTROLLED PARTNERSHIPS 1,098,272
-------------
SHAREHOLDERS' INVESTMENT:
Preferred stock 295
Common stock 4,788
Additional paid-in capital 15,956,435
Warrants outstanding 50,000
Accumulated deficit (3,066,206)
-------------
Total shareholders' investment 12,945,312
-------------
Total liabilities and shareholders' investment $102,856,365
-------------
-------------
The accompanying notes to consolidated financial
statements are an integral part of these consolidated balance sheets
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE PERIOD ENDED MARCH 31, 1997
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Additional Additional
Series A Paid-In Paid-In
Preferred Capital Common Capital Warrants Accumulated
STOCK PREFERRED STOCK COMMON OUTSTANDING DEFICIT TOTAL
---------- ----------- ------------- ----------- ------------- ---------- ----
<S> <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 -- -- -- -- -- (341,663) (341,663)
Other -- -- -- 1,690 -- -- 1,690
Cash dividends paid on
preferred stock -- -- -- -- -- (31,830) (31,830)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE, March 31, 1997 $295 $1,560,705 $4,788 $14,395,730 $50,000 $(3,066,206) $12,945,312
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
Stock balances at December 31, 1996:
Common stock: 4,787,462 shares; Preferred stock: 294,723 shares
Stock balances at March 31, 1997:
Common stock: 4,787,462 shares; Preferred stock: 294,723 shares
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997 and 1996
(unaudited)
- -------------------------------------------------------------------------------
1997 1996
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) (341,663) $ 204,507
Adjustments to reconcile net income to
net cash
from operating activities:
Deferred tax provision (220,965) 75,415
Depreciation and amortization 927,454 122,155
Gain on sale of land (28,812) --
Minority interest in operations 25,740 371,183
Non-cash consulting 1,688 6,529
Equity in operations 7,194 3,946
Capital distributions from unconsolidated
partnership interests 3,094 54,091
(Increase) decrease in assets -
Accounts receivable - trade (238,712) (145,491)
Inventories 10,388 653
Prepaid expenses 232,808 (184,145)
Increase (decrease) in liabilities -
Accounts payable 521,795 (46,289)
Accrued payroll and related taxes 41,413 (11,713)
Other accrued expenses 255,932 (233,901)
Accrued interest (2,241) (148)
Deferred revenue - Beach Club (274,062) (280,313)
Deferred consulting (37,504) (200,000)
Customer deposits -- (14,837)
Deferred franchise revenue -- (40,000)
----------- ----------
Net cash from operating activities 883,547 (318,358)
----------- ----------
The accompanying notes to consolidated financial
statements are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1997 and 1996
(unaudited)
- -------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES: 1997 1996
---- ----
Acquisition of land/real estate development $ (58,049) $ (31,972)
Increase in restricted cash (174,220) --
Cash collected on sale of land 399,659 --
Change in affiliates accounts and notes
receivable 136,464 60,546
Purchase of equipment (292,256) (20,363)
Change in other assets (46,361) 3,345
Deposits (97,832) --
Change in non affiliate accounts receivable (317,434) (248,658)
-------------- ----------
Net cash from investing activities (357,307) (237,102)
-------------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgages (168,454) (68,533)
Distributions to limited partners (26,000) (111,417)
Proceeds from stock options exercised -- 1,667
Dividends paid (31,830) (31,830)
Borrowings on line of credit, net -- 500,000
-------------- ----------
Net cash used in financing activities (226,284) 289,887
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 299,956 (265,573)
CASH AND CASH EQUIVALENTS - beginning of period 1,057,368 766,428
-------------- ----------
CASH AND CASH EQUIVALENTS - end of period $ 1,357,324 $ 500,855
-------------- ----------
-------------- ----------
OTHER INFORMATION:
Cash paid during the period for:
Interest $ 1,996,078 $ 205,537
Income taxes $ 7,390 $ 171,269
The accompanying notes to consolidated financial
statements are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 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. It is suggested that these consolidated
financial statements 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 (see Note 18) 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 is changing from a management
fee and royalty fee 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
calandar 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 1997.
