<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Year Ended Commission File
December 31, 1998 Number 0-17838
HUDSON HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
A New York Corporation IRS Employer Identification
No. 16-1312167
ADDRESS TELEPHONE NUMBER
300 Bausch & Lomb Place (716) 454-3400
Rochester, New York 14604
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange on
Title of Each Class which Registered
------------------- ----------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK $.001 PAR VALUE
(Title of the Class)
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 / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The Registrant's revenues for the year ended December 31, 1998: $57,639,638.
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant (computed by reference to the closing price as reported by the
National Quotation Bureau, Inc. as of March 26, 1999) was $11,198,532 (6,399,161
shares at $1 3/4 per share).
The number of shares outstanding of each of the Registrant's classes of common
stock as of February 20, 1999, is as follows:
5,732,495 SHARES OF COMMON STOCK
Par Value $.001 per share
Parts of the Proxy Statement for the Registrant's Annual Meeting of Stockholders
to be held June 17, 1999 are incorporated by reference to Part III of the Form
10-K Report.
Index to Exhibits is located on pages _____ through _____.
<PAGE>
PART 1
ITEMS 1 AND 2. DESCRIPTION OF BUSINESS AND PROPERTIES
Throughout this report, Hudson Hotels Corporation, together with its
consolidated subsidiaries, is referred to as "Hudson" or the "Company".
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain matters discussed in this Annual Report on Form 10-K 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 import. 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 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 factors in evaluating the forward-looking statements and
are cautioned not to place undue reliance on such forward-looking statements.
The forward-looking statements included herein are made as of the date of this
report, and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
NARRATIVE DESCRIPTION OF BUSINESS
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". The Company was incorporated in New York State on June 5, 1987. For
a number of years, the Company has provided development, construction,
operations, marketing, accounting and professional development services for its
own operations and for third party hotel/motel investors.
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.
The Company, in return, received $4.0 million over a three (3) year period,
allocated as follows: $3,037,640 for the purchase of the franchising assets;
$700,000 for consulting services over three (3) years; and $262,360 in interest
related to deferred payments. Expenses of $121,759 were netted against the
purchase price. Of the total consideration, $2.0 million was paid at closing,
$1.0 million was paid at the first anniversary and $500,000 at the second
anniversary, and an additional $500,000 was paid 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% of gross room revenues from hotels 101-250 and
.5% of gross room revenues for all hotels in excess of 250.
Under this Agreement, the Company has the right to franchise and construct an
additional twenty-two (22) Microtel Inn properties and ten (10) "suites"
properties 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.
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, which has been the
Company's strength since it acquired Hudson Hotels Corporation in 1992. During
1996, 1997 and 1998, the Company embarked upon a significant expansion and
development program, which includes several acquisitions (see Note 13) and
development of five (5) Microtel Inns through a joint venture partnership.
As of December 31, 1998, the Company managed forty-three (43) hotel properties
located primarily in the Northeast and Southeast United States. Of the
forty-three (43) hotel properties under management, twenty-five (25) are owned
directly by the Company. These properties range from super budget "Microtel
Inns" to full-service hotels. The Company competes for management contracts with
many other hotel management companies, many of which have significantly larger
organizations and greater financial resources. In some cases, hotel owners may
require the hotel management company to invest in or advance funds to the hotel
in order to obtain the management contract. In these cases, the Company is at a
competitive disadvantage when compared to these larger, better capitalized
competitors.
<PAGE>
The management contracts are entered into on variations of the Company's
standard form management contract, for terms which vary from month to month to
ten years, and provide for a full range of hotel management services, including
operations management, personnel and staffing, sales and marketing, business
systems, financial management, and food and beverage management, for a fee
typically, a percentage of gross revenues.
The Company's portfolio of managed properties, owned, and partially owned
through partnerships in which the Company has a minority equity position, or
owned by unrelated parties, is made up of the following franchise affiliations:
<TABLE>
<CAPTION>
PERCENT OF COMPANY'S
NUMBER OF TOTAL
FRANCHISE NUMBER OF HOTELS GUEST ROOMS GUEST ROOMS
--------- ---------------- ----------- -----------
<S> <C> <C> <C>
OWNED
Fairfield Inn 8 949 19.6%
Hampton Inns 9 1,085 22.4%
Comfort Inn 2 184 3.8%
Econo Lodge 1 65 1.3%
Red Roof Inn 1 147 3.0%
Independent 4 459 9.5%
-- ----- -----
25 2,889 59.6%
MANAGED WITH A FINANCIAL INTEREST
Microtel Inn 8 842 17.4%
Econo Lodge 1 102 2.1%
Holiday Inn 1 146 3.0%
Hampton Inn 1 133 2.7%
Comfort Suites 1 100 2.1%
-- ----- -----
12 1,323 27.3%
OTHER MANAGED
Microtel Inn 3 305 6.3%
Comfort Inn 2 193 4.0%
Independent 1 134 2.8%
-- ----- -----
6 632 13.1%
TOTAL 43 4,844 100%
== ===== ====
</TABLE>
The Company has a minority equity position, either as a general or a limited
partner, in seven (7) entities that own hotel properties. In addition, it is a
general partner in Watertown Hotel Properties II, L.P., an entity which
previously owned a hotel property and which now holds a mortgage upon a Microtel
Inn, which represents a portion of the sale price of this property and in
Microtel Partners 1995-1, L.P., which owns a parcel of land in Tonawanda, New
York for hotel development.
The Company's owned and managed properties are located in the following areas of
the United States and had the indicated capital renovation, average occupancy,
and average daily rate during the fiscal year ended December 31, 1998.
2
<PAGE>
<TABLE>
<CAPTION>
1998 1998 1998
Number of Planned & Completed Average Average
Hotel Type and Region Guest Rooms Renovation Expenditures* Occupancy Daily Rate
--------------------- ----------- ------------------------ --------- ----------
<S> <C> <C> <C> <C>
Northeastern Region
Luxury 134 $ 4,004 57.6% $ 89.62
Midrange 834 $ 476,207 74.7% $ 62.05
Budget 571 $ 146,513 76.2% $ 42.98
---------- ---------- ------- ----------
Sub-Total 1,539 $ 626,724 73.8% $ 57.38
Southeastern Region
Luxury 70 $ 234,976 75.9% $ 120.30
Midrange 1713 $ 991,184 69.2% $ 53.75
Budget 890 $ 216,469 70.3% $ 42.38
---------- ---------- ------- ----------
Sub-Total 2,673 $1,442,629 69.7% $ 51.71
Midwest
Luxury -- -- -- --
Midrange 269 $ 133,562 73.0% $ 68.95
Budget -- -- -- --
---------- ---------- ------- ----------
Sub-Total 269 $ 133,562 73.0% $ 68.95
Southwest
Luxury -- -- -- --
Midrange 363 $ 44,956 63.6% $ 57.63
Budget -- -- -- --
---------- ---------- ------- ----------
Sub-Total 363 $ 44,956 63.6% $ 57.63
---------- ---------- ------- ----------
TOTAL 4,844 $2,247,871 70.7% $ 54.91
========== ========== ======= ==========
</TABLE>
- ----------
* 5% of room revenue for the owned hotels is projected to be used for the
collective renovations of the owned hotels annually.
RECENT DEVELOPMENTS
Beginning in 1996, the Company began a significant expansion and development
program. During 1996, the Company acquired the partnership interests it did not
already own in five (5) hotel partnerships, in exchange for 1,170,103 shares of
the Company's common stock. In addition, the Company acquired twelve (12) hotel
properties from SB Motel Corp., an indirect wholly owned subsidiary of Salomon
Inc. The purchase price for the properties was $60.4 million, determined by
arms-length negotiation with SB Motel Corp., after analysis and valuation by the
Company. The price was based upon historic and projected operating results of
the properties. The purchase price was paid by issuing 370,657 registered shares
of Company common stock, valued at $2.4 million, by issuing the Company's
subordinated promissory note in the amount of $2.9 million to SB Motel Corp.
(which was repaid by the Company on October 31, 1997), and by paying the balance
of $55.1 million in cash. The cash portion of the purchase price was obtained by
(a) placing a $37.5 million mortgage issued by Nomura Asset Capital Corporation
on the properties purchased (b) the Company securing $17.0 million of mezzanine
financing from Nomura Asset Capital Corporation and (c) the Company utilizing
$.6 million of its available capital. In addition to the consideration stated
above, the Company has granted to Salomon Inc, a right of first refusal to
undertake equity offerings on behalf of the Company.
On October 31, 1997, the Company acquired nine (9) hotel properties operating as
Hampton Inns from Equity Inns Partnership, L.P., pursuant to a Hotel Asset
Purchase Agreement between the Company and Equity Inns Partnership, L.P. The
purchase price for the nine (9) Hampton Inns was $46.3 million, determined by
arms length negotiation with Equity Inns Partnership, L.P., after analysis and
valuation by the Company based upon historical and projected operating results
of the properties. As part of its pre-closing due diligence, the Company
obtained independent valuations of the nine (9) properties from Hospitality
Valuation Services, which supported the negotiated purchase price. The purchase
price was paid by issuing a subordinated promissory note in the amount of
approximately $3.9 million (currently maturing October 31, 2000) secured by
2,000,000 shares of the Company's common stock issued in the name of Hudson
Hotels Properties Corp. (a wholly owned subsidiary of the Company). The cash
portion of the purchase price was obtained (a) by placing a $30.0 million
mortgage issued by Nomura Asset Capital Corporation and (b) by the Company
securing $18.0 million of mezzanine financing from
3
<PAGE>
Nomura Asset Capital Corporation. The Company obtained $5.6 million of financing
in excess of the purchase price which was used to fund escrow and reserve
accounts, pay for the costs of the transaction and to provide for repairs and
upgrades to the properties.
In 1998, the Company announced its plans to "paper clip" with Hudson Hotels
Trust ("Hudson Trust"), a newly formed entity that planned an initial public
offering ("IPO"), led by a group of seven (7) underwriters to raise funds to
acquire a group of twenty-nine (29) hotel properties, which would then be leased
to the Company. Prior to the IPO, Hudson Trust borrowed a total of $4.0 million
from two different third party sources (in the form of two $2.0 million notes).
As part of the loan agreement, the Company pledged 1,333,332 shares of its stock
as security for the repayment of the loans from the third parties. These funds
were used to put deposits on the hotels to be acquired by Hudson Trust and for
other expenses related to the IPO. Due to difficult capital market conditions,
Hudson Trust was not able to complete its IPO. As a result, it is unlikely that
Hudson Trust will be able to repay these loans when they come due April 30,
1999. Subsequent to fiscal year-end one of the holders of these notes agreed to
convert one of the $2.0 million notes into 666,666 shares of Hudson common
stock.
On August 14, 1998, the Company acquired three properties through a limited
partnership ("HH Bridge, L.P.") in conjunction with a third party that owned
the majority (58%) of the limited partnership interests in HH Bridge, L.P.
This third party also had the right to acquire the Company's interest in
HH Bridge, L.P. in the event of default of certain obligations in the limited
partnership agreement for $1. As of December 31, 1998, the partnership was
unable to make certain "guaranteed return" payments to this third party, who
then exercised its rights to acquire the Company's 41% limited partnership
interest for $1. The operations of HH Bridge, L.P. have been consolidated by
the Company from August 14, 1998, to December 31, 1998, however, the balance
sheet has been deconsolidated at December 31, 1998 and a loss on asset
valuation was taken for the Company's investment in the partnership of $3.4
million in the fourth quarter of 1998. Presently the Company owns a 1%
interest in HH Bridge, L.P., as a general partner.
In December of 1998 the Company sold its leasehold interest in the Inn on the
Lake in Canandaigua, NY to the lessor thereof and entered into a management
agreement to manage the property.
