<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, 1998
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.
300 Bausch & Lomb Place, Rochester, New York 14604
- --------------------------------------------------------------------------------
(Address or principal executive offices) (Zip Code)
(716) 454-3400
- --------------------------------------------------------------------------------
(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 18, 1998 the Registrant had issued and outstanding 5,732,495
shares of its $.001 par value common stock.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1997
(unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Hotel operating revenues $16,087,093 $ 9,897,830 $41,840,741 $27,004,219
Management fees 177,881 153,181 652,097 583,727
Royalties 372,429 242,804 862,643 543,927
Other 40,360 40,527 117,517 212,132
----------- ----------- ----------- -----------
Total operating revenues 16,677,763 10,334,342 43,472,998 28,344,005
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Direct 10,452,240 6,318,709 26,923,133 17,665,484
Corporate 1,059,236 763,792 2,615,274 1,990,516
Depreciation and amortization 1,602,007 977,258 4,393,435 2,888,966
----------- ----------- ----------- -----------
Total operating costs and expenses 13,113,483 8,059,759 33,931,842 22,544,966
----------- ----------- ----------- -----------
Income from operations 3,564,280 2,274,583 9,541,156 5,799,039
OTHER INCOME (EXPENSE):
Interest income 58,810 46,744 166,990 135,685
Interest expense (3,696,176) (2,065,862) (10,189,863) (6,109,941)
Settlement of litigation (475,000) -- (475,000) --
Non-recurring costs (4,838,872) -- (4,838,872) --
Gain on sale of property and equipment -- -- 74,523 --
----------- ----------- ----------- -----------
Total other expense (8,951,238) (2,019,118) (15,262,222) (5,974,256)
----------- ----------- ----------- -----------
Income (Loss) from operations, before
income taxes, minority interest and equity
in income of affiliates (5,386,958) 255,465 (5,721,066) (175,217)
PROVISION (BENEFIT) FROM INCOME TAXES (2,053,150) 119,555 (2,182,022) ( 72,780)
----------- ----------- ----------- -----------
Income (Loss) from operations, before
minority interest and equity in
income of affiliates (3,333,808) 135,910 (3,539,044) (102,437)
MINORITY INTEREST 13,823 (27,195) (39,153) (80,160)
EQUITY IN INCOME OF AFFILIATES 100,387 65,610 165,291 73,428
----------- ----------- ----------- -----------
NET INCOME (LOSS) $(3,219,598) $ 174,325 $(3,412,906) $ (109,169)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ (0.61) $ 0.03 $ (0.67) $ (0.04)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
NET INCOME (LOSS) PER COMMON SHARE - DILUTED N/A $ N/A N/A N/A
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND 1997
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $2,325,075 $ 2,112,203
Cash - restricted 6,105,261 2,158,047
Accounts receivable - trade 905,438 847,679
Prepaid expenses and other 1,602,792 1,273,311
--------- ---------
TOTAL CURRENT ASSETS 10,938,566 6,391,240
INVESTMENTS IN PARTNERSHIP INTERESTS 1,752,798 1,900,010
LAND AND REAL ESTATE DEVELOPMENT 4,188,290 4,163,435
PROPERTY AND EQUIPMENT, NET 151,972,941 82,769,917
DEFERRED TAX ASSET 3,441,940 450,229
OTHER ASSETS 8,039,003 8,527,458
--------- ---------
TOTAL ASSETS $180,333,538 $104,202,289
------------ ------------
------------ ------------
</TABLE>
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
CURRENT LIABILITIES: 1998 1997
---- ----
<S> <C> <C>
Lines of credit $ 300,000 $ 512,536
Current portion of long-term debt 1,233,899 3,147,608
Accounts payable - trade 1,163,861 2,243,569
Other accrued expenses 7,901,352 2,753,678
---------- ----------
TOTAL CURRENT LIABILITIES 10,599,112 8,657,391
LONG-TERM DEBT 157,359,291 80,064,186
DEFERRED REVENUE - LAND SALE 185,055 185,055
LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP 1,058,878 1,099,232
SHAREHOLDERS' INVESTMENT:
Preferred stock 295 295
Common stock 5,743 5,164
Additional paid-in capital 19,386,598 17,079,589
Warrants outstanding -- 50,000
Accumulated deficit (8,220,183) (2,897,372)
---------- ----------
11,172,453 14,237,676
Less: 10,000 shares of common stock
in treasury, at cost at September
30, 1998 and 1997 (41,251) (41,251)
---------- ----------
TOTAL SHAREHOLDERS' INVESTMENT 11,131,202 14,196,425
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS'
INVESTMENT $180,333,538 $104,202,289
------------ ------------
------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
SERIES A ADDITIONAL ADDITIONAL
PREFERRED PAID-IN CAPITAL COMMON PAID-IN CAPITAL WARRANTS ACCUMULATED TREASURY
STOCK PREFERRED STOCK COMMON OUTSTANDING DEFICIT STOCK TOTAL
--------- --------------- ------ --------------- ----------- ----------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $295 $1,560,705 $5,166 $16,275,868 $ 50,000 $(4,711,787) $ (41,251) $13,138,996
Net Loss -- -- -- -- -- (3,412,906) -- (3,412,906)
Other -- -- -- 43,102 -- -- -- 43,102
Sale of common stock -- -- 333 999,667 -- -- -- 1,000,000
Issuance of common stock
to employees and
consultants -- -- 40 67,460 -- -- -- 67,500
Settlement of lawsuit -- -- 200 424,800 (50,000) -- -- 375,000
Exercise of stock options -- -- 4 14,996 -- -- -- 15,000
Cash dividends paid
on preferred stock -- -- -- -- -- (95,490) -- (95,490)
---- ---------- ------ ----------- --------- ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 1998 $295 $1,560,705 $5,743 $17,825,893 $ -- $(8,220,183) $ (41,251) $11,131,202
---- ---------- ------ ----------- --------- ------------ ------------ ------------
---- ---------- ------ ----------- --------- ------------ ------------ ------------
</TABLE>
Stock balances at December 31, 1997:
Common stock: 5,155,162 shares; Preferred stock: 294,723 shares
Stock balances at September 30, 1998:
Common stock: 5,732,495 shares; Preferred stock: 294,723 shares
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1998 and 1997