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.
<PAGE>
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 three month period ended March 31, 1997, and
a combined summary of condensed financial information for the partnerships
which the Company does not control for the three month period ended
March 31, 1997.
WATERTOWN HOTEL UNCONSOLIDATED
PROPERTIES II, L.P. PARTNERSHIPS
------------------- --------------
Property and equipment, net of accumulated
depreciation $ -- $28,102,555
Current assets 9,372 2,630,772
Notes and mortgage receivable - noncurrent 1,100,000 --
Other assets -- 1,052,245
------------- -------------
TOTAL ASSETS 1,109,372 31,785,572
------------- -------------
Mortgage and notes payable - current -- 1,990,073
Other current liabilities -- 785,833
Mortgage/Notes payable - noncurrent -- 22,509,663
------------- -------------
TOTAL LIABILITIES -- 25,285,569
------------- -------------
NET ASSETS $ 1,109,372 $ 6,500,003
------------- -------------
------------- -------------
Net Revenues $ -- $ 2,674,087
Operating Expenses 1,500 1,624,363
------------- -------------
Income (Loss) from Operations (1,500) 1,049,724
Other Income (Expense), Net 27,500 (1,129,244)
------------- -------------
NET INCOME (LOSS) $ 26,000 $ (79,520)
------------- -------------
------------- -------------
<PAGE>
5. LONG TERM DEBT
Future minimum repayments under long-term debt are
as follows:
Remainder 1997 $ 3,359,496
1998 4,086,027
1999 4,145,975
2000 4,215,720
2001 and thereafter 67,616,464
6. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease arrangements for
automobiles and office space. Total rent expense under operating
leases amounted to $42,881 and $39,094 for the periods ending March
31, 1997 and 1996, respectively. Future minimum lease payments
under operating leases are approximately: 1997 remainder - $108,364;
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 approximately $156,000 and
$-0- for the three months ended March 31, 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 $3.7 million at March 31, 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 operations' adjusted net revenues, as
defined in the lease agreement.
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 - $685,500; 1998 - $914,000; 1999 - $914,000; 2000 -
$914,000; thereafter $3,503,667.
<PAGE>
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 less 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 $5,500 and $-0- for the
three month period ended March 31, 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:
Remainder of 1997 $16,500
1998 22,000
1999 22,000
2000 22,000
2001 22,000
Thereafter 73,333
--------
$177,833
--------
--------
7. 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 March 31, 1997, Company has net operating loss carryforwards
for income tax purposes of approximately $1,432,000 which may be used
to offset future taxable income. These loss carryforwards will
begin to expire in 2003.
8. RECEIVABLES/PAYABLES WITH AFFILIATES
The Company has advanced affiliated entities the following as
of March 31, 1997:
Microtel Partners 1995-I, L.P. $142,178
Airport Hotel Properties, L.P. 10,000
Other 37,358
--------
$189,536
--------
--------
<PAGE>
9. 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 will
be paid each 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 the Company's common stock market price on
October 5, 1995.
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 (28 existing and 22 new ones to be
undertaken by the Company) and ten (10) Suites. During 1996, USFS
completed an initial public offering with proceeds to that entity of
approximately $37,000,000. As a result, it was determined that the
future collectability was not in doubt and the balance of the deferred
revenue was recognized at December 31, 1996.
<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.
Franchise placement income for the three month period ended March 31, 1996
reflects the opening of three franchises (Raleigh, North Carolina; Lake
Norman, North Carolina and Charlotte, North Carolina). There were no
franchise sales during the three month period ended March 31, 1997. Royalties
for the three month period ended March 31, 1997 have increased $26,284 over
the three month period ended March 31, 1996, an increase of 24%. The
increase is attributable to twenty eight franchised Microtels in operation,
as opposed to twenty six during the same three month period in 1996.
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 three years.