Additionally, the Company, in February 1999, completed the sale of five (5)
parcels of its undeveloped land for a price of $1.7 million. This transaction
was undertaken to provide working capital during the Company's seasonally slow
period. Because this transaction was in process at the fiscal year-end, a loss
on asset valuation of $1.8 million was recognized, along with the loss of $3.4
million from the loss of the Company's interest in HH Bridge, L.P.
The Company's mezzanine loan agreement requires Hudson to use the proceeds of
asset sales to pay down the debt; however, Hudson has instead used these
proceeds for working capital. This violation of the mezzanine loan agreement
gave the lender the right to demand immediate repayment of the mezzanine
loan. In April 1999, the Company entered into an agreement with this lender,
which waives these violations of the mezzanine loan agreement if the Company
fulfills certain conditions. One of these conditions is that the Company is
not to make any principal payments to creditors that are subordinated to this
lender, including Equity Inns, LP ("Equity Inns") for its 10% subordinated
note or on the $7.5 million convertible subordinated debenture or for the
obligations of Hudson Hotels Trust. Such requirements will cause the Company
to default in its obligations to Equity Inns. However, under the
subordination agreement with Equity Inns, that company is currently prevented
from taking legal action to enforce the payment of its debt. After default,
Equity Inns could obtain 2,000,000 shares of Hudson Hotels common stock,
which is collateral for this debt. Additionally, upon default, the holders of
$4.0 million debt in Hudson Hotels Trust can convert their debt into a total
of 1,333,332 shares of Hudson common stock. One of these holders, in 1999,
has already converted $2.0 million of this debt into 666,666 shares of Hudson
common stock. Additionally, the Company at December 31, 1998 had certain
portions of its mezzanine debt that would begin to amortize in the fourth
quarter of 1999. As a result of the recent agreement with the holder of this
debt, the amortization of this debt now begins in the second quarter of 2000,
which amortization the Company will not, at current operating levels, be able
to service. Therefore, the Company's viability is dependent upon the
restructuring of its debt obligations and strengthening its equity and asset
base, and ultimately, a return of profitability.
As a result of these losses the Company's equity position has been substantially
diminished and due to the Company's inability to attain profitable operations
the Company was also compelled to eliminate its net deferred tax asset resulting
in a deferred tax expense of $1,387,926 in the fourth quarter of 1998. Because
of these conditions the Company may have to obtain additional equity to continue
to maintain its stock listing on the NASDAQ stock market.
4
<PAGE>
EMPLOYEE RELATIONS
At December 31, 1998, the Company had approximately 1,600 employees working at
the hotels it owns or manages or in its administrative support functions. None
of these employees are subject to collective bargaining agreements. The Company
believes that all of its relations with these employees are good.
COMPANY PROPERTIES
The Company currently owns twenty-five (25) hotel properties in addition to
having a minority equity interest in entities that own hotel properties. There
are 2,889 guestrooms in these twenty-five (25) properties.
DESCRIPTION OF PROPERTIES
At fiscal year end, the Company owned six (6) parcels of land, which were either
being held for sale to hotel/restaurant developers or development by the
Company. Subsequent to fiscal year-end, the Company sold five (5) of these
parcels to meet its seasonal liquidity needs. The Company has recognized a loss
in the amount of $1,818,211 in its fourth quarter for the impairment in the
value of this land based on the proceeds from the sale.
Investment in land/real estate under development or held for sale is summarized
as follows:
TONAWANDA, NEW YORK: This land is north of Buffalo, New York, off Interstate 290
and is in proximity to major businesses, universities and shopping centers. The
Company owns about 7 acres at a cost of $780,822 or $113,657 an acre. The parcel
is zoned for hotel and restaurant development. Also, this piece of land is
adjacent to an existing Microtel and a parcel owned by Microtel Partners 1995-I,
L.P. (see below).
The following five (5) parcels of land were sold in the first quarter of 1999
and the net loss of $1,818,211 for the five (5) parcels was accrued as an
impairment loss in the fourth quarter of 1998.
ARLINGTON, TEXAS: This land is between the cities of Dallas and Fort Worth, off
State Highway 360. The Company owned 2.0 acres at a cost of $604,629, or
$302,314 an acre. The parcel is zoned for hotel development.
TUCSON, ARIZONA: This land is outside the city limits of Tucson, off Interstate
10. The Company owned 2.0 acres at a cost of $478,851, or $239,425 an acre. The
parcel is zoned for hotel development.
PLANO, TEXAS (PLANO PARKWAY): This land is north of Dallas, Texas, accessible to
Lyndon B. Johnson Freeway I-635, the Dallas North Tollway and Central Expressway
US-75. The Company owned 2.0 acres at a cost of $677,697, or $338,848 an acre.
The parcel is zoned for hotel development.
PLANO, TEXAS: This land is north of Dallas, Texas, off the North Central
Expressway. The Company owned 2.0 acres at a cost of $595,661 or $297,831 per
acre. The parcel is zoned for hotel development.
IRVING, TEXAS: This land is located west of Dallas, Texas, adjacent to the
Dallas-Fort Worth International Airport, off John W. Carpenter Freeway. The
Company owned 2.02 acres, at a cost of $472,932 or $234,124 per acre. The parcel
is zoned for hotel development.
The Company, through its equity investments, owns minority interests in the
following:
THE MONTGOMERY GROUP, L.P.: This limited partnership operates an 84 room Comfort
Inn and is located in Montgomeryville, Pennsylvania. The Company's ownership
percentage totals 2.74%. The hotel was opened in 1991, and is in very good
condition. The total outstanding mortgage balance at December 31, 1998, was
approximately $3.1 million. The Company does not currently manage this hotel.
950 JEFFERSON ASSOCIATES, L.P.: This limited partnership operates a 102 room
Econo Lodge that is located in Henrietta, New York. The Company's ownership
percentage totals 2%. The hotel was built in 1984 and is in fair condition. The
partnership has a first mortgage with a balance of approximately $2.5 million at
December 31, 1998.
MICROTEL GATLINBURG L.P.: This limited partnership operates a 102 room Microtel
Inn that is located in Gatlinburg, Tennessee. The hotel is located adjacent to
the Great Smoky Mountain National Park and a short distance from Dollywood in
Pigeon Forge, Tennessee. The Company's ownership percentage totals 10%. The
hotel was built in 1994 and is in excellent condition. The partnership has a
first mortgage with a balance of approximately $2.2 million at December 31,
1998.
5
<PAGE>
FISHERS ROAD HOTEL PROPERTIES, L.P.: This limited partnership operates a 99 room
Microtel Inn which is located in Victor, New York, adjacent to Interstate 90.
The Company's ownership percentage is 22.5%. The hotel was built in 1994 and is
in excellent condition. The partnership has a first mortgage with a balance of
approximately $1.5 million at December 31, 1998.
ESSEX MICROTEL LERAY, L.P.: This limited partnership operates the 100 room
Microtel Inn located in Watertown, New York, which opened in 1990. The Company's
ownership interest as a special limited partner totals 4.0%. The first mortgage
on the property totals approximately $1.1 million and is held by Watertown Hotel
Properties II, L.P., a partnership in which the Company has the general
partnership interest and controls under the terms of the partnership agreement.
The Company does not currently manage this hotel.
ROCHESTER HOSPITALITY PARTNERS, L.P.: This limited partnership was formed to
build and operate six Microtel Inns. The Company's ownership percentage is 20%.
The partnership owns six (6) Microtel Inns which opened between 1995 and 1997,
varying from 99 to 122 rooms. All of these properties are in excellent
condition. The partnership has an aggregate first mortgage on the six (6)
properties, with a balance of approximately $15.5 million at December 31, 1998.
HH BRIDGE, L.P.: This limited partnership owns a 146-room Holiday Inn in
Cleveland, Ohio; a 133-room Hampton Inn in Cheektowaga, New York; and a 100-room
Comfort Suites in Cheektowaga, New York. These properties are in good to
excellent condition. The partnership has a first mortgage with a balance of
$18.3 million. The Company owns a 1% general partnership interest in the limited
partnership.
MICROTEL PARTNERS 1995-I, L.P.: This limited partnership owns 2.87 acres of land
in Tonawanda, New York, on which it had plans to build a suite hotel. The
project is currently on hold waiting for market conditions to improve.
The Company's ownership percentage is 50%.
WATERTOWN HOTEL PROPERTIES II, L.P.: This limited partnership holds
approximately an $1.1 million mortgage receivable from Essex Microtel Leray L.P.
which is collateralized by a 100 room Microtel Inn located in Watertown, New
York. Monthly payments consist of interest only at 9% per annum. The entire
principal amount is due April 30, 2000. The Company's general partnership
interest totals 1%.
COMPANY OWNED HOTELS
The Company, through its indirect wholly owned subsidiary HH Properties-I, Inc.,
owns the following properties. The properties are secured by a first mortgage
from Nomura Asset Capital Corporation, with an aggregate balance of $54.9
million at December 31, 1998. As part of the first mortgage agreement with
Nomura, the Company is required to reserve 5% of operating revenues as defined
in the loan agreement, which is used for capital improvements to the properties.
All properties are in good to very good condition.
<TABLE>
<CAPTION>
PROPERTY NAME LOCATION NUMBER OF ROOMS
------------- -------- ---------------
<S> <C> <C>
Seagate Hotel and Beach Club Delray Beach, Florida 70
Brookwood Inn Pittsford, New York 108
Comfort Inn West Greece, New York 83
Comfort Inn Jamestown, New York 101
Econo Lodge Canandaigua, New York 65
Fairfield Inn Albany, Georgia 120
Fairfield Inn Cary, North Carolina 125
Fairfield Inn North Charleston, South Carolina 120
Fairfield Inn Columbia, South Carolina 128
Fairfield Inn Durham-Research Triangle Park, North Carolina 96
Fairfield Inn Richmond, Virginia 124
Fairfield Inn Statesville, North Carolina 116
Fairfield Inn Wilmington, North Carolina 120
Brookwood Inn Durham, North Carolina 149
Red Roof Inn Raleigh, North Carolina 147
Brookwood Inn Charlotte, North Carolina 132
------
1,804
</TABLE>
6
<PAGE>
For a narrative description of the properties, please refer to the Company's 8-K
filings dated September 13, 1996 and December 12, 1996.
The Company, through its indirect wholly owned subsidiary HH Properties-II,
Inc., owns the following properties. The properties are secured by a first
mortgage from Nomura Asset Capital Corporation, with an aggregate balance of
$29.6 million at December 31, 1998. As part of the first mortgage agreement with
Nomura, the Company is required to reserve 5% of operating revenues as defined
in the loan agreement, which is used for capital improvements to the properties.
All properties are in very good condition.
<TABLE>
<CAPTION>
PROPERTY NAME LOCATION NUMBER OF ROOMS
------------- -------- ---------------
<S> <C> <C>
Hampton Inn Greenville, South Carolina 123
Hampton Inn Spartanburg, South Carolina 110
Hampton Inn Albuquerque, New Mexico 124
Hampton Inn Greensboro, North Carolina 121
Hampton Inn Eden Prairie, Minnesota 123
Hampton Inn San Antonio, Texas 123
Hampton Inn Amarillo, Texas 116
Hampton Inn Roswell, Georgia 129
Hampton Inn Syracuse, New York 116
-----
1,085
</TABLE>
For a narrative description of the properties, please refer to the Company's 8-K
filing dated November 14, 1997.
On August 14, 1998, the Company acquired three properties through a limited
partnership ("HH Bridge, L.P.") in conjunction with a third party that owned
the majority (58%) of the limited partnership interests in HH Bridge, L.P.
This third party also had the right to acquire the Company's interest in
HH Bridge, L.P. in the event of default of certain obligations in the limited
partnership agreement for $1. As of December 31, 1998, the partnership was
unable to make certain "guaranteed return" payments to this third party, who
then exercised its rights to acquire the Company's 41% limited partnership
interest for $1. The operations of the HH Bridge, L.P. have been consolidated
by the Company from August 14, 1998, to December 31, 1998, however, the
balance sheet has been deconsolidated at December 31, 1998 and a loss on
asset valuation was taken for the Company's investment in the partnership of
$3.4 million in the fourth quarter of 1998. Presently the Company owns a 1%
interest in HH Bridge, L.P., as a general partner.