(unaudited)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
---- ----
<S> <C> <C>
Net Loss $ (3,412,906) $(109,169)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Deferred tax provision (2,054,014) (72,780)
Depreciation and amortization 4,393,435 2,888,966
Gain on sale of property and equipment (74,523) (28,812)
Minority interest in operations 39,153 80,160
Non-cash litigation settlement 375,000 --
Non-cash consulting and employee compensation 110,602 85,633
Equity in operations (165,291) (73,428)
Capital distributions from unconsolidated
partnership interests 194,114 77,385
(Increase) decrease in assets -
Accounts receivable - trade (7,560) (404,687)
Prepaid expenses and other (421,343) (16,344)
Increase (decrease) in liabilities -
Accounts payable (230,599) 383,967
Other accrued expenses 4,306,064 (160,088)
--------- --------
Net cash provided by operating activities 3,052,132 2,650,803
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land/real estate development (41,139) (101,338)
Increase in restricted cash (2,641,333) (642,168)
Cash collected on sale of property and equipment 2,038,910 399,659
Change in affiliates accounts and notes receivable (38,672) 133,174
Purchase of property building and equipment (28,272,365) (1,685,538)
Deposits and other assets 294,212 (858,077)
Change in non-affiliate accounts receivable 235,291 203,656
----------- ----------
Net cash used in investing activities (28,425,096) (2,550,632)
----------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 27,300,000 --
Repayment of mortgages (699,318) (380,342)
Distributions to limited partners (80,352) (80,000)
Purchase of treasury stock -- (41,251)
Proceeds from stock options exercised 15,000 1,039,211
Dividends paid (95,490) (95,490)
Borrowings (Repayments) on line of credit, net (412,537) 512,536
Proceeds from sale of common stock 1,000,000 --
----------- ----------
Net cash provided by financing activities 27,027,303 954,664
----------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS 1,654,339 1,054,835
CASH AND CASH EQUIVALENTS - beginning of period 670,736 1,057,368
CASH AND CASH EQUIVALENTS - end of period $2,325,075 $2,112,203
----------- ----------
----------- ----------
OTHER INFORMATION:
Cash paid during the period for:
Interest $10,035,108 $6,072,533
Income taxes $ 36,505 $ 31,279
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 1998
(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, 1997 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, 1997 Form 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 entered into an agreement with US Franchise
Systems, Inc. ("USFS") pursuant to which USFS purchased worldwide franchising
and administration for the Microtel hotel chain (the "USFS Agreement").
Following this transaction, the Company ceased its franchising activities.
Although the agreement was entitled Joint Venture Agreement, the transaction was
structured as an outright sale of the Company's franchising rights.
Pursuant to the USFS Agreement, the Company will receive $4 million over a three
year period, allocated as follows: $3,037,640 for the purchase of the
franchising assets; $700,000 for consulting services over three years; and
$262,360 in interest related to deferred payments. Expenses of $121,759 were
netted against the purchase price. Of the total consideration, $2 million was
paid at closing, $1 million was paid at the first anniversary and $500,000 at
the second anniversary, and an additional $500,000 is due at the third
anniversary. In addition to the lump sum payments, the Company is entitled to
receive royalty payments from properties franchised by USFS at the rate of 1% of
gross room revenues from hotels 1-100; .75% from hotels 101-250; and .5% for all
hotels in excess of 250.
As a result of the sale of its franchising system pursuant to the USFS
Agreement, the Company has focused its efforts on developing, building and
managing various hotel products, including Microtel Inns. The Company has had
this focus since it acquired Hudson Hotels Corporation in 1992. Also, during
1996 and 1997, the Company embarked upon a significant expansion and development
program, which included several acquisitions and the development of five (5)
Microtel Inns through a joint venture partnership.
The Company operates in the industry segment of hotel development and
management.
<PAGE>
3. SUMMARIZED FINANCIAL INFORMATION - INVESTMENTS IN PARTNERSHIP INTERESTS
The following is a summary of condensed financial information for the
unconsolidated partnerships which the Company does not control for the nine
month period ended September 30, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Property and equipment, net of accumulated depreciation $30,889,368 $31,284,051
Current assets 2,957,720 3,161,388
Other assets 856,896 1,080,655
----------- -----------
TOTAL ASSETS 34,703,984 35,526,094
----------- -----------
Mortgage and notes payable - current 1,811,670 1,671,671
Other current liabilities 933,798 1,080,030
Mortgage/Notes payable - noncurrent 24,946,567 25,030,217
----------- -----------
TOTAL LIABILITIES 27,692,035 27,781,918
----------- -----------
NET ASSETS $ 7,011,949 $ 7,744,176
----------- -----------
----------- -----------
COMPANY'S SHARE $ 1,752,798 $ 1,900,010
----------- -----------
----------- -----------
Net revenues $10,471,128 $ 8,890,176
Operating expenses 3,760,551 4,867,485
----------- -----------
Income from operations 6,710,577 4,022,691
Other expense, net (5,676,878) (3,421,882)
----------- -----------
NET INCOME $ 1,033,699 $ 600,809
----------- -----------
----------- -----------
COMPANY'S SHARE $ 165,291 $ 73,428
----------- -----------
----------- -----------
</TABLE>
4. LINE OF CREDIT
The Company has a $400,000 line of credit with a commercial bank, with an
interest rate of prime plus 1 1/2%. Amounts borrowed are collateralized by land
in Tonawanda, New York. Borrowings under this line of credit were $300,000 at
September 30, 1998.