Overall, management fees for the three month period ended March 31, 1997
decreased $78,918, or 33%, from the same three month period ended March 31,
1996. The decrease is primarily the result of the change in the Company's
ownership position in hotels managed, which is summarized below:
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
Owned 17 -0-
Managed with
financial interest 9 14
Other managed 5 4
--- ---
31 18
--- ----
Management fees of approximately $387,000 were generated by the seventeen
(17) owned hotels, which were eliminated for consolidation purposes.
Development fees decreased $25,000 from the same period in 1996. The
decrease is attributable to no hotels under development compared to three
Microtels under various stages of development for which fees were charged.
These fees represent a reimbursement of costs incurred.
Hotel operations for the three months ended consist of the following:
MARCH 31, 1997 MARCH 31, 1996
-------------- --------------
Hotel room revenue $6,550,856 $810,472
Beach Club revenue 350,513 369,990
Food and beverage revenue 745,155 374,835
Other 314,833 106,530
----------- ----------
Total $7,961,357 $1,661,827
----------- ----------
----------- ----------
<PAGE>
Hotel room revenues for the three month period ended March 31, 1997
increased $5,740,384 from the three month period ended March 31, 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 closed during the three month
period ended March 31, 1996, as the facility underwent major renovations, and
reopened June 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. The beach club revenue relates to the operation of the beach
club at the Seagate Hotel and Beach Club, which decreased $19,477, or 5%,
from the three month period ended March 31, 1996. Food and beverage revenue
was $745,155 for the three month period ended March 31, 1997, compared to
$374,835 for the three month period ended March 31, 1996, an increase of
$370,320, or 99%. The increase is primarily the result of the Canandaigua
Inn on the Lake being closed during the three month period ended March 31,
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; 56% of Other represents telephone revenue, with the remaining
percentage being vending and movie revenues.
Consulting fees for the three months ended March 31, 1997 represent fees
received 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 9).
During the three month period ended March 31, 1997, the gain on sale of land
relates to the sale of 1.39 acres of land the Company owned in Strawberry
Plains Pike, Tennessee, to an unrelated third party. The Company recognized
income based on its cash proceeds, less the cost of land and its related
improvements. There was no sale of land during the same period in 1996.
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.
Operating Costs and Expenses - Direct represents cost and expenses associated
with the operation of the hotels owned or leased by the Company. Direct
costs and expenses for the three month period ended March 31, 1997, increased
$4,466,751 over the three month period ended March 31, 1996. This increase is
primarily due to the acquisition of seventeen 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 $101,822,
or 21%, from prior year. The increase is primarily a result of the
following: (1) legal fees retainer increasing $30,000 for the period as a
result of Company growth and (2) payroll expense increasing approximately
$60,000 as a result of pay increases and the addition of four employees.
Depreciation and amortization for the period ended March 31, 1997 increased
$805,299, or 659%, over the three month period ended March 31, 1996. The
increase is a result of the acquisition of five hotels on July 31, 1996, and
twelve hotels on November 27, 1996. One of the five 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 March 31, 1996, as
a result of the Company's ownership interest in the partnership.
Other Income (Expense) - Interest income is $44,382, of which $27,500, or
62%, is generated by interest on the mortgage receivable from Watertown Hotel
Properties II, L.P. Another $16,882 relates primarily to interest earned by
the Company on the outstanding balance owed the Company by US Franchise
Systems, Inc. Of the $1,993,837 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 purchase of partnership interests,
Tonawanda bond issue and line of credit.
<PAGE>
Minority interest for the three month period ended March 31, 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 March 31, 1997
represents the elimination of the minority partners interest in Watertown
Hotel Properties II, L.P. Equity in losses of affiliates represents the net
losses 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 three month period ended
March 31, 1997, represents federal and state income tax benefit generated by
the loss before tax of $562,627. The provision includes tax expense/benefit
from the valuation of deferred tax assets and liabilities. The provision for
income taxes of $81,681 for the three month period ended March 31, 1996
represents federal and state tax expense on income before tax of $286,188.