The three (3) properties contained in HH Bridge, L.P. include the following (the
Company owns a 1% general partnership interest in HH Bridge, L.P.):
HOLIDAY INN - CLEVELAND AIRPORT: This full-service hotel has 146
guestrooms, a restaurant and bar. The property is located 3 miles from
the Cleveland, Ohio airport. The hotel provides van service to its
guests. It is located in Cleveland, Ohio, on 4.0 acres of land owned by
HH Bridge, L.P.
COMFORT SUITES - BUFFALO AIRPORT: This limited-service, mid-priced
hotel has 100 guestrooms and is located 2 miles from the Buffalo
Airport. The hotel provides free continental breakfast, van service to
the airport and a 100% guest satisfaction guarantee. The hotel is
located in Cheektowaga, New York, on 3.7 acres of land owned by HH
Bridge, L.P.
HAMPTON INN - BUFFALO AIRPORT: This limited-service, mid-priced hotel
has 133 guestrooms and is located 3 miles from the Buffalo Airport. The
hotel provides free continental breakfast, van service to the airport
and a 100% guest satisfaction guarantee. The hotel is located in
Cheektowaga, New York, on 2.5 acres of land owned by HH Bridge, L.P.
7
<PAGE>
OTHER PROPERTIES
In addition to its hotels, the Company also leases about 19,000 square feet of
office space in Rochester, New York, which serves as the Company's headquarters.
The lease has an initial term of five years, which expires in 2003. The Company
also has an option to extend this lease to 2008.
HOTEL LODGING INDUSTRY
Although the hospitality lodging industry experienced strong profits in 1998,
the increases in occupancy, ADR (average room rate) and RevPAR (revenue per
available room), which the industry had often experienced since 1992 were
moderated with declining occupancy in 1997 and 1998. According to Smith Travel
Research, hotel room demand has outpaced supply from 1992 through 1996. But,
beginning in 1997, room supply increases exceeded demand increases. Room supply
has increased as a result of favorable financing, which had become increasingly
available until the summer of 1998, when financing hotel properties became more
difficult.
Currently, the majority of properties owned or managed by the Company fall under
the limited service economy/mid-price category. This category is defined as a
hotel which provides some, but not all of the amenities of a full-service hotel.
It is appropriate to compare the Company's portfolio to this segment since the
majority of the Company's properties fall within this segment (Hampton Inn,
Comfort Inn, Econo Lodge, Fairfield Inn and Red Roof Inn.) The limited-service
economy/mid-priced segment has seen increases in occupancy, room revenue and
RevPAR from 1992 to 1995. In 1996 through 1998, the segment of the hotel
industry that the Company competes in experienced a decline in occupancy, but
room rate and RevPAR continued to increase. ADR percentage growth has decreased
compared to prior years. These results are due to added supply exceeding added
demand, moderated by guests willing to pay a premium for clean/fresh hotel rooms
with certain amenities offered by nationally branded limited-service hotels.
The tables below compare the Company's performance to the limited service
economy/midscale segment as a whole (in the United States) in the categories of
occupancy, ADR (room revenue) and RevPAR (revenue per available room). The
industry statistics represent results obtained from Smith Travel Research
("STR") and are based on the data STR has compiled for hotels STR classifies as
limited service mid-price and economy hotels with 75-125 rooms.
OCCUPANCY
U.S. LIMITED SERVICE
YEAR COMPANY OWNED HOTELS ECONOMY/MIDPRICED
---- -------------------- -----------------
1994 N/A 64.1%
1995 N/A 64.3%
1996 62.6% 63.0%
1997 65.2% 62.0%
1998 68.7% 61.6%
ADR
U.S. LIMITED SERVICE
YEAR COMPANY OWNED HOTELS ECONOMY/MIDPRICED
---- -------------------- -----------------
1994 N/A $44.42
1995 N/A $46.75
1996 $62.96 $49.18
1997 $56.51 $51.48
1998 $58.74 $53.63
8
<PAGE>
REVPAR
U.S. LIMITED SERVICE
YEAR COMPANY OWNED HOTELS ECONOMY/MIDPRICED
---- -------------------- -----------------
1994 N/A $28.49
1995 N/A $30.04
1996 $39.39 $31.00
1997 $36.82 $31.91
1998 $40.35 $33.05
BUSINESS STRATEGY
The Company plans to continue to improve its position in the lodging industry by
implementing the following strategies:
ENHANCE OPERATING PERFORMANCE OF ITS EXISTING HOTELS OWNED OR UNDER MANAGEMENT.
The Company operated forty-three (43) hotels at the end of 1998. The Company
intends to utilize its operating, marketing and financial systems resources to
enhance operating performance by maximizing revenues and reducing operating
expenses. To do this, in 1998, the Company substantially changed its management
structure at both the hotel properties and in its administrative support
functions. During the year, the Company hired a new President and Chief
Operating Officer, a new Executive Vice President and Chief Financial Officer, a
new Vice President of Human Resources, as well as regional operations and
revenue management personnel. In addition, a substantial number of managers at
the hotels were replaced or were reassigned to new positions. All of these steps
were taken to enhance the operating performance of the hotels by improving
revenue and customer service and to provide administrative support for hotel
operations. Much of this support was added in anticipation of the growth of the
Company, which was expected to occur as a result of the additional hotels the
Company would manage upon the completion of the Hudson Trust IPO. Because Hudson
Trust did not complete its IPO, the Company now has higher administrative costs
than expected, for its current size. Some of these costs and the support
services related to them may have to be eliminated if the Company is unable to
continue its growth plans.
ACQUIRE ADDITIONAL HOTEL MANAGEMENT CONTRACTS. In addition to the twenty-five
(25) hotels that the Company owns, it also manages eighteen (18) hotels at
December 31, 1998, for other owners. The Company has a minority ownership
position in twelve (12) of these eighteen (18) hotels. The Company is active in
trying to obtain additional hotel management contracts in order to utilize its
information systems and personnel to enhance the operating performance of
additional managed hotels. The Company believes that due to its size,
experience, information systems, purchasing power and support systems it is
often a more effective hotel manager than individuals or smaller firms, which
lack these resources. Additionally, the Company is better able to utilize its
operating structure and spread its administrative costs as it grows the number
of hotels it operates. However, as described above, the Company often must
compete with larger and better-capitalized hotel management companies that have
competitive advantages when compared to the Company.
OPPORTUNISTIC ACQUISITION OF HOTELS. The Company will attempt to capitalize on
its strength as an owner/operator by continuing to identify and pursue the
acquisition of hotels. Since 1996, the Company acquired twenty-one (21) hotels
for approximately $40,750 per room, totaling $106.7 million. This acquisition
included eight (8) Fairfield Inns, four (4) Cricket Inns (of which two (2) were
converted to Brookwood Inns and one (1) was converted to a Red Roof Inn and one
(1) which was sold during the fiscal year ended December 31, 1998) and nine (9)
Hampton Inns, which are geographically dispersed throughout the country. The
Company believes that hotel acquisitions will provide future growth
opportunities through increased cash flow and an incremental increase in the
value of the hotels acquired. However, given the Company's highly leveraged
financial condition and its current losses, it is at a substantial disadvantage
in acquiring additional hotel properties since it does not have significant
ability to obtain capital to acquire hotel assets. Such acquisitions, if any are
to occur, will probably require the Company to raise new capital.
SERVICE MARKS
As a result of the USFS Agreement, the Company transferred all proprietary marks
relating to the "Microtel" name to US Franchise Systems, Inc. The Company
retains service marks for certain independent properties which it owns including
"Brookwood Inn" and "Seagate".
9
<PAGE>
The Company uses various national trade names pursuant to licensing arrangements
with national franchisors which include: Microtel Inn(R), a registered trademark
of USFS; Comfort Inn(R) and Econo Lodge(R), registered trademarKS oF Choice
Hotels International, Inc.; Fairfield Inn by Marriott(R), a registered trademark
of Marriott International, Inc.; Hampton Inn(R), a registered trademark of
Promus Corp.; and Red Roof Inn(R), a registered trademark of Red ROOf Inns, Inc.
COMPETITION
The hospitality industry is highly competitive. There is no single competitor or
small number of competitors of the Company that are dominant in the industry.
The Company's hotel properties operate in areas that contain numerous
competitors, many of which have substantially greater resources than the
Company. Competition in the lodging industry is based generally on location,
room rates, quality of services and guest amenities offered. The Company's
properties compete against all hotel products in any given market for market
share. In practice, the hotel industry is highly segmented, ranging from luxury
destination resorts to small "mom and pop" properties. The Company's properties
compete directly against other national and regional chains of hotels in each
geographical market in which the Company hotels are located. New or existing
competitors could significantly lower rates or offer greater conveniences,
services or amenities or significantly expand, improve or introduce new
facilities in markets in which the hotels compete, thereby adversely affecting
the Company's operations. The Company also competes with other regional and
national hotel companies for development and management contracts.
There are hundreds of hotel management companies in the United States, including
several which manage over 100 properties and many which manage about as many or
more hotels than the Company. Although most of the firms are private companies,
several are public companies and many of these companies have greater financial
strength than the Company and few are as highly financially leveraged as is the
Company.
Although most of the Company's hotels operate under national brands, the Company
has several properties that do not have the benefit of a national brand.
Currently, more than seventy (70%) percent of all U.S. hotel rooms operate under
a national brand which provides certain competitive advantages over hotels which
do not have national brands.
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 earnings
also may be adversely affected by events beyond the Company's control, such as
extreme weather conditions, economic factors and other considerations affecting
travel.
GOVERNMENT REGULATION
A number of states regulate the licensing of hotels and restaurants, including
liquor licenses, by requiring registration, disclosure statements and compliance
with specific standards of conduct. The Company believes it is substantially in
compliance with these requirements. The Company is also subject to laws
governing its relationship with hotel employees, including minimum wage
requirements, overtime, working conditions and work permit requirements.
Compliance with, or changes in, these laws could reduce the revenue and
profitability of the Company owned hotels or otherwise adversely affect the
Company's operations.
Under the Americans with Disabilities Act (ADA), all public accommodations are
required to meet certain requirements related to access and use by disabled
persons. These requirements became effective in 1992. Although significant
dollars have been and continue to be invested in ADA required upgrades to the
Company owned hotels, a determination that the Company is not in compliance with
the ADA could result in a judicial order requiring compliance, imposition of
fines or an award of damages to private litigants. The Company is likely to
incur additional costs of complying with the ADA; however, such costs are not
expected to have a material adverse effect on the Company's results of
operations or financial condition.
ENVIRONMENTAL COMPLIANCE
The Company has not been materially affected by, nor has it incurred any
significant costs related to compliance with federal, state or local
environmental laws.
10
<PAGE>
YEAR 2000 COMPLIANCE
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the year 2000 from the year 1900.
Like other organizations, the Company could be adversely affected if the
computer systems used by it or its service providers do not properly address
this problem prior to January 1, 2000. Currently, the Company does not
anticipate that the transition to the year 2000 will have any material impact on
its performance. The Company's plan to respond to the Year 2000 problem consists
of three phases that address the state of readiness, Year 2000 costs, risks and
contingency plans.
Phase I includes a plan to respond to the Year 2000 problem, which includes the
following areas (the "Focus Areas"): (i) telephone and call accounting systems;
(ii) credit card readers; (iii) sprinkler systems and fire suppression system;
(iv) security systems; (v) card entry systems; (vi) elevator systems; (vii)
computer systems and vendor contracts (hardware); (viii) fax machines and
laundry equipment; (ix) HVAC (heating and air conditioning systems) and utility
companies; (x) food, beverage, equipment, supplies and other ordering systems;
and (xi) computer software systems, including franchisor and non-franchisor
reservation systems. The Company has created a task force and procedures to
survey, test and report results for management's review. The Company believes
that the estimated cost to remediate its Year 2000 problems is about $1,000,000.