<PAGE>
5. Long Term Debt
In September 1998, the Company and Equity Inns agreed to revise the
principal payment schedule to provide a $1,000,000 principal payment on
October 31, 1998 and $250,000 principal payments every three months
thereafter. A balloon payment of $1,134,052 is due October 31, 2000.
The interest rate will remain at 10%.
As a result of postponing the initial public offering of Hudson Hotels
Trust, the Company has acquired all of the equity interest in Hudson
Hotels Trust and has assumed $4 million in promissory notes. The
promissory notes consist of two (2) 12% notes payable to independent
third parties payable in monthly installments of interest only, with
the principal balance due on April 30, 1999. At the option of the note
holders, at the stated maturity, the notes may be converted into term
loans, bearing interest at 12% and 60 equal monthly principal payments
of $33,333. The notes can be prepaid at any time prior to maturity. The
notes are secured by the pledge of 1,333,332 shares of common stock of
the Company as security of the payment of the notes to the independent
third parties. In addition, the Company issued warrants to acquire
500,000 shares of the Company's common stock at $4.00 a share, which
expire April 30, 2003, to the independent third parties as
consideration for amounts loaned. The value of the issued warrants are
expensed over the expected period of the loans.
As a result of the acquisition of three (3) hotel properties (see Note
8), the Company has added the following long-term debt:
Note payable to Capital America, dated August 14, 1998,
totaling $18.3 million, due in monthly installments of
interest only of LIBOR +2.75% until August 1999, after which
time the note can be converted to a loan which will have an
interest rate of 2.25% in excess of the ten year treasury bill
rate at the date of conversion.
A $5 million contribution to HH Bridge, L.P., from an
independent third party on which HH Bridge, L.P. will make
quarterly payments of $250,000 which the Company treats as
interest payments. See Note 8 for a description of principal
due dates.
Future minimum repayments under long-term debt are as follows:
<TABLE>
<CAPTION>
<S> <C>
Remainder 1998 $1,233,899
1999 8,067,700
2000 7,896,956
2001 7,897,342
2002 14,625,816
2003 and thereafter 118,871,477
------------
TOTAL $158,593,190
------------
------------
</TABLE>
6. Commitments and Contingencies
The Company has various operating lease arrangements for automobiles
and office space. Total rent expense under operating leases amounted to
$198,948 and $115,124 for the periods ending September 30, 1998 and
1997, respectively. Future minimum lease payments under operating
leases are approximately:
remainder of 1998 - $104,300; 1999 - $417,209; and 2000 - $409,056.
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 based on franchise agreements
which extend from ten to sixteen 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 $1,654,000 and $782,000 for the
nine months ended September 30, 1998 and 1997, respectively.
The Company provided 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. 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 1998 - $228,500;
1999 - $914,000; 2000 - $914,000; 2001 - $914,000; 2002 - $914,000;
thereafter $1,675,667.
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 for the
nine month period ended September 30, 1998 and 1997.
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>
<CAPTION>
<S> <C>
Remainder of 1998 $5,500
1999 22,000
2000 22,000
2001 22,000
2002 22,000
Thereafter 726,000
--------
$819,500
--------
--------
</TABLE>
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 liabilities represent the difference in more than one
depreciation method.
At September 30, 1998, Company has net operating loss carryforwards for
income tax purposes of approximately $9,986,000 which may be used to
offset future taxable income. These loss carryforwards will begin to
expire in 2003.
8. Acquisition
On August 14, 1998, HH Bridge, L.P. ("the Partnership"), a limited
partnership in which the Company has a 42% interest, completed the
acquisition of three hotel properties from an unrelated third party for
approximately $26.6 million plus other indirect costs. The purchase
price is subject to adjustment and includes cash paid for assets
purchased and other direct costs of the acquisitions. The acquisition
has been accounted for under the purchase method and, accordingly, the
operating results of the three hotels have been included in the
consolidated operating results since the date of the acquisition.
The funds used to acquire the three hotel properties were provided by
cash from the Partnership and long-term borrowings. The Company funded
the partnership through long-term borrowings and cash from operations.
The Partnership agreement provides for put and call arrangements on the
third party limited partner's ("M, L, R & R") 58% partnership interest
in HH Bridge, L.P. M, L, R & R shall have the right, prior to July 14,
1999, to cause the Company to purchase M, L, R & R's entire partnership
interest for $6 million (the "Put"). If the Put is exercised, the
closing of the purchase of M, L, R & R's partnership interest shall
take place on August 14, 1999. The Company shall have the right to
purchase M, L, R & R's entire partnership
<PAGE>
interest for $6 million by November 13, 1999, at which point such
purchase price of $6 million increases $66,667 for each month
thereafter. The Company will be required to purchase M, L, R & R's
partnership interest on August 13, 2003 for $9 million.
As a result of the Put arrangement in the partnership agreement, the
Company has consolidated the balance sheet and statement of operations
of HH Bridge, L.P. within the Company's financial statements. In
addition, the Company has classified M, L, R & R's interest in the
Partnership as long-term debt and will record any increases in the
purchase price as financing costs.
9. Settlement of Litigation
On September 30, 1998, the Company reached settlement in long standing
litigation with plaintiffs, Ladenburg, Thalmann Co., who alleged a
breach of contract by the Company. In exchange for termination of the
lawsuit and mutual release, the Company paid to the plaintiff a total
of $100,000 in cash and 200,000 shares of common stock valued at
$375,000.
10. Non-Recurring Cost
During the third quarter of 1998, the Company recognized unusual
charges of $4.84 million ($2.95 million or $0.57 per share after tax).
These charges include (i) a deposit and direct costs related to the
postponed acquisition of twenty-six Fairfield Inns by Marriott that are
under contract to Hudson Hotels Trust and (ii) costs incurred by the
Company as Hudson Hotels Trust was unable to raise funds through an
initial public offering. These costs and deposits were written off due
to current economic conditions, which have prevented the completion of
Hudson Hotels Trust's initial public offering.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis should be read in conjunction
with the entire Form 10-KSB 1997 Annual Report. Particular attention should be
directed to the Consolidated Financial Statements found at Item 7 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations found at Item 6.