Net Income - As a result of the above factors, net income decreased $546,170
from the three month period ended March 31, 1996 to a loss of $341,663 for
the three month period ended March 31, 1997. The three month period ended
March 31, 1997 earnings decreased for the following reasons: (1) Due to the
seasonal nature of the lodging industry, hotel room revenues in the first and
fourth quarters are less than the second and third quarters and (2)
Depreciation and amortization increased $805,299 for the three month period
ended March 31, 1997 as compared to March 31, 1996, as a result of the
acquisition of seventeen (17) hotels in 1996. The net loss per common share
basic of $.08, compared with a net income per common share basic of $.05 for
the three month period ended March 31, 1996. Weighted average shares used in
computing earning/loss per share increased from 3,233,078 for the three month
period ended March 31, 1996, to 4,787,462 for the three month period ended
March 31, 1997. The predominant factors for this increase are (i) stock
issued for the two major acquisitions in 1996 and (ii) issuance of common
stock upon conversion of convertible subordinated debentures and (iii) stock
options exercised. Consolidation of the revenues and expenses for Watertown
Hotel Properties II, L.P. provides no additional net income or loss to the
Company than from reporting the investment under the equity method of
accounting.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1997, the Company had a working capital deficit of $3,398,730,
as compared to a working capital deficit of $3,712,513 at December 31, 1996.
Cash and cash equivalents totaled $1,357,324. The majority of the working
capital deficit is primarily attributable to a $2,900,000 note in current
portion of long-term debt, which is due to SB Motel Corp. as a result of the
November 27, 1996 acquisition, along with accrued expenses which resulted
from the acquisition.
Accounts and notes receivable represent amounts due from customers or
affiliated entities or individuals and in the opinion of management are fully
realizable.
Investment in real estate partnership interests represents the Company's
interest in various partnerships. Investment in real estate partnership
interests decreased $34,900 from December 31, 1996. The predominant factors
for the decrease are income/losses recorded from the various partnerships and
cash distributions received from the partnerships which are accounted for
under the equity method.
Investment in land represents land purchased for the purpose of future
development or sale. Real estate development represents parcels of land
owned by the Company which are currently under development as hotel sites. As
of March 31, 1997, five parcels are under development. During the three month
period ended March 31, 1997, the Company sold its 1.39 acre site at
Strawberry Plains Pike, Tennessee, for cash proceeds of $399,659. Land and
development costs of the Strawberry Plains Pike, Tennessee, site totaled
$370,847 prior to the sale.
The majority of property and equipment reflected on the balance sheet relates
to acquisition of seventeen hotels during 1996. The acquisitions were
accounted for using the purchase method of accounting.
<PAGE>
Deferred tax assets represent the future benefit from tax loss carryforwards
realized as a result of current year earnings and the expected profitability
in future fiscal periods, along with an alternative minimum tax credit and
deferred revenue relating to consulting, initial franchise placement fees and
land sale. Deferred tax liability relates to the acquisition of Hudson, the
tax effect related temporary differences associated with the difference in
the financial reporting and tax basis of the purchased assets and
depreciation.
Other assets consist of (i) a mortgage note receivable held by Watertown
Hotel Properties II, L.P. in the amount of $1,100,000 collateralized by land
and the Microtel hotel located in Watertown, New York, (ii) deposits consist
of a $450,000 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. 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. In addition, there is also a $210,000 deposit as
a commitment to acquire three hotels from $25,500,000 (iii) Deferred
financing costs represent costs incurred to acquire financing for the
acquisition of seventeen hotels. These costs are inclusive of the
$56,000,000 first mortgage, along with the $17,000,000 mezzanine note. The
deferred financing costs are being amortized over the term of the related
financing; (iv) Beach Club, net, was recorded as a result of the acquisition
of the Seagate Hotel and Beach Club, which the Beach Club operation was
valued based on an independent appraisal. This amount will be amortized over
its estimated useful life of 20 years and (v) Receivable from sale of
franchise rights - long-term, represents a receivable recorded as a result of
determining that the future collectibility of the sale of franchise rights
was not in doubt.