The Company is currently proceeding with Phase II of its assessment of the Year
2000 problem. Phase II involves initiating a survey and checklist to each hotel
manager for completion and return to management. The survey was developed by the
Company after a review of franchisor and other Year 2000 compliance information
to include (i) the current vendor list with a column for a listing of current
product usage and (ii) a vendor address log and telephone number listing. Each
hotel checklist included the front desk, business center, housekeeping/back
office, beverage and guest rooms. Phase II also involves the testing of the
Company's computer systems. The Company is in the process of conducting testing
on the systems identified in Phase I and has yet to encounter any Year 2000
compliance issue which cannot be corrected before January 1, 2000.
Phase III of the Company's assessment of the Year 2000 problem includes the
results of testing, action plans, reporting of results and contingency plans to
remediate any Year 2000 problems. The risks and contingency plans include a
"reasonably likely worst case Year 2000 scenario." The Company believes that the
consequences of a worst case scenario rest almost exclusively with outside
vendors. The contingency plan, which the Company is currently initiating, is to
replace non-compliant vendors with new compliant vendors. A thorough review of
all vendors will continue to be an ongoing Year 2000 strategy for the Company.
However, the Company's contingency plan has back-up support to address each of
the focus areas.
The franchisors of many of the hotels have provided compliance guides to assist
in the Company's response to the Year 2000 problem. Promus Hotel Corporation,
Holiday Hospitality/Bass Hotels & Resorts, Marriott International, Inc., and
Choice Hotels International, Inc. have completed third party vendor checks,
reviewed computer systems and provided for reference a preferred compliant
vendor list. A checklist for Year 2000 issues, a work plan and a sample vendor
letter was provided to help the Company complete its assessment of the Year 2000
problem.
The Company is in the process of mailing a questionnaire to third party vendors
to assess third party risks. The results of this risk assessment will be
completed by April 30, 1999. In addition, the Company has sought assurances from
the Lessee and other service providers that they are taking all necessary steps
to ensure that their computer systems will accurately reflect the year 2000, and
the Company will continue to monitor the situation. There can be no assurance
that the systems of such third parties will be Year 2000 compliant or that any
third party's failure to have Year 2000 compliant systems would not have a
material adverse effect on the Company's systems and operations.
ITEM 3. 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;
however, this indemnity specifically excludes indemnity for punitive damages
which may be assessed against the Company. 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
11
<PAGE>
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 May of 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 monetary damages and costs in the aggregate amount of $20.0
million 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. In March 1999 this lawsuit was settled and the case dismissed. All
expenses of this lawsuit were covered by the Company's insurer.
On December 4, 1998 and February 5, 1999, the Company was served with claims
before the State of South Carolina Human Affairs Division arising out of an
incident that occurred at the Greenville, SC Hampton Inn on November 7, 1997.
A security guard employed by Security Masters, Inc. (the contract provider of
security services at the Hampton Inn) allegedly confronted a group of black
students with a starter pistol, and directed racially biased comments to the
students during that confrontation. The Company has provided requested
information to the Human Affairs Division regarding the incident, and has
agreed to take part in a proposed mediation to resolve the matter. The
complainants have not requested any specific damages or other relief.
On April 13, 1999, the Company and its subsidiary, Canandaigua Hotel Corp.,
were each served with a summons and complaint by Cheryl K. Lee, as
administratrix of the Estate of Eugene R. Guthrie, Deceased, alleging
negligence relating to the design and maintenance of the handicapped access
ramp at the Inn on the Lake, which negligence allegedly caused injuries
resulting in the death of the decedent. L, R, R & M, LLC, the owner of the Inn
on the Lake, is also a defendant. The action has been commenced in New York
Supreme Court, Monroe County, and demands damages in the amount of $2,000,000
plus costs and disbursements. This action has been turned over to the
Company's insurance company for defense; the Company believes that it has
adequate insurance to cover 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 material adverse effect on the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the year ended December 31,
1998, to a vote of the Company's security holders, through the solicitation of
proxies or otherwise.
12
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock of the Company has been traded in the over-the-counter market
since its initial public offering on April 13, 1989, and is listed in the Nasdaq
Stock Market under the symbol "HUDS". The following table sets forth, for the
calendar quarters indicated, the range of high and low quotations on the Nasdaq
Stock Market.
FISCAL YEAR ENDED DECEMBER 31, 1997
High Low
---- ---
First Quarter (January - March, 1997) 6 3/4 4 1/2
Second Quarter (April - June, 1997) 6 1/4 3 1/2
Third Quarter (July - September, 1997) 6 15/16 5 1/8
Fourth Quarter (October - December, 1997) 6 3/4 3 7/8
FISCAL YEAR ENDED DECEMBER 31, 1998
First Quarter (January - March, 1998) 4 7/8 3 13/16
Second Quarter (April - June, 1998) 4 15/16 3 7/8
Third Quarter (July - September, 1998) 4 5/16 2
Fourth Quarter (October - December, 1998) 2 3/8 1 1/8
The quotations listed above reflect inter-dealer prices, without retail mark-up,
markdown, or commissions and may not necessarily represent actual transactions.
To date, the Company has not paid a dividend on its Common Stock. The payment of
future dividends is subject to the Company's earnings and financial position and
such other factors, including contractual restrictions, as the Board of
Directors may deem relevant and it is unlikely that dividends will be paid on
common stock in the foreseeable future.
As of March 26, 1999, there were approximately 265 holders of record of the
Common Shares of the Company with approximately 2,500 beneficial shareholders.
ITEM 6. SELECTED HISTORICAL FINANCIAL DATA
The following table presents summary selected historical financial data for the
Company derived from its financial statements as of and for the five periods
ended December 31, 1998. The historical information set forth below should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Consolidated Financial Statements
and notes thereto, each contained herein.
<TABLE>
<CAPTION>
(IN THOUSANDS ($,000) EXCEPT FOR PER SHARE DATA)
1998 1997 1996 1995 (1) 3/31/95 (1)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Operating Revenue $ 57,640 $ 38,731 $ 14,148 $ 6,896 $ 7,294
Income from Operations $ 5,215 $ 5,983 $ 1,867 $ 653 $ 1,042
Net Income / (Loss) $ (15,165) $ (1,892) $ 636 $ 1,311 $ 1,065
PER SHARE DATA:
Net Income (Diluted) $ (2.86) $ (0.40) $ 0.12 $ 0.31 $ 0.28
BALANCE SHEET DATA (AT END OF
PERIOD):
Total Assets $ 142,676 $ 152,118 $ 102,893 $ 15,781 $ 14,680
Long-Term and
Convertible $ 128,040 $ 128,559 $ 80,064 $ 8,506 $ 8,546
Subordinated Debt
Shareholders' Investment $ (166) $ 13,139 $ 13,317 $ 3,911 $ 2,315
</TABLE>
(1) In 1995, the Company changed its fiscal year-end from March 31 to
December 31. As a result, the Company had a "short year" of only nine (9)
months for the period April 1, 1995 to December 31, 1995. The year ended
March 31, 1995 is a full 12 month fiscal year.
13
<PAGE>
ITEM 7. 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 this entire Form10-K 1998 Annual Report. Particular attention should be
directed to the Consolidated Financial Statements found at Item 8.
As a result of the acquisitions of (i) five partnerships in which the Company
had a minority interest, (ii) twelve (12) hotels from SB Motel Corp., and (iii)
nine (9) Hampton Inns during the past three years, a significant portion of the
current results are not directly comparable to prior year results, specifically
hotel operations and direct costs, expenses and interest expense.
RESULTS OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1998, COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1997:
Total operating revenues increased $18,908,541, or 49%, to $57,639,638 for 1998
from $38,731,097 in 1997, reflecting changes in revenue categories and the
inclusion of added properties for a longer period of time in 1998 than in 1997,
as discussed below.
HOTEL OPERATIONS were $55,383,217 for the twelve months ended December 31, 1998,
an increase of $18,460,321, or 50%, from $36,922,896 for the twelve months ended
December 31, 1997. Hotel operations consisted of the following:
<TABLE>
<CAPTION>
Twelve Months Ended
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
Hotel room revenue $47,231,157 $30,617,628
Beach club revenue 1,396,984 1,346,522
Food and beverage revenue 4,901,800 3,565,646
Other 1,853,276 1,393,100
----------- -----------
Total $55,383,217 $36,922,896
=========== ===========
</TABLE>
Hotel room revenues were $47,231,157 for the twelve month period ended December
31, 1998 an increase of $16,613,529, or 54%, from the $30,617,628 for the twelve
month period ended December 31, 1997. The increase is a result of (i) the
acquisition of nine (9) hotels on October 31, 1997 and, therefore, the Company
only recognized revenues from these hotels for a portion of 1997 while the
Company recognized revenues from these hotels for all of 1998, and (ii) the
Company consolidating the operations of three (3) hotels acquired by a
partnership (HH Bridge, L.P.) in which the Company had a 42% interest. The HH
Bridge, L.P. partnership agreement states that in an event of default of certain
obligations, the third parties have the right to acquire the Company's 41%
limited partnership interest for $1. As a result of the Company's default as of
December 31, 1998 of certain of these obligations these third parties exercised
their rights to acquire the Company's 41% limited partnership interest in HH
Bridge, L.P. for $1 and as a result, the balance sheet has been deconsolidated
at December 31, 1998.
Occupancy and average daily room rates for Company-owned hotels were 68.7% and
$58.74, respectively, for the twelve month period ended December 31, 1998
compared to 65.2% and $56.51, respectively, for the twelve months ended December
31, 1997.
The Beach Club revenue relates to the operation of the beach club at the Seagate
Hotel and Beach Club, which was $1,396,984 for the twelve month period ended
December 31, 1998 an increase of $50,462, or 4%, from $1,346,522 for the twelve
month period ended December 31, 1997, as a result of an increase in new member
dues (initiation fees).
Food and beverage revenue was $4,901,800 for the twelve month period ended
December 31, 1998, an increase of $1,336,154, or 37%; compared to $3,565,646 for
the twelve month period ended December 31, 1997. The increase is primarily the
result of the acquisition of HH Bridge, L.P. on August 14, 1998, which has a
full-service restaurant and additional food and beverage volume at the
Canandaigua Inn on the Lake.
14
<PAGE>
Other revenues were $1,853,276 for the twelve month period ended December 31,
1998 an increase of $460,176, or 33%, from the $1,393,100 for the twelve month
period ended December 31, 1997 as a result of the acquisition of nine (9) hotels
on October 31, 1997; therefore, the Company only recognized revenues from these
hotels for a portion of 1997. Additionally, the Company consolidated the three
(3) hotels (HH Bridge, L.P.) on August 14, 1998, which added to the revenues for
1998.
ROYALTIES for the twelve month period ended December 31, 1998 increased
$492,522, or 65% to $1,249,569 from $757,047 for the twelve month period ended
December 31, 1997. The increase is attributable to a total of one hundred
twenty-four (124) franchised Microtel Inns in operation at December 31, 1998, as
opposed to sixty-two (62) franchised Microtel Inns in operation at December 31,
1997. The Company receives all royalties on twenty-eight (28) of the previously
cited Microtel Inns and on the remaining ninety-six (96) franchises established
by US Franchise Systems, Inc., the Company receives royalty payments from USFS
of 1% of gross room revenues from hotels 1-100; .75% of gross room revenues from
hotels 101-250; and .5% of gross room revenues above 250 units.
Pursuant to the USFS Agreement, the Company has retained the right to franchise,
construct and collect franchise placement fees on an additional twenty-two (22)
Microtel Inn properties and ten (10) "suite" properties. The USFS Agreement
allows the Company to retain all royalties on fifty (50) Microtel Inns
(twenty-eight (28) existing and twenty-two (22) new ones to be developed by the
Company) and ten (10) Microtel Suites to be developed by the Company. Hudson
also receives royalty payments from USFS for franchises it opens based on the
schedule discussed in the preceding paragraph.