As a result of the acquisition of nine (9) Hampton Inns on October 31, 1997, and
the consolidation of HH Bridge, L.P. on August 14, 1998, a significant portion
of the current results are not directly comparable to prior year results,
specifically hotel operating revenues and direct costs, expenses and interest
expense.
RESULTS OF OPERATIONS
Three months ended September 30, 1998, compared to the three months ended
September 30, 1997:
Total operating revenues increased $6,343,421, or 61% to $16,677,763 for the
three months ended September 30, 1998, from $10,334,342 for the three months
ended September 30, 1997, reflecting changes in revenue categories, as discussed
below.
HOTEL OPERATING REVENUES were $16,087,093 for the three months ended September
30, 1998, an increase of $6,189,263, or 63%, from $9,897,830 for the three
months ended September 30, 1997. Hotel operations consisted of the following:
<TABLE>
<CAPTION>
Three Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Hotel room revenue $13,666,122 $8,191,814
Beach club revenue 296,089 319,988
Food and beverage revenue 1,595,377 1,111,110
Other 529,505 274,918
----------- ----------
Total $16,087,093 $9,897,830
----------- ----------
----------- ----------
</TABLE>
Hotel room revenues for the three month period ended September 30, 1998
increased $5,474,308, or 67%, to $13,666,122 from $8,191,814 for the three month
period ended September 30, 1997. The increase is primarily the result of
acquiring nine (9) hotels on October 31, 1997, and three (3) hotels on August
14, 1998, thus the revenue for the acquisitions was not included for the three
months ended September 30, 1997. Occupancy and average daily room rates for the
Company owned hotels were 76.9% and $59.98, respectively, for the three months
ended September 30, 1998, and 75.1% and $56.69, respectively, for the three
months ended September 30, 1997.
The Beach Club revenue, which totaled $296,089 for the three month period ended
September 30, 1998 and relates to the operation of the beach club at the Seagate
Hotel and Beach Club, decreased $23,899, or 7%, from the comparable period in
1997. The decrease is specifically attributable to a decrease in initiation fees
collected from new members.
Food and beverage revenue was $1,595,377 for the three month period ended
September 30, 1998, compared to $1,111,110 for the three month period ended
September 30, 1997, an increase of $484,267, or 44%. The increase is primarily
the result of additional food and beverage volume at the Canandaigua Inn on the
Lake.
ROYALTIES for the three month period ended September 30, 1998 increased $129,625
to $372,429 from $242,804 for the three month period ended September 30, 1997,
an increase of 53%. The increase is attributable to one hundred (100) franchised
Microtel Inns in operation at September 30, 1998, as opposed to fifty-eight (58)
in operation at September 30, 1997. The Company receives all royalties on
twenty-eight (28) of the one hundred (100) franchised Microtel Inns and on the
remaining seventy (70) franchises established by US Franchise Systems, Inc., the
Company receives royalty payments from USFS of 1% of gross room revenues. After
USFS has separately franchised 100 hotels, the royalty rate drops to .75% for
hotels 101-250; and .5% for hotels 251 and beyond.
<PAGE>
As a result of the Company's joint venture agreement (the "USFS Agreement")
with US Franchise Systems, Inc., the Company has retained the right to
collect franchise placement fees on an additional twenty-two (22) Microtel
Inn properties (for a total of 50 properties) and ten (10) "suite" properties
and retain all royalties on these fifty (50) Microtel Inns and ten (10) new
suites properties. The Company will also receive royalty payments in the
future from US Franchise Systems, Inc., for franchises it opens based on the
schedule discussed in the preceding paragraph.
MANAGEMENT FEES for the three month period ended September 30, 1998, remained
consistent compared to the same three-month period ended September 30, 1997. The
schedule of owned and managed hotels is summarized below:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Owned 28 17
Managed with financial interest 10 10
Other managed 5 5
---- ---
43 32
---- ---
---- ---
</TABLE>
Management fees of approximately $652,000, generated by the twenty-eight (28)
owned hotels for the three month period ended September 30, 1998, were
eliminated for consolidation purposes.
The Company plans to continue its revenue growth by maintaining the following
strategies: (i) enhance operating performance of its existing hotels owned or
under management (ii) develop and build Microtel Inns on sites acquired (iii)
opportunistic acquisition of existing hotels and (iv) pursuing strategies
intending to form a "paperclipped" REIT in order for the Company to benefit from
leasing hotel properties from the REIT. There is no assurance that the
Company will be successful in these efforts.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues,
less direct expenses; departmental expenses and undistributed expenses) for the
three months ended September 30, 1998 was 41%, compared to 43% for the three
months ended September 30, 1997. The decrease in gross operating margin is a
result of undertaking operational steps to improve customer service and improve
the physical plant through repairs and maintenance to the properties purchased
in 1997 and 1996.
CORPORATE represents general and administrative costs and expenses associated
with the corporate office. Corporate costs and expenses increased $295,444, or
39%, to $1,059,236 from $763,792 for the three month period ended September 30,
1998. The increase is primarily a result of the following: (1) increases in
professional fees incurred for the three month period ended September 30, 1998,
compared to the three month period ended September 30, 1997, (2) payroll expense
increased as a result of the addition of employees and (3) rent expense
associated with leasing new office space.
DEPRECIATION AND AMORTIZATION for the three month period ended September 30,
1998 increased $624,749, or 64%, to $1,602,007 from $977,258 for the three month
period ended September 30, 1997. The increase is a result of the acquisition of
nine (9) hotels on October 31, 1997, and three (3) hotels on August 14, 1998,
thus recording additional depreciation and amortization during the three months
ended September 30, 1998.