Long-term debt is substantially comprised of a $56,000,000 first mortgage and
a $17,000,000 mezzanine note. These amounts borrowed were used to acquire
seventeen hotels in 1996. The remaining long-term debt consists of the
Company issuing $7,500,000 convertible subordinated debenture, a note issued
by the Company for the purchase of the SB Motel Corp. portfolio and a bond
with the Town of Tonawanda relating to improvements to land in that township.
Shareholders' equity decreased to $12,945,312 as of March 31, 1997, from
$13,317,115 as of December 31, 1996. The factors which significantly
affected the level of shareholders' equity are a decrease of $31,830
resulting from preferred dividend payment and a decrease of $341,663 for net
loss for the three month period ended March 31, 1997. The Company believes
it has sufficient resources from its present cash position to meet its
current obligations and believes that its cash position and revenues from
operations are sufficient to meet its cash requirements for the next twelve
months. The Company has not been negatively impacted by inflation during any
of the periods presented.
<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 1997.
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. 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>
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: The following report was filed on Form
8-K
Date of Report Item
-------------- ----
February 4, 1997 Acquisition of Assets
<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: 5/12/97 /S/ BRUCE A. SAHS
---------------------------------------------
Bruce A. Sahs, Executive Vice President
and Chief Operating Officer
Date: 5/12/97 /S/ TARAS M. KOLCIO
---------------------------------------------
Taras M. Kolcio, Chief Financial Officer
<PAGE>
Exhibit 11
COMPUTATION OF EARNINGS PER COMMON SHARE
THREE MONTHS
------------
3/31/97 3/31/96
------- -------
PRIMARY
- ---------------------------------------
Net earnings applicable to common stock:
Net earnings (loss) $(341,663) $204,507
Deduct preferred stock dividends paid (31,830) (31,830)
----------- -----------
Net earnings applicable to common stock (373,493) 172,677
----------- -----------
----------- -----------
Weighted average number of common shares
and common equivalent outstanding 4,787,462 3,233,078
Additional shares assuming conversion of
options and warrants -- 604,087
----------- -----------
Weighted average common shares outstanding 4,787,462 3,837,165
Basic earnings (loss) per share $ (.08) $ .05
----------- -----------
----------- -----------
FULLY DILUTED*
- -----------------------------------------
Net earnings (loss) applicable to common
stock on a diluted basis:
Net earnings applicable to common stock
per above 172,677
Add net interest expense related
to convertible
debentures 39,600
Add dividends on convertible preferred stock 31,830
-----------
Net earnings applicable to common stock on a
diluted basis $242,683
-----------
-----------
Total shares for diluted:
Weighted average common shares outstanding 3,837,165
Additional shares to be issued under full
conversion of convertible debentures 600,000
Addition shares to be issued under full
conversion of preferred stock 294,723
-----------
Total shares for fully diluted $4,731,008
-----------
-----------
Diluted earnings per share $ .05
-----------
-----------
*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 March 31,1997
as the impact would be antidilutive.
<PAGE>
<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
STA.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,047,423
<SECURITIES> 0
<RECEIVABLES> 681,704
<ALLOWANCES> 0
<INVENTORY> 191,312
<CURRENT-ASSETS> 5,164,810
<PP&E> 84,739,133
<DEPRECIATION> 1,623,579
<TOTAL-ASSETS> 102,856,365
<CURRENT-LIABILITIES> 8,563,540
<BONDS> 83,423,682
0
295
<COMMON> 4,788
<OTHER-SE> 12,940,229
<TOTAL-LIABILITY-AND-EQUITY> 102,856,365
<SALES> 8,321,726
<TOTAL-REVENUES> 8,321,726
<CGS> 5,974,510
<TOTAL-COSTS> 5,974,510
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,993,837
<INCOME-PRETAX> (529,693)
<INCOME-TAX> (220,964)
<INCOME-CONTINUING> (308,729)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (341,663)
<EPS-PRIMARY> $(.08)
<EPS-DILUTED> 0
</TABLE>