MANAGEMENT FEES for the twelve month period ended December 31, 1998 increased
$73,948, or 9%, to $875,005, compared to management fees of $801,057 for the
twelve month period ended December 31, 1997. The increase in management fees is
primarily due to increased gross revenues at hotels managed by the Company as
management fees are generally based on a percentage of gross revenues. The
schedule of owned and managed hotels at December 31, 1998 is summarized below:
DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- -----------------
Owned 25 26
Managed with financial interest 12 10
Other managed 6 5
---- ----
43 41
==== ====
Management fees of approximately $2,735,524 were generated by the owned hotels
for the twelve month period ended December 31, 1998, which were eliminated for
consolidation purposes.
OTHER REVENUE for the twelve month period ended December 31, 1998 decreased
$118,250, or 47%, to $131,847 from $250,097 for the year ended December 31,
1997. This is primarily the result of non-recurring fees received in 1997 for
the construction of one (1) hotel, the gain from the sale of real estate and
franchise placement fees.
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) acquire additional hotel management contracts, and (iii)
pursue opportunistic acquisition or management of existing hotels. However,
given the Company's highly leveraged financial condition, it is at a substantial
disadvantage in acquiring additional hotel properties.
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 twelve months ended December 31,
1998 was 33.7%, compared to 32.8% for the twelve months ended December 31, 1997.
The increase is the result of undertaking operational steps to more effectively
and efficiently manage the hotel properties.
CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses increased
$1,124,793, or 43%, to $3,741,951 from $2,617,158 for the year ended December
31, 1998. The increase is primarily a result of the following: (1) professional
fees increased 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.
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<PAGE>
INDIRECT OPERATING COSTS represents costs incurred by the Company which do
not represent direct hotel or corporate expenses. During 1998 the Company had
$577,074 of indirect operating costs, a decrease of $648,714, or 53%, from
the prior year. The 1998 indirect operating costs represent a one time
non-cash charge of $529,764 associated with warrants issued by the Company
and valued as a result of two $2.0 million notes issued by Hudson Hotels
Trust. The remaining indirect operating costs are associated with corporate
moving expenses associated with relocation to new office space. The 1997
indirect operating costs consisted primarily of a non-cash charge of $835,118
for consulting expenses related to investor relations services. This amount
was written off in 1997, as its expected future value appeared minimal. The
remaining indirect operating costs in 1997 are comprised of costs relating to
the acquisition of nine (9) Hampton Inns and write-offs of several
development expenditures which the Company will no longer pursue.
LOSS ON ASSET VALUATION totaling $5,259,701 was recorded in 1998 as a result of
the subsequent sale and disposition of assets in 1999 (see Note 17).
DEPRECIATION AND AMORTIZATION for the twelve month period ended December 31,
1998 increased $2,033,625, or 50%, to $6,130,386 from $4,096,761 for the
twelve month period ended December 31, 1997. The increase is a result of
depreciation charges for a full year in 1998 related to the acquisition of
nine (9) hotels on October 31, 1997 and depreciation charges for three (3)
hotels consolidated August 14, 1998 to December 31, 1998.
OTHER INCOME (EXPENSE) for the year ended December 31, 1998 increased
$10,258,133, or 116%, to $19,091,744 from $8,833,611 for the year ended December
31, 1997. The increase is primarily the result of incurring additional debt for
the acquisition of nine (9) hotels on October 31, 1997 and the three (3) HH
Bridge, L.P. hotels consolidated by the Company since August 14, 1998. Of the
$14,180,437 in total interest expense, 61% relates to the mortgages on the
hotels acquired or consolidated by the Company in 1996, 1997 and 1998. The
remaining amount 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. In addition, the Company had a
litigation settlement totaling $475,000 (see Note 15) and non-recurring charges
totaling $4,838,872 (see Note 16).
EQUITY IN OPERATIONS OF AFFILIATES represents the net income earned from the
Company's equity investment in various hotels. The income for the year ended
December 31, 1998 increased by $133,075 to $198,910, or 202%, from $65,835 for
the year ended December 31, 1997. The increase is a result of various hotel
properties in a partnership still undergoing a start-up period during 1997 and
other hotel properties increasing profitability.
INCOME TAXES - The provision for income tax of $1,421,057 includes recording a
valuation allowance for the Company's deferred tax asset as realization of the
future tax benefits related to the deferred tax assets is dependent on many
factors, including the Company's ability to generate taxable income within the
net operating loss carryforward period. The benefit for income tax of $1,000,849
for the twelve month period ended December 31, 1997 represents federal and state
tax income tax benefit from the recognition of deferred tax assets and
liabilities on loss before tax of $2,892,603. See Note 10 for a detailed
description of deferred tax assets and liabilities.
NET INCOME/LOSS - As a result of the above factors, net loss increased
$13,273,440, or 702%, from the twelve month period ended December 31, 1997 to a
net loss of $15,165,194 for the twelve month period ended December 31, 1998. The
net loss per common share - basic of $2.86, compared with a net loss per common
share - basic of $0.40 for the twelve month period ended December 31, 1997.
TWELVE MONTHS ENDED DECEMBER 31, 1997, COMPARED TO THE TWELVE MONTHS ENDED
DECEMBER 31, 1996:
Total operating revenues increased $24,583,048, or 174% to $38,731,097 for 1997,
reflecting changes in revenue categories, as discussed below.
HOTEL OPERATIONS were $36,922,896 for the twelve months ended December 31, 1997,
an increase of $25,192,600, or 215%, from the twelve months ended December 31,
1996. Hotel operations consist of the following:
16
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Hotel room revenue $30,617,628 $ 7,167,164
Beach club revenue 1,346,522 1,416,695
Food and beverage revenue 3,565,646 2,444,842
Other 1,393,100 701,595
----------- -----------
Total $36,922,896 $11,730,296
=========== ===========
</TABLE>
Hotel room revenues for the twelve month period ended December 31, 1997
increased $23,450,464, or 327%, from the twelve month period ended December 31,
1996. The increase is a result of the fact that the acquisition of five (5)
hotels on July 31, 1996 and twelve (12) hotels on November 27, 1996 occurred
during the year and, therefore, the Company only recognized revenues from these
hotels for a portion of 1996. Additionally, the company acquired nine (9) hotels
on October 31, 1997, which added to the revenues for 1997. In addition, the
Canandaigua Inn on the Lake was open only seven (7) months during the twelve
month period ended December 31, 1996, as the facility underwent major
renovations during the first five months. Operating revenues (which includes
hotel room revenue, beach club revenue and food and beverage revenue) for the
Seagate Hotel and Beach Club are included prior to the acquisition on July 31,
1996, as a result of the Company being the controlling partner in the limited
partnership. Occupancy and average daily room rate for company owned hotels were
65.2% and $56.51, respectively, for the twelve month period ended December 31,
1997.
The Beach Club revenue relates to the operation of the beach club at the Seagate
Hotel and Beach Club, which decreased $70,173, or 5%, from the twelve month
period ended December 31, 1996, as a result of a reduction in new member dues
(initiation fees).
Food and beverage revenue was $3,565,646 for the twelve month period ended
December 31, 1997, compared to $2,444,842 for the twelve month period ended
December 31, 1996, an increase of $1,120,804, or 46%. The increase is primarily
the result of the Canandaigua Inn on the Lake being closed, as the facility
underwent major renovations and reopened June 1996.
Other hotel revenue increased $691,505, or 99% to $1,393,100 from $701,595 in
fiscal year 1996, as a result of the acquisition of five (5) hotels on July 31,
1996 and twelve (12) hotels on November 27, 1996 occurred during the year and,
therefore, the Company only recognized revenues from these hotels for a portion
of 1996. Additionally, the Company acquired nine (9) hotels on October 31, 1997,
which added to the revenues for 1997.
ROYALTIES for the twelve month period ended December 31, 1997 have increased
$154,998 or 26% to $757,047 from $602,049 for the twelve month period ended
December 31, 1996. The increase is attributable to sixty-two (62) franchised
Microtel Inns in operation, as opposed to twenty-six (26) during the same twelve
month period in 1996. The Company receives all royalties on twenty-eight (28) of
the previously cited Microtel Inns and on the remaining ninety-six (96)
franchises established by US Franchise Systems, Inc., the Company receives
royalty payments from USFS of 1% of gross room revenues from hotels 1-100; .75%
of gross room revenues from hotels 101-250; and .5% of gross room revenues above
250 units.
The Company has retained the right to franchise, construct and collect franchise
placement fees on an additional twenty-two (22) Microtel Inn properties and ten
(10) "suite" properties. The USFS Agreement allows the Company to retain all
royalties on fifty (50) Microtel Inns (twenty-eight (28) existing and twenty-two
(22) new ones to be developed by the Company) and ten (10) Microtel Suites to be
developed by the Company. Hudson also receives royalty payments from USFS for
franchises it opens based on the schedule discussed in the preceding paragraph.
MANAGEMENT FEES for the twelve month period ended December 31, 1997 remained
consistent with the same twelve month period ended December 31, 1996. During the
twelve month period ended December 31, 1997, the Company obtained one (1)
management contract, compared with three (3) for the twelve month period ended
December 31, 1996. The schedule of owned and managed hotels is summarized below:
17
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
<S> <C> <C>
Owned 26 17
Managed with financial interest 10 11
Other managed 5 4
--- ---
41 32
=== ===
</TABLE>
Management fees of approximately $1,807,000 generated by the twenty-six (26)
owned hotels for the twelve months ended December 31, 1997, were eliminated for
consolidation purposes.
OTHER REVENUE for the year ended December 31, 1997 decreased $586,939, or 70% to
$250,097 from $837,036 for the year ended December 31, 1996. This is primarily
the result of non-recurring development fees received in 1996 for the
construction/renovation of four (4) Microtel Inns and one full-service hotel.
Other revenue for the year ended December 31, 1997 represents consulting fees of
$10,000 for the construction of one (1) hotel; consulting fees of $150,000 as
part of the USFS Agreement under which the Company will be receiving fees for
various consulting services during 1998 (see Note 1) and the gain from the sale
of real estate totaling $28,812, franchise placement fees of $55,500 for two (2)
franchise sales (Greenville, South Carolina and Springfield, Missouri) and other
miscellaneous income of $5,785.
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 twelve months ended December 31,
1997 was 32.8%, compared to 23.9% for the twelve months ended December 31, 1996.
The increase is a result of acquiring twelve (12) hotel properties on November
27, 1996 and reporting the results for only the month of December, which is
typically one of the slowest operating months, thus adversely effecting the
gross operating margin for the year ended December 31, 1996. In addition, the
Canandaigua Inn on the Lake reopened and resumed operations in June 1996 and had
not yet stabilized operations.
CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses increased
$834,252 or 47% to $2,617,158 from $1,782,906 from the prior year. The increase
is primarily a result of the following: (1) professional fees increased as a
result of Company growth and (2) payroll expense increased as a result of pay
increases, and the addition of employees.
INDIRECT OPERATING COSTS represents costs incurred by the Company which do not
represent direct hotel or corporate expenses. These costs increased $674,639 or
122% to $1,225,788 from $551,149 in fiscal year 1996. The Company incurred
charges of $1,225,788 during the fourth quarter of 1997. The increase is
primarily due to $835,118 of non-cash consulting expense related to investor
relations services. This amount was written off as its expected value in the
future appeared minimal. The balance is comprised of costs relating to the
acquisition of nine (9) Hampton Inns and write-off of several development
expenditures which the Company will no longer pursue.
During the fourth quarter of 1996, the Company had indirect operating costs of
$551,149 primarily a result of the acquisition of the SB Motel Corp. portfolio.