OTHER EXPENSE for the three month period ended September 30, 1998 had an overall
expense increase of $6,932,120 to $8,951,238, or 343%, from $2,019,118 for the
three month period ended September 30, 1997. The increase is primarily the
result of incurring additional debt for the acquisition of nine (9) hotels on
October 31, 1997, three (3) hotels on August 14, 1998, litigation settlement
totaling $475,000 (see Note 9), and non-recurring charges totaling $4,838,872
(see Note 10). Of the $3,696,176 in total interest expense, for the three months
ended September 30, 1998, 60% relates to the mortgages held on the hotels
acquired in 1996, 1997 and 1998. The remaining 40% 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.
EQUITY IN OPERATIONS OF AFFILIATES represents the net income incurred from the
Company's equity investment in various hotels. The income for the three month
period ended September 30, 1998 increased $34,777, or 53%, to $100,387 from
$65,610 for the comparable three month period September 30, 1997, as a result of
various hotel properties in a partnership still undergoing a start-up period of
lower revenues for the three months ended September 30, 1997.
<PAGE>
INCOME TAXES - The benefit for income taxes for the three month period ended
September 30, 1998, represents federal and state income tax generated by the net
loss before tax of $5,272,748 (including the equity in income from affiliates
and minority interest). The benefit includes tax expense/benefit from the
valuation of deferred tax assets and liabilities. The benefit for income taxes
of $2,053,150 for the three month period ended September 30, 1997 represents
federal and state tax benefit on loss before tax.
NET INCOME/LOSS - As a result of the above factors, net income decreased
$3,393,923 from $174,325 for the three month period ended September 30, 1997 to
net loss of $3,219,598 for the three month period ended September 30, 1998, a
decrease of 1,947%. The net loss per common share - basic of $0.61, compared
with net income per common share - basic and diluted of $0.03 for the three
month period ended September 30, 1997.
Nine months ended September 30, 1998, compared to the nine months ended
September 30, 1997
Total operating revenue increased $15,128,993, or 53%, to $43,472,998 for the
nine months ended September 30, 1998, from $28,344,005 for the nine months ended
September 30, 1997, reflecting changes in revenue categories, as discussed
below.
HOTEL OPERATING REVENUES were $41,840,741 for the nine months ended September
30, 1998, an increase of $14,836,522, or 55%, from $27,004,219 for the nine
months ended September 30, 1997. Hotel operations consist of the following:
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Hotel room revenue $35,670,991 $22,281,320
Beach club revenue 1,057,863 986,560
Food and beverage revenue 3,614,329 2,763,095
Other 1,497,558 973,244
----------- -----------
TOTAL $41,840,741 $27,004,219
----------- -----------
----------- -----------
</TABLE>
Hotel room revenues for the nine month period ended September 30, 1998 increased
$13,389,671, or 60%, to $35,670,991 from $22,281,320 for the nine month period
ended September 30, 1997. The increase is primarily the result of acquiring nine
(9) hotels on October 31, 1997, and three (3) hotels on August 14, 1998, thus
the revenue for the acquisition was not included for the nine months ended
September 30, 1997. Occupancy and average daily room rates for the Company owned
hotels were 70.2% and $58.92, respectively, for the nine months ended September
30, 1998 and 68.7% and $56.24, respectively, for the nine months ended September
30, 1997.
The beach club revenue, which totaled $1,057,863 for the nine month period ended
September 30, 1998 and relates to the operation of the beach club at the Seagate
Hotel and Beach Club, increased $71,303, or 7%, from the comparable period in
1997. The increase is specifically attributable to increase in initiation fees
being charged to new members.
Food and beverage revenue was $3,614,329 for the nine month period ended
September 30, 1998, compared to $2,763,095 for the nine month period ended
September 30, 1997, an increase of $851,234, or 31%. The increase is primarily
the result of additional volume at the Canandaigua Inn on the Lake.
ROYALTIES for the nine month period ended September 30, 1998, have increased
$318,716 to $862,643 from $543,927 for the nine month period ended September 30,
1997, an increase of 59%. The increase is attributable to one hundred (100)
franchised Microtels in operation at September 30, 1998, as opposed to
fifty-eight (58) in operation at September 30, 1997.
As a result of the USFS Agreement, the Company has retained the right to 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 and ten (10) suites. The Company will also receive royalty payments in
the future from US Franchise Systems, Inc., for franchises they open.
<PAGE>
Overall, MANAGEMENT FEES for the nine month period ended September 30, 1998,
remained consistent with the same nine month period ended September 30, 1997.
The schedule of owned and managed hotels is summarized below:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
Owned 28 17
Managed with financial interest 10 10
Other managed 5 5
---- ----
43 32
---- ----
---- ----
</TABLE>
Management fees of approximately $2,038,000 were generated by the twenty-eight
(28) owned hotels for the nine months ended September 30, 1998, which were
eliminated for consolidation purposes.
The Company plans to continue its revenue growth by implementing the following
strategies: (i) enhance operating performance of its existing hotels owned or
under management (ii) develop and building Microtel Inns on sites acquired (iii)
opportunistic acquisition of existing hotels and (iv) pursuing strategies
intending to form a paperclipped REIT in order for the Company to benefit from
leasing hotel properties from the REIT. There is no assurance that the
Company will be successful in these efforts.
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,
1998 was 41.6%, compared to 40.8% for the nine months ended September 30, 1997.
The increase is a result of undertaking operational steps to more effectively
and efficiently manage the properties purchased in 1996, 1997, and 1998.
CORPORATE represents general and administrative costs and expenses associated
with the corporate office. Corporate costs and expenses increased $624,758, or
31%, from $1,990,516 to $2,615,274 for the nine month period ended September 30,
1998. 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 and the addition of employees and
(3) rent expense associated with leasing new office space.
DEPRECIATION AND AMORTIZATION for the nine month period ended September 30,
1998, increased $1,504,439, or 52%, to $4,393,435 from $2,888,966 for the nine
month period ended September 30, 1997. The increase is a result of the
acquisition of nine (9) hotels on October 31, 1997, and three (3) hotels on
August 14, 1998, thus recording additional depreciation and amortization during
the nine month period ended September 30, 1998.
OTHER EXPENSE for the nine month period ended September 30, 1998 had an overall
expense increase of $9,287,966 or 155% to $15,262,222 from $5,974,256 for the
nine months ended September 30, 1997. The increase is primarily the result of
incurring additional debt for the acquisition of nine (9) hotels on October 31,
1997, and three (3) hotels on August 14, 1998, litigation settlement totaling
$475,000 (see Note 9), and non-recurring charges totaling $4,838,872 (see Note
10). Of the $10,189,863 in total interest expense, 60% relates to the mortgages
held on the hotels acquired in 1997 and 1998. The remaining 40% represents
interest on the Company's outstanding convertible debentures, mezzanine
financing, additional note payable relating to the purchase of hotels, Tonawanda
bond issue and line of credit.
EQUITY IN OPERATIONS OF AFFILIATES represents the net income incurred from the
Company's equity investment in various hotels. The income for the nine month
period ended September 30, 1998 increased $91,863, or 125%, to $165,291 from
$73,428 for the comparable nine months ended September 30, 1997, as a result of
the improved performance of various hotel properties in a partnership that was
still undergoing a start-up period of lower revenues for the nine months ended
September 30, 1997.
INCOME TAXES - The benefit for income taxes for the nine month period ended
September 30, 1998 and 1997, represents federal and state income tax benefit
generated by the net loss before tax of $5,594,928 (including the equity in
income from affiliate and minority interest) and $181,949, respectively. The
benefit includes benefit from the valuation of deferred tax assets and
liabilities.
<PAGE>
NET LOSS - As a result of the above factors, net loss increased $3,303,737 from
$109,169 for the nine month period ended September 30, 1997, to a net loss of
$3,412,906 for the nine month period ended September 30, 1998, an increase of
3,026%. The net loss per common share - basic of $0.67 for the nine month period
ended September 30, 1998, compared with a net loss per common share - basic of
$0.04 for the nine month period ended September 30, 1997.
CAPITAL RESOURCES AND LIQUIDITY
At September 30, 1998, the Company had a $400,000 working capital demand line
note with a commercial bank which bears interest a rate of prime plus 1/2%.
Amounts borrowed are collateralized by unencumbered land. At September 30, 1998,
$300,000 was borrowed under the term of this line.
At September 30, 1998, the Company had $2,325,075 of cash and cash equivalents
compared with $670,736 at December 31, 1997. 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, taxes, insurance and capital asset reserves. A substantial portion of the
escrowed cash funds are released several times monthly for application against
current liabilities. The balances held in escrow on September 30, 1998 and
December 31, 1997 were $6,105,261 and $3,463,928, respectively.
Net cash flows provided by operating activities were $3,052,132 for the nine
month period ended September 30, 1998, an increase of $401,329 from
$2,650,803, for the comparable period in 1997. The net increase is primarily
the result of the acquisition of nine (9) Hampton Inns on October 31, 1997,
and consolidation of HH Bridge, L.P. Earnings were offset by the
non-recurring charge of $4.9 million (see Note 10). In addition, the Company
increased its other accrued expenses from December 31, 1997, by approximately
$4.3 million primarily resulting from accruing (i) approximately $1.6 million
for the non-recurring charge (see Note 10) and (ii) $1.0 million for the
purchase premium of HH Bridge, L.P. (see Note 8) and (iii) $1.7 million for
regular operating activities as it relates to the acquisition of nine (9)
Hampton Inns on October 31, 1997, and consolidation of HH Bridge, L.P.
Net cash flows used in investing activities was $28,425,096 for the nine month
period ended September 30, 1998, an increase of $25,874,464 from $2,550,632, for
the comparable period for 1997. Net cash used by investing activities for the
nine months ended September 30, 1998, reflects primarily the acquisition of
three (3) hotels for $26.6 million (see Note 8), $2,641,333 was placed into
escrow as required by the loan agreements, $1,664,092 of capital improvements to
twenty-five (25) hotels and $2,038,910 of cash received for the sale of property
and equipment.
Net cash flows provided by financing activities was $27,027,303 for the nine
month period ended September 30, 1998. Net cash used in financing activities
consists of net repayments on the line of credit totaling $412,537, proceeds
from the exercise of options totaling $15,000 for the nine month period ended
September 30, 1998, repayment of mortgages $699,318, preferred dividends
$95,490, proceeds from the sale of stock of $1 million and proceeds from
borrowings of $27.3 million primarily utilized for the acquisition of the
three (3) hotel properties in HH Bridge, L.P.
EBITDA increased by $5,246,586, or 60%, to $13,934,591 for the nine month period
ended September 30, 1998, compared to $8,688,005 for the comparable period in
1997. 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 primarily a result of the acquisition
of nine (9) hotel properties acquired on October 31, 1997, and the acquisition
of three (3) hotels on August 14, 1998 (See Note 8) and improved operating
performance of the existing hotel properties held by the Company prior to the
October 31, 1997 acquisition.
The Company's principal sources of liquidity are existing cash balances and cash
flow from operations. As a result of the Company's non-recurring charge (see
Note 10), the Company may require additional capital to continue its operations.
Strategies which the Company is considering to increase liquidity will include
extending payables or obtaining a line of credit. There is no assurance such
strategies or financing will work or be available in amounts required or on
terms satisfactory to the Company. There is no assurance that the Company will
be successful in these efforts.
<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 1995. 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 and 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.
Seasonality
The lodging industry is seasonal in nature. Generally, the Company's hotel
revenues are greater in the second and third quarters than in the first and
fourth quarters. This seasonality can be expected to cause quarterly
fluctuations in revenues and profitability of the Company. Quarterly earning
also may be adversely affected by events beyond the Company's control, such as
extreme weather conditions, economic factors and other considerations affecting
travel.