DEPRECIATION AND AMORTIZATION for the twelve month period ended December 31,
1997 increased $3,074,904, or 301%, to $4,096,761 from $1,021,857 for the twelve
month period ended December 31, 1996. The increase is a result of the
acquisition of five (5) hotels on July 31, 1996, twelve (12) hotels on November
27, 1996, and nine (9) hotels on October 31, 1997.
OTHER EXPENSE (NET) for the year ended December 31, 1997 increased $8,449,754 or
2,201% to $8,833,611 from $383,857 for the year ended December 31, 1996. The
increase is primarily the result of incurring additional debt for the
acquisition of twelve (12) hotels on November 27, 1996 and nine (9) hotels on
October 31, 1997. Of the $9,028,366 in total interest expense, 63% relates to
the mortgages held on the hotels acquired in 1996 and 1997. The remaining amount
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.
During the three month period ended December 31, 1995, the Company had elected
to record the proceeds receivable on the installment method of accounting
relating to the USFS Agreement with USFS. This method is applicable in cases
where receivables are collectible over an extended period of time and where
there is little basis for estimating the degree of collectability.
18
<PAGE>
During 1996, USFS completed an initial public offering with proceeds to that
entity of approximately $37.0 million. As a result, it was determined that the
future collectability was not in doubt and the balance of the deferred revenue
was recognized during the three month period ended December 31, 1996.
EQUITY IN OPERATIONS OF AFFILIATES represents the net income earned from the
Company's equity investment in various hotels. The income for the year ended
December 31, 1997 increased $48,308, or 276% to $65,835 from $17,527 for the
year ended December 31, 1996 as a result of various hotel properties in a
partnership still undergoing a start-up period of lower revenues for the year
ended December 31, 1996.
INCOME TAXES - The income tax benefit for the twelve months ended December 31,
1997 represents federal and state income tax benefit generated by a loss before
tax of $2,892,603. The benefit includes tax expense/benefit from the recognition
of deferred tax assets and liabilities. The provision for income taxes of
$472,014 for the twelve month period ended December 31, 1996 represents federal
and state tax expense on income before tax of $1,108,064. See Note 10 for a
detail description of deferred tax assets and liabilities.
NET INCOME/LOSS - As a result of the above factors, net income decreased
$2,527,804 from the twelve month period ended December 31, 1996 to a net loss of
$1,891,754 for the twelve month period ended December 31, 1997. The net loss per
common share - basic of $(.40), compared with a net income per common share -
basic of $.13 for the twelve month period ended December 31, 1996.
CAPITAL RESOURCES AND LIQUIDITY
At December 31, 1998, the Company had a $400,000 working capital demand line
note with a commercial bank, which bears interest at a rate of prime plus 1
1/2%. Amounts borrowed are collateralized by unencumbered land. At December 31,
1998, $400,000 was borrowed under the terms of this line.
At December 31, 1998, the Company had $1,751,580 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 December 31, 1998 and 1997 were $3,013,617 and $3,463,928,
respectively.
Net cash flows from operating activities decreased $1,548,531 to $913,765 for
the year ended December 31, 1998 from $2,462,296 for the year ended December 31,
1997. The net decrease is primarily the result of actual losses generated as a
result of non-recurring charges, net of amounts accrued and not paid at December
31, 1998.
Net cash flows used in investing activities increased by $49,249,970 for
the year ended December 31, 1997 to $2,327,747 for the year ended December 31,
1998. Net cash flow provided by investing activities for the twelve months ended
December 31, 1998 reflects cash received for the sale of a hotel and a lease,
changes in restricted cash, collection of deposits and other assets, less the
purchase of equipment. Net cash used in investing activities for the twelve
months ended December 31, 1997, reflects the acquisition of nine (9) Hampton
Inns on October 31, 1997, amounts placed into escrow as required by the loan
agreements, capital improvements to the seventeen (17) hotels acquired in 1996
and deposits submitted for the acquisition of three (3) hotels.
Net cash flows provided by financing activities decreased by $46,233,963
to $2,494,826 at December 31, 1998. Net borrowing on the line of credit
decreased by $312,537 for the 1998 twelve month period, compared to an
increase of $712,537 for the 1997 twelve months. Net cash flows from
financing activities for the twelve months ended December 31, 1998 reflects
the proceeds from the sale of common stock and exercise of options. This was
offset by repayment of mortgages, preferred stock dividends and repayments on
our line of credit. Net cash flows provided by financing activities for the
twelve months ended December 31, 1997 reflects amounts borrowed to acquire
nine (9) Hampton Inns on October 31, 1997, cash proceeds from the exercise of
options and proceeds from our line of credit. This was offset by financing
costs, repayment of mortgages, preferred dividends paid and purchase of
treasury stock.
19
<PAGE>
EBITDA increased by $6,525,512, or 65%, to $16,604,865 during the twelve
months ended December 31, 1998; compared to $10,079,353 for the twelve months
ended December 31, 1997. EBITDA is defined as total operating revenues less
direct, corporate and indirect operating costs. The Company believes this
definition of EBITDA provides a meaningful measure of its ability to service
debt. The increase is a result of the acquisition of nine (9) hotel
properties on October 31, 1997, and the consolidation of three (3) hotels
effective August 14, 1998.
LIQUIDITY - In December of 1998, and the first quarter of 1999, the Company
sold certain assets and took other actions as described in Item 1 "Recent
Developments" to generate cash or avoid cash payment which would allow
sufficient liquidity to maintain current operations during its seasonally
slow operating season (the fourth and first quarters). The Company's
mezzanine loan agreement requires Hudson to use the proceeds of asset sales
to pay down the debt; however, Hudson has instead used these proceeds for
working capital. This violation of the mezzanine loan agreement gave the
lender the right to demand immediate repayment of the mezzanine loan. In
April 1999 the Company entered into an agreement with this lender, which
waives these violations of the mezzanine loan agreement if the Company
fulfills certain conditions. One of these conditions is that the Company is
not to make any principal payments to creditors which are subordinated to
this lender, including Equity Inns, LP ("Equity Inns") for its 10%
subordinated note or on the $7.5 million convertible subordinated debenture
or for the obligations of Hudson Hotels Trust. Such requirements will cause
the Company to default in its obligations to Equity Inns. However, under the
subordination agreement with Equity Inns, that company is currently prevented
from taking legal action to enforce the payment of its debt. After default,
Equity Inns could obtain 2,000,000 shares of Hudson Hotels common stock,
which is collateral for this debt. Additionally, upon default, the holders of
$4.0 million debt in Hudson Hotels Trust can convert their debt into a total
of 1,333,332 shares of Hudson common stock. One of these holders, in 1999, has
already converted $2.0 million of this debt into 666,666 shares of Hudson
common stock. Additionally, the Company at December 31, 1998 had certain
portions of its mezzanine debt that would begin to amortize in the fourth
quarter of 1999. As a result of the recent agreement with the holder of this
debt, the amortization of this debt now begins in the second quarter of 2000,
which amortization the Company will not, at current operating levels, be able
to service. Therefore, the Company's viability is dependent upon the
restructuring of its debt obligations and strengthening its equity and asset
base, and ultimately, a return of profitability.
The Company is currently in discussions with several of its institutional
lenders about its debt obligations and activities to restructure its debt. There
is negative working capital of $6,504,154 at December 31, 1998 with a
significant amount of this negative working capital generated by significant
principal debt payments. These principal payments described herein are expected
to continue. Furthermore, the Company is severely restricted in accessing the
cash flows generated from revenues as they are trapped for application against
required escrows for debt, tax, insurance, capital asset reserve, and now
beginning in the second quarter of 2000, principal amortization of the Company's
mezzanine debt.
There can be no assurances that the Company's restructuring efforts will be
successful, or that the institutional lenders will agree to a course of action
consistent with the Company's requirements in restructuring the obligations.
Even if such agreement is reached it may require approval of additional debt
holders, or possibly agreements of other creditors and shareholders of the
Company, none of which is assured. Furthermore, there can be no assurance that
restructuring of the Company's debt can be successfully accomplished on terms
acceptable to the Company. Under current circumstances, the Company's ultimate
ability to remain viable depends upon the successful restructuring of its debt
obligations. If the Company is unsuccessful in these efforts, it may be unable
to make its future obligations associated with its principal payments, as well
as other obligations, making it necessary to undertake such other actions
including seeking court protection as may be appropriate to preserve asset
value.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, SFAS No. 130, "Reporting Comprehensive Income," was issued. This
statement requires that comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise arising from non-owner sources. The classifications of
comprehensive income under current accounting standards include foreign currency
items, minimum pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. The Company adopted the
provisions of SFAS No. 130 on January 1, 1998. However, since the Company does
not have any comprehensive income items, there was no impact on the presentation
of its consolidated financial statements.
20
<PAGE>
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments for an Enterprise and Related Information." This
statement changed the way public companies report information about segments of
their business in their annual financial statements and requires them to report
segment information in their quarterly reports issued to shareholders. It also
requires entity-wide disclosures about the products and services an entity
provides, and its major customers. The Company adopted the provision of SFAS No.
131 on January 1, 1998.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The following tables summarize the financial instruments held by the Company at
December 31, 1998, which are sensitive to changes in interest rates. At December
31, 1998, approximately 26% of the Company's debt and capital lease obligations
are subject to changes in market interest rates and are sensitive to those
changes. The Company currently has no derivative instruments to offset the risk
of interest rate changes. In the future, the Company may choose to use
derivative instruments, such as interest rate swaps to manage the risk
associated with interest rate changes.
The following table presents principal cash flows for debt outstanding at
December 31, 1998, by maturity date and the related average interest rate.
<TABLE>
<CAPTION>
1999 2000 2001 2002 THEREAFTER TOTAL
---- ---- ---- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Long-term debt:
Fixed rate 6,018 2,981 8,713 1,326 80,019 99,057
Weighted-average interest rate 8.99% 8.93% 8.98% 9.04% 9.05%
Variable rate - 6,167 5,000 5,000 18,833 35,000
Weighted-average interest rate 11.00% 11.00% 11.00% 11.00% 11.00%
</TABLE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
21
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORTS
22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
Hudson Hotels Corporation and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in shareholders' investment
(deficit) and cash flows present fairly, in all material respects, the
financial position of Hudson Hotels Corporation and Subsidiaries (the
"Company") at December 31, 1998 and 1997 and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers, LLP
Rochester, New York
March 24, 1999 except as to the information in Note 2
as to which the date is April 14, 1999.