Year 2000
In 1997, the Company began the process of identifying and evaluating specific
risk areas necessary to address the Year 2000 issue. This issue affects
information technology ("IT"), non-IT systems, and exposure from third-party
risks that have time-sensitive programs or imbedded technology that may not
properly recognize the Year 2000 which could result in system and/or operating
failures. The Company is communicating with software/hardware vendors and others
with which it conducts business to help identify and resolve the Year 2000
issue. The total Year 2000 associated costs have not been completely quantified,
but it is not expected to have a material adverse impact on the Company's
financial condition or results of operations. However, no estimates can be made
as to the potential adverse impact that may result from the failure of the
Company's software/hardware vendors and third parties with which it conducts
business to become Year 2000 compliant. Costs related to the Year 2000 issue are
being expensed as incurred. It is management's understanding that significant
third party vendors with which it does business are now, or will be in a timely
manner, year 2000 compliant. However, if the company or one or more of the third
party vendors fail to complete its Year 2000 program in a timely manner, there
can be no assurance that such failure will not have a material adverse effect on
the Company's operations or financial position.
<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 an unspecified amount of 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, 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 in January
1999.
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 defended by the insurance
carrier of Ridge Road Hotel Properties and Hudson. The Company believes that it
has adequate insurance for any potential loss.
US Franchise Systems, Inc. ("USFS") has informed Hudson Hotels Corporation that
USFS will claim indemnity under the USFS Agreement for any liability to USFS
arising out of the following suit: Plaintiff Larry Owens, a guest in the process
of registering at the Birmingham Microtel Inn, seeks monetary damages in the
amount of $500,000 and punitive damages of $2,000,000 for injury arising out of
a gun shot wound to the buttocks, which occurred during a robbery of the hotel.
This case was commenced in Alabama State Court on December 13, 1996. The claim
is based upon plaintiff's assertion that the hotel owner had a duty to warn
potential guests that a robbery was in progress. Hudson does not own or manage
this hotel. USFS was named in the lawsuit as franchisor of Microtel Inns.
Hudson's liability under this claim is being defended by the hotel's insurance
company.
On June 18, 1998, Vickie Lynn Webb filed a civil suit against the Company and
others in United States District Court in the Eastern District of Tennessee,
alleging sexual harassment and asking for unspecified damages. The
allegations were based upon alleged actions of the manager and another
employee of the hotel. The lawsuit has been settled without material cost to
the Company.
After taking into consideration legal Counsel's evaluation of all such actions,
management is of the opinion that the outcome of such proceedings or claims
which is pending, or known to be threatened (as described above) individually or
in the aggregate, will not have a significant effect on the Company's financial
statements.
<PAGE>
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. On
September 30, 1998, the Company reached settlement with Ladenburg, Thalmann &
Co. The Company funded a total of $100,000 in cash and 200,000 shares of common
stock valued at $375,000 in settlement of the litigation.
<PAGE>
Item 2. Change in Securities and Use of Proceeds
On August 17, 1998, the Company sold 333,334 shares of its common stock, par
value $.001 to a single purchaser, M, L, R & R, for a purchase price of $3.00
per share, an aggregate consideration of $1,000,000 cash. No underwriter or
placement agent was involved in the sale; no discounts or commissions were paid
in connection with this sale. The shares were offered only to this purchaser;
the purchaser is an accredited investor. The Company has relied upon section
4(2) and 4(6) of the Securities Act of 1933 for exemption from registration of
these securities.
In September 1998, the Company issued 20,000 shares of its common stock, par
value $.001, to a consultant in satisfaction of $40,000 of consulting services.
No discounts or commissions were paid in connection with this issuance. The
Company has relied on section 4(2) of the Securities Act of 1933 for exemption
from registration of these securities.
On September 30, 1998, the Company issued 200,000 shares of its common stock,
par value $.001, to the plaintiff in a lawsuit against the Company, in
consideration of settlement and dismissal of the lawsuit. No discounts or
commissions were paid in connection with this issuance. The Company relied upon
section 4(2) of the Securities Act for exemption from registration of these
securities; however, pursuant to the settlement agreement, the Company will
register these shares for sale by the current holder.
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information
During the second and third quarters of 1998, the Company pursued a strategy
as sponsor of a real estate investment trust to establish a "paper clip" REIT
to acquire and hold properties, including those currently owned by the
Company, and lease them to the Company. The Company caused the formation of
Hudson Hotels Trust, a Maryland real estate investment trust (the "Trust"),
and a subsidiary limited partnership (the "OP") to act as the operating
partnership of the Trust. The Company caused the Trust to enter into two real
estate purchase contracts with independent third party sellers to purchase a
total of 29 hotel properties, and to undertake the due diligence, debt
negotiation, and other activities, and to incur the attendant costs required,
to be prepared to close upon the purchase of those properties.
The Company caused the Trust to prepare and file with the Securities and
Exchange Commission a registration statement for the sale of Trust equity
securities, and to incur the legal, accounting, printing, and fee expenses
related to that effort. Certain officers of the Company participated in the
"road show" to promote the sale of stock of the Trust throughout July.
The Company funded the Trust by (i) directly lending the sum of $1,200,000 to
the Trust; (ii) assigning to the OP, in exchange for partnership units,
the option to purchase three of the properties to be acquired, for which the
Company had paid $630,000; and (iii) supporting the incurrance of various costs
and fees associated with the offering of Trust securities, the acquisition of
the 29 properties, and the mortgage financing thereof. In addition, the Trust
borrowed an aggregate of $4,000,000 from two independent individuals. This debt
bears interest at 12% payable monthly, is due on April 30, 1999, and can be
converted, at the note holder's option, to a 5-year amortizing term loan. To
support these loans, the Company pledged 1,333,332 shares of its common stock as
collateral, and issued an aggregate of 500,000 warrants for its common stock,
exercisable at $4.00 per share and expiring April 30, 2003.