23
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of
Hudson Hotels Corporation:
We have audited the accompanying consolidated balance sheets of Hudson Hotels
Corporation (a New York corporation) and subsidiaries as of December 31, 1996,
and the related consolidated statements of income, changes in shareholders'
investment and cash flows for the year ended December 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. We did not audit the financial
statements of HH Properties-I, Inc., a wholly-owned subsidiary, at December 31,
1996 and for the period from November 15, 1996 to December 31, 1996, which
statements reflect total assets of $88,632,482 as of December 31, 1996, and
total revenues of $2,236,396 for the period then ended. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for HH Properties-I, Inc.
as of December 31, 1996, and for the period then ended, is based solely on the
report of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Hudson Hotels Corporation and
subsidiaries as of December 31, 1996, and the results of their operations and
their cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ Bonadio & Co., LLP
Rochester, New York
March 28, 1997
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
March 22, 1997
To the Board of Directors and Shareholders
Hudson Hotels Corporation and Subsidiaries
In our opinion, the accompanying balance sheet and the related statements of
operations, changes in stockholder's equity and cash flows present fairly, in
all material respects, the financial position of HH Properties-I, Inc. (the
"Company"), a wholly owned subsidiary of Hudson Hotels Properties Corp. at
December 31, 1996, and the results of its operations and its cash flows for the
period November 15, 1996 through December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Rochester, New York
March 22, 1997
25
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
- ------ ---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,751,580 $ 670,736
Cash - restricted 3,013,617 3,463,928
Accounts receivable - trade 931,212 897,878
Prepaid expenses and other 1,356,730 1,378,069
------------- -------------
TOTAL CURRENT ASSETS 7,053,139 6,410,611
INVESTMENTS IN PARTNERSHIP INTERESTS 1,781,218 1,781,621
LAND AND REAL ESTATE DEVELOPMENT 2,430,880 4,147,151
PROPERTY AND EQUIPMENT, NET 124,434,369 129,749,648
DEFERRED TAX ASSET -- 1,387,926
OTHER ASSETS 6,976,612 8,641,153
------------- -------------
TOTAL ASSETS $ 142,676,218 $ 152,118,110
============= =============
LIABILITIES AND SHAREHOLDERS' INVESTMENT (DEFICIT)
- --------------------------------------------------
CURRENT LIABILITIES:
Lines of credit $ 400,000 $ 712,537
Current portion of long-term debt 6,017,698 3,433,217
Accounts payable - trade 1,112,851 1,394,460
Other accrued expenses 6,026,744 3,595,288
------------- -------------
TOTAL CURRENT LIABILITIES 13,557,293 9,135,502
LONG-TERM DEBT 128,039,543 128,559,291
DEFERRED REVENUE - LAND SALE 185,055 185,055
LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP 1,060,581 1,099,266
SHAREHOLDERS' INVESTMENT (DEFICIT):
Preferred stock 295 295
Common stock 5,743 5,166
Additional paid-in capital 19,873,260 17,836,573
Warrants outstanding -- 50,000
Accumulated deficit (20,004,301) (4,711,787)
------------- -------------
(125,003) 13,180,247
Less: 10,000 shares of common stock in treasury,
at cost at December 31, 1998 and 1997 (41,251) (41,251)
------------- -------------
TOTAL SHAREHOLDERS' INVESTMENT (DEFICIT) (166,254) 13,138,996
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS'
INVESTMENT (DEFICIT) $ 142,676,218 $ 152,118,110
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
26
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING REVENUES: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Hotel operations $ 55,383,217 $ 36,922,896 $ 11,730,296
Management fees 875,005 801,057 978,668
Royalties 1,249,569 757,047 602,049
Other 131,847 250,097 837,036
------------ ------------ ------------
TOTAL OPERATING REVENUES 57,639,638 38,731,097 14,148,049
OPERATING COSTS AND EXPENSES:
Direct 36,715,748 24,808,798 8,925,508
Corporate 3,741,951 2,617,158 1,782,906
Indirect operating costs 577,074 1,225,788 551,149
Loss on asset valuation 5,259,701 -- --
Depreciation and amortization 6,130,386 4,096,761 1,021,857
------------ ------------ ------------
Total operating costs and expenses 52,424,860 32,748,505 12,281,420
------------ ------------ ------------
Income from operations 5,214,778 5,982,592 1,866,629
------------ ------------ ------------
OTHER INCOME (EXPENSE):
Gain on sale of worldwide franchise rights -- -- 1,385,758
Interest income 328,042 194,755 298,825
Interest expense (14,180,437) (9,028,366) (2,068,440)
Settlement of litigation (475,000) -- --
Non-recurring costs (4,838,872) -- --
Gain on sale of property and equipment 74,523 -- --
------------ ------------ ------------
TOTAL OTHER (EXPENSE) (19,091,744) (8,833,611) (383,857)
------------ ------------ ------------
Income/(Loss) before income taxes, minority interest
and equity in operations of affiliates (13,876,966) (2,851,019) 1,482,772
PROVISION/(BENEFIT) FOR INCOME TAXES 1,421,057 (1,000,849) 472,014
------------ ------------ ------------
Income/(Loss) before minority interest, and equity in
operations of affiliates (15,298,023) (1,850,170) 1,010,758
MINORITY INTEREST (66,081) (107,419) (392,235)
EQUITY IN OPERATIONS OF AFFILIATES 198,910 65,835 17,527
------------ ------------ ------------
NET INCOME (LOSS) $(15,165,194) $ (1,891,754) $ 636,050
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC ($ 2.86) $ (0.40) $ 0.13
============ ============ ============
NET INCOME PER COMMON SHARE - DILUTED N/A N/A $ 0.12
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
27
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT (DEFICIT)
FOR THE THREE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SERIES A ADDITIONAL ADDITIONAL
PREFERRED PAID-IN CAPITAL COMMON PAID-IN CAPITAL
STOCK PREFERRED STOCK COMMON
----- --------- ----- ------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $295 $1,560,705 $3,280 $ 5,610,844
Net Income -- -- -- --
Exercise of stock options,
including related tax benefits -- -- 24 17,643
Conversion of debentures -- -- 600 2,999,400
Purchase of treasury stock -- -- -- --
Issuance of common stock and use of
treasury stock for purchase of five
hotels -- -- 513 3,324,491
Issuance of common stock and use of
treasury stock for purchase of SB
Motel Corp. portfolio -- -- 371 2,358,502
Other -- -- -- 83,160
Cash dividends paid on preferred stock -- -- -- --
---- ---------- ------ -----------
BALANCE, DECEMBER 31, 1996 $295 $1,560,705 $4,788 $14,394,040
Net Loss -- -- -- --
Purchase of treasury stock -- -- -- --
Exercise of stock options -- -- 233 1,046,855
Issuance of common stock and options
for investor relation services -- -- 145 834,973
Cash dividends paid on preferred stock -- -- -- --
---- ---------- ------ -----------
BALANCE, DECEMBER 31, 1997 $295 $1,560,705 $5,166 $16,275,868
Net Loss -- -- -- --
Sale of common stock -- -- 333 999,667
Issuance of common stock to -- -- 40 67,460
employees and consultants
Settlement of lawsuit -- -- 200 424,800
Exercise of options -- -- 4 14,996
Cash dividends paid on preferred stock -- -- -- --
Other -- -- -- 529,764
---- ---------- ------ -----------
BALANCE, DECEMBER 31, 1998 $295 $1,560,705 $5,743 $18,312,555
==== ========== ====== ===========
<CAPTION>
WARRANTS ACCUMULATED TREASURY
OUTSTANDING DEFICIT STOCK TOTAL
----------- ------- ----- -----
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 60,000 (3,201,443) (122,855) 3,910,826
Net Income -- 636,050 -- 636,050
Exercise of stock options,
including related tax benefits (10,000) -- -- 7,667
Conversion of debentures -- -- -- 3,000,000
Purchase of treasury stock -- -- (3,953,042) (3,953,042)
Issuance of common stock and use of
treasury stock for purchase of five
hotels -- -- 4,075,897 7,400,901
Issuance of common stock and use of
treasury stock for purchase of SB
Motel Corp. portfolio -- -- -- 2,358,873
Other -- -- -- 83,160
Cash dividends paid on preferred stock -- (127,320) -- (127,320)
-------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 1996 50,000 (2,692,713) -- 13,317,115
Net Loss -- (1,891,754) -- (1,891,754)
Purchase of treasury stock -- -- (41,251) (41,251)
Exercise of stock options -- -- -- 1,047,088
Issuance of common stock and options
for investor relation services -- -- -- 835,118
Cash dividends paid on preferred stock -- (127,320) -- (127,320)
-------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 1997 50,000 (4,711,787) (41,251) 13,138,996
Net Loss -- (15,165,194) -- (15,165,194)
Sale of common stock -- -- -- 1,000,000
Issuance of common stock to -- -- -- 67,500
employees and consultants
Settlement of lawsuit (50,000) -- -- 375,000
Exercise of options -- -- -- 15,000
Cash dividends paid on preferred stock -- (127,320) -- (127,320)
Other -- -- 529,764
-------- ------------ ----------- ------------
BALANCE, DECEMBER 31, 1998 $ 0 $(20,004,301) $ (41,251) $ (166,254)
======== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
28
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
NET INCOME (LOSS) $(15,165,194) $(1,891,754) $ 636,050
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Deferred tax provision 1,387,926 (1,010,478) 265,767
Depreciation and amortization 6,130,386 4,096,761 1,070,050
Loss on asset valuation 5,259,701 -- --
Non-cash expenses 972,264 835,118 83,160
Gain on sale of assets (74,523) (28,812) --
Gain on installment sale -- -- (1,385,758)
Bad debt expense -- 167,163
Minority interest 66,081 107,419 392,235
Equity in operations of affiliates (198,910) (65,835) (17,527)
Capital distributions from unconsolidated partnership interests 281,739 163,577 92,272
Cash collected on installment sale 454,546 288,112 694,983
(Increase) decrease in assets:
Accounts receivable - trade (33,334) (454,886) 36,924
Prepaid expenses and other (316,764) (35,126) (434,100)
Increase (decrease) in liabilities:
Accounts payable (281,609) (465,136) 1,388,338
Other accrued expenses 2,431,456 756,173 731,468
------------ ----------- -----------
Net cash provided by operating activities 913,765 2,462,296 3,553,862
------------ ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
29
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land/real estate development (101,940) (85,054) (2,094,550)
Cash collected on sale of assets 2,188,625 399,659 --
Change in restricted cash 450,311 (1,948,049) (1,515,879)
Capital contribution to unconsolidated partnership interests -- -- (12,900)
Collection on non-affiliate mortgage 38,000 -- 200,000
Change in non-affiliates accounts and notes receivable 78,180 29,049 (32,360)
Purchase of equipment (2,056,524) (2,595,035) (640,982)
Purchase of partnership interest (3,556,837) -- --
Change in other assets 384,477 (11,937) (40,582)
Purchase of hotels -- (47,148,504) (58,794,287)
Deposits 450,000 (343,034) (329,262)
Cash received in acquisition -- -- 557,538
Change in affiliate accounts receivable (202,039) 125,188 25,751
------------ ------------ ------------
Net cash used in investing activities (2,327,747) (51,577,717) (62,677,513)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of borrowings 4,000,000 51,884,052 83,400,000
Financing costs -- (1,154,545) (2,508,238)
Repayment of mortgages (1,935,267) (3,483,680) (17,023,406)
Distributions to limited partners (145,050) (108,092) (381,070)
Proceeds from stock options exercised 15,000 1,047,088 7,667
Dividends paid (127,320) (127,320) (127,320)
Purchase of treasury stock -- (41,251) (3,953,042)
Proceeds from sale of common stock 1,000,000 -- --
Borrowings on line of credit, net (312,537) 712,537 --
------------ ------------ ------------
Net cash provided by financing activities 2,494,826 48,728,789 59,414,591
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,080,844 (386,632) 290,940
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 670,736 1,057,368 766,428
------------ ------------ ------------
CASH AND CASH EQUIVALENTS - END OF PERIOD $ 1,751,580 $ 670,736 $ 1,057,368
============ ============ ============
OTHER INFORMATION:
Cash paid during the period for:
Interest $ 14,152,439 $ 8,747,412 $ 1,662,972
Income taxes $ 40,690 $ 31,693 $ 205,269
Non-cash financing and investing activities
Issuance of 600,000 shares of common stock upon
conversion of convertible subordinated debentures -- -- $ 3,000,000
Acquisition of seventeen properties in 1996 for stock -- -- $ 9,759,773
Liabilities assumed for the purchase of the five properties
on July 31, 1996 -- -- $ 12,263,011
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. 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". The Company was incorporated in New York State on June 5, 1987.
The principal activity of the Company is as owner/manager of hotels. The Company
also manages hotels with financial interest (through various partnerships) and
manages hotels through third party management contracts. The owned and managed
hotels are located in twelve (12) states, and are operated under various
franchise agreements. The Company operates in the industry segment of hotel
operations and management.
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.
The Company, in return, received $4.0 million over a three (3) year period,
allocated as follows: $3,037,640 for the purchase of the franchising assets;
$700,000 for consulting services over three (3) years; and $262,360 in interest
related to deferred payments. Expenses of $121,759 were netted against the
purchase price. Of the total consideration, $2.0 million was paid at closing,
$1.0 million was paid at the first anniversary and $500,000 at the second
anniversary, and an additional $500,000 was paid 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% of gross room revenues from hotels 101-250 and
.5% of gross room revenues for all hotels in excess of 250.