At the end of July, the Company and its underwriters determined that pricing was
not favorable to the Company in the current market, and the offering was delayed
several times. At the end of August, the Company, the Trust and the underwriters
determined that adverse market conditions had forced the indefinite postponement
of the offering and sale of stock in the Trust. The Company intends, however, to
continue to pursue its strategy of alliance with a REIT in a "paperclip"
structure.
Following the initial delay of the Trust's initial public offering, the
Company sponsored the organization of a Virginia limited partnership, HH
Bridge, L.P., to acquire three of the properties under contract to the Trust
from the seller thereof. The Company contributed $3,643,000 to the capital of
the Partnership for a 1% general partnership interest and a 41.2% limited
partnership interest; M, L, R & R, an investment partnership, contributed
$5,000,000 for a 57.8% limited partnership interest. Under the Partnership
Agreement,
<PAGE>
M, L, R & R receives a 20% preferred return on its investment, payable
quarterly. The Company receives all income of the Partnership in excess of that
preferred return. M, L, R & R has the right to put its partnership interest to
the Company on August 14, 1999 for $6,000,000. The Company has the right at any
time to purchase the partnership interest of M, L, R & R for a purchase price
fixed at $6,000,000 through November 13, 1999 and thereafter increasing at
$66,666.67 per month. If not sooner purchased, the Company is required to
purchase M, L, R & R's interest on August 13, 2003 for $9,000,000.
The Partnership utilized its capital to acquire, on August 14, 1998, the
following three hotel properties for an aggregate purchase price of
approximately $26,600,000:
Holiday Inn - Cleveland, Ohio: A 146 room full-service hotel located
just off Interstate 71, approximately two miles northeast of the
Cleveland Hopkins International Airport.
Comfort Suites - Cheektowaga (Metropolitan Buffalo), New York: A 100
suite (1 and 2 bedrooms with separate living, sleeping and kitchen
areas) hotel located adjacent to the Greater Buffalo International
Airport, near the intersection of Interstate 90 and State Route 33.
Hampton Inn - Cheektowaga (Metropolitan Buffalo), New York: A 135 room
limited-service hotel located just off exit 52W off Interstate 90.
The purchase price was determined by arms-length negotiation after analysis and
valuation by the Company based upon historic and projected operating results of
the hotels. In addition to the capital contributions set out above, the
Partnership placed a $18,300,000 mortgage loan on the acquired properties with
Capital Company of America, LLC, as Lender. There were no material relationships
between the Partnership and the Seller on one side and the Seller on the other
side prior to the acquisition.
As a result of the indefinite postponement of the initial public offering of the
Trust and the subsequent acquisition of three properties by HH Bridge, L.P., the
Company has assumed responsibility for the $4,000,000 in loans due to third
party investors, and for approximately $4.8 million in fees, costs and expenses
relating to the proposed IPO of the Trust and related real estate acquisitions.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
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 - None
</TABLE>
<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: 11/9/98 /s/ John Sabin
-----------------------------------------------
John Sabin, Executive Vice President and
Chief Financial Officer
Date: 11/9/98 /s/ Taras M. Kolcio
-----------------------------------------------
Taras M. Kolcio, Vice President, Controller and
Chief Accounting Officer
<PAGE>
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
------------ -----------
9/30/98 9/30/97 9/3098 9/30/97
------- ------- ------ -------
BASIC
------------------------------
<S> <C> <C> <C> <C>
Net earnings applicable to common stock:
Net Income (Loss) $ (3,219,598) $ 174,325 $ (3,412,906) $ (109,169)
Deduct preferred stock dividends paid (31,830) (31,830) (95,490) (95,490)
------- ------- ------- -------
Net earnings/(loss) applicable to common stock $ (3,251,428) $ 142,495 $ (3,508,396) $ (204,659)
------------- ------------- ------------- ------------
------------- ------------- ------------- ------------
Weighted average number of common shares
outstanding 5,355,499 5,082,101 5,223,351 4,943,591
--------- --------- --------- ---------
--------- --------- --------- ---------
Earnings/(Loss) per share - Basic $ (0.61) $ 0.03 $ (0.67) $(0.04)
------- ------ ------- ------
------- ------ ------- ------
Earnings per share - diluted N/A $ N/A N/A N/A
--- ------ --- ---
--- ------ --- ---
</TABLE>
The exercise of outstanding stock options, convertible subordinated debenture
and convertible preferred stock were not included in the calculations of diluted
earnings per share, as their effect would be antidilutive. Potentially dilutive
shares total 1,570,103 and 1,632,135 for the three months ended September 30,
1998 and 1997, respectively, and 1,618,047 and 1,610,341 for the nine months
ended September 30, 1998 and 1997, respectively.
<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, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS AND NOTES TO CONSOLIDATED.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> $ 4,270,250
<SECURITIES> 0
<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> 28,344,005
<TOTAL-REVENUES> 28,344,005
<CGS> 19,656,000
<TOTAL-COSTS> 19,656,000
<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
</TABLE>
<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 STOCKHOLDERS' INVESTMENT, CONSOLIDATED STATEMENTS OF
CASH FLOWS AND NOTES TO CONSOLIDATED, 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-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 8,430,336
<SECURITIES> 0
<RECEIVABLES> 905,438
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 10,938,566
<PP&E> 160,217,325
<DEPRECIATION> 8,244,384
<TOTAL-ASSETS> 180,333,538
<CURRENT-LIABILITIES> 10,599,112
<BONDS> 158,593,190
0
295
<COMMON> 5,743
<OTHER-SE> 11,125,164
<TOTAL-LIABILITY-AND-EQUITY> 180,333,538
<SALES> 43,472,998
<TOTAL-REVENUES> 43,472,998
<CGS> 29,538,407
<TOTAL-COSTS> 29,538,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,189,863
<INCOME-PRETAX> (5,721,066)
<INCOME-TAX> (2,182,022)
<INCOME-CONTINUING> (3,539,044)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,412,906)
<EPS-PRIMARY> (.67)
<EPS-DILUTED> 0
</TABLE>