Under this Agreement, the Company has the right to franchise and construct an
additional twenty-two (22) Microtel Inn properties and ten (10) "suites"
properties and to receive all royalties on the fifty (50) Microtels (28)
existing and twenty-two (22) new ones to be undertaken by the Company) and ten
(10) suites.
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, which has been the
Company's strength since it acquired Hudson Hotels Corporation in 1992. During
1996, 1997 and 1998, the Company embarked upon a significant expansion and
development program, which includes several acquisitions and development of five
(5) Microtel Inns through a joint venture partnership.
2. LIQUIDITY:
In December of 1998, and the first quarter of 1999, the Company sold certain
assets and took other actions as described in Item 1 "Recent Developments" to
generate cash or avoid cash payments which would allow sufficient liquidity
to maintain current operations during its seasonally slow operating season
(the fourth and first quarters). The Company's mezzanine loan agreement
requires Hudson to use the proceeds of asset sales to pay down the debt;
however, Hudson has instead used these proceeds for working capital. This
violation of the mezzanine loan agreement gave the lender the right to demand
immediate repayment of the mezzanine loan. In April 1999, the Company entered
into an agreement with this lender, which waives these violations of the
mezzanine loan agreement if the Company fulfills certain conditions. One of
these conditions is that the Company is not to make any principal payments to
subordinated creditors of this lender, including Equity Inns, LP ("Equity
Inns"), its $7.5 million convertible subordinated debenture or for the
obligations of Hudson Hotels Trust. Such requirement will cause the Company
to default in its obligations to Equity Inns, however, under the
subordination agreement with Equity Inns, that company is currently prevented
from taking legal action to enforce the payment of its debt. However, after
default, Equity Inns could obtain 2,000,000 shares of Hudson Hotels common
stock, which is collateral for this debt. Additionally, upon default, the
holders of $4.0 million debt in Hudson Hotels Trust can convert their debt
upon default into a total of 1,333,332 shares of Hudson common stock. One of
these holders has already converted $2.0 million of this debt into 666,666
shares of Hudson common stock. Additionally, the Company at December 31, 1998
had certain portions of its mezzanine debt that would begin to amortize in
the fourth quarter of 1999. As a result of
31
<PAGE>
this recent agreement with the holder of this debt, the amortization of this
debt now begins in the second quarter of 2000, which amortization the Company
will not, at current operating levels, be able to service. Therefore, the
Company's viability is dependent upon the restructuring of its debt obligations
and strengthening its equity and asset base, and ultimately, a return of
profitability.
The Company is currently in discussions with several of its institutional
lenders about its debt obligations and activities to restructure its debt. There
is negative working capital of $6,504,154 at December 31, 1998 with a
significant amount of this negative working capital generated by significant
principal debt payments. These principal payments described herein are expected
to continue. Furthermore, the Company is severely restricted in accessing the
cash flows generated from revenues as they are trapped for application against
required escrows for debt, tax, insurance, capital asset reserve, and now
beginning in the second quarter of 2000, principal amortization of the Company's
mezzanine debt.
There can be no assurances that the Company's restructuring efforts will be
successful, or that the institutional lenders will agree to a course of action
consistent with the Company's requirements in restructuring the obligations.
Even if such agreement is reached it may require approval of additional debt
holders, or possibly agreements of other creditors and shareholders of the
Company, none of which is assured. Furthermore, there can be no assurance that
restructuring of the Company's debt can be successfully accomplished on terms
acceptable to the Company. Under current circumstances, the Company's ultimate
ability to remain viable depends upon the successful restructuring of its debt
obligations. If the Company is unsuccessful in these efforts, it may be unable
to make its future obligations associated with its principal payments, as well
as other obligations, making it necessary to undertake such other actions
including seeking court protection as be appropriate to preserve asset value.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries collectively referred to as the Company. The
consolidated financial statements also include the accounts of a partnership
that is controlled by the Company. Other investments in partnerships that the
Company does not control are accounted for under the equity method (see below
and Note 4). Income and expenses are recorded on the accrual basis of accounting
and all significant inter-company accounts and transactions have been
eliminated.
INVESTMENTS IN PARTNERSHIP INTERESTS
The Company owns or owned equity interests, either as a general or limited
partner, in entities that own hotel properties or real estate that may be
developed as a hotel property. Effective August 1, 1996, the Company acquired
various remaining general and limited partner interests in five (5) hotel
partnerships in which the Company was a minority partner. Subsequent to that
date, the operations of those five hotels are included in the operating results
of the Company.
Income and losses of controlled partnerships are allocated to the Company
according to the terms of each partnership agreement.
The Company received development and franchise placement fees totaling $0,
$40,500 and $180,000 for the years ended 1998, 1997 and 1996, respectively, from
unconsolidated entities in which the Company has a minority interest.
Development fees represent cost reimbursement. The Company also receives ongoing
royalties from some of these entities on the same basis as independent parties.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks with maturities of less than 30 days. The
Company maintains its cash in bank deposit accounts, which at times, may exceed
federally insured limits. The Company has not experienced any losses in such
accounts. The Company believes it is not exposed to any significant credit risk
on cash and cash equivalents.
32
<PAGE>
RESTRICTED CASH
The Company is required to maintain certain levels of escrowed cash in order to
comply with the terms of its debt agreements. All cash is trapped for
application against required escrows for debt, tax, insurance and capital asset
reserve. A substantial portion of the escrowed cash funds is released several
times monthly for application against current liabilities.
ACCOUNTS RECEIVABLE - TRADE
Accounts Receivable - Trade represents billed receivables to hotel entities for
management services, royalties due and hotel room rentals. At December 31, 1998
and 1997, $72,952 and $35,130, respectively, represents amounts due from
entities in which the Company has a minority interest.
INVENTORIES
Inventories are stated at the lower of cost, on a first-in, first-out method, or
market and consist primarily of hotel supplies.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. When property or equipment is
retired or otherwise disposed of, the related cost and accumulated depreciation
are reversed and the net difference, less any amount realized from the
disposition, is reflected as income or loss. Betterments, renewals and
extraordinary repairs that extend the life of an asset are capitalized; other
repairs and maintenance are expensed.
Property and equipment consists of the following at December 31,
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Land $ 16,283,653 $ 14,991,042
Building and building improvements 98,656,047 99,366,884
Furniture and equipment 18,813,802 19,834,696
------------- -------------
133,753,502 134,192,622
Less - accumulated depreciation (9,319,133) (4,442,974)
------------- -------------
$ 124,434,369 $ 129,749,648
============= =============
</TABLE>
For financial reporting purposes, depreciation is computed using the
straight-line method for building and accelerated methods for furniture and
equipment over the following estimated useful lives:
Building and building improvements 20-40 years
Furniture and equipment 5-7 years
The Company reviews quarterly its properties in accordance with the Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long
Lived Assets" to determine if its carrying costs will be recovered from future
operating cash flows. In cases where the Company does not expect to recover its
carrying costs, the Company recognizes an impairment loss. In the fourth quarter
of 1998 the Company recognized an impairment loss of $1,818,211 in relation to
five (5) parcels of undeveloped land that were sold in the first quarter of
1999. Additionally, a loss of $3,441,490 was recognized from the loss of the
Company's limited partnership interest in HH Bridge, L.P.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Given the Company's current financial position, it is not practical to determine
the fair value of its financial instruments.
DEFERRED FINANCING COSTS
Costs incurred to acquire financing are being amortized over the estimated term
of the related financing. Accumulated amortization was $562,465 and $169,557 as
of December 31, 1998 and 1997, respectively.
33
<PAGE>
REVENUE RECOGNITION
Hotel operations revenue, principally from room rentals, is recognized as
earned. Ongoing credit evaluations are performed and an allowance for
potential credit losses is provided against the portion of accounts
receivable which is estimated to be uncollectible.
Membership dues for the beach club of the Seagate Hotel and Beach Club are
recognized ratably over the membership period. Membership dues received in
advance are reflected as deferred membership dues.
Royalty fee revenue is based on gross room revenues and the number of franchised
businesses open under the USFS Agreement.
Management fee revenue is recognized monthly as the services are performed in
accordance with the terms of the management contracts and is generally based on
a percentage of the managed property's revenue plus charges for accounting and
marketing fees.
BEACH CLUB MEMBERSHIP
As a result of the acquisition of the Seagate Hotel and Beach Club, the Beach
Club operation was valued at $3,206,531, based on an independent appraisal.
Amortization is provided using the straight-line method over the twenty (20)
year estimated useful life of the asset. Accumulated amortization is $387,456
and $227,129 as of December 31, 1998 and 1997, respectively.
EARNINGS PER SHARE
The Company calculates earning per share ("EPS") in accordance with Statement of
Financial Accounting Standards (SFAS) No. 128, which is effective for both
interim and annual periods ending after December 15, 1997.
SFAS No. 128 requires dual presentation of basic EPS and diluted EPS. Basic EPS
is computed as net earnings, less preferred stock dividends, divided by the
weighted-average number of common shares outstanding for the period. Diluted EPS
reflects dilution that could occur from common shares issuable through stock
options, convertible subordinated debentures and convertible preferred stock.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net Earnings Applicable to Common Stock:
Net earnings (loss) $(15,165,194) $(1,891,754) $ 636,050
Deduct preferred stock dividends paid (127,320) (127,320) (127,320)
------------ ----------- -----------
Net earnings (loss) applicable to common stock $(15,292,514) $(2,019,074) $ 508,730
============ =========== ===========
Weighted average number of common shares outstanding 5,353,078 4,996,694 3,771,702
============ =========== ===========
EARNINGS (LOSS) PER SHARE - BASIC $ (2.86) $ (0.40) $ 0.13
============ =========== ===========
Net earnings applicable to common stock per above $ -- $ -- $ 508,730
============ =========== ===========
Shares used in calculating basic earnings per share -- -- 3,771,702
Additional shares assuming conversion of options and warrants -- -- 478,143
------------ ----------- -----------
Total shares for diluted -- -- 4,249,845
EARNINGS PER SHARE - DILUTED N/A N/A $ 0.12
============ =========== ===========
</TABLE>
The exercise of outstanding stock options, convertible subordinated debenture
and convertible preferred stock were not included in some of the calculations of
diluted EPS, as their effect would be anti-dilutive. Unexercised stock
options/warrants to purchase 3,459,092; 1,648,134 and 772,357 shares of the
Company's common stock were not included in the computations of diluted EPS
because the prices were greater than the average market price of the Company's
stock or the addition of the options and warrants are considered antidilutive
during the years ended December 31, 1998, 1997 and 1996, respectively.
34
<PAGE>
The Company did not include the conversion of convertible preferred stock and
convertible subordinated debentures totaling 1,961,390, 1,294,723, and 1,294,723
shares of the Company's common stock in the calculation of EPS because the
addition is considered antidilutive for the years ended December 31, 1998, 1997
and 1996, respectively.
ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
4. SUMMARIZED FINANCIAL INFORMATION - INVESTMENTS IN PARTNERSHIP
INTERESTS:
The following is a summary of condensed financial information for the
unconsolidated partnerships that the Company does not control for the
partnerships years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Property and equipment, net of
accumulated depreciation $ 57,248,847 $ 29,943,215 $ 29,490,826
Current assets 3,495,286 2,925,293 2,918,869
Other assets 1,088,155 938,340 1,341,308
------------ ------------ ------------
TOTAL ASSETS 61,832,288 33,806,848 33,751,003
------------ ------------ ------------
Mortgage and notes payable - current 550,524 302,732 2,157,446
Other current liabilities 2,429,449 712,866 847,865
Mortgage and note payable - noncurrent 43,614,917 25,056,584 24,118,255
------------ ------------ ------------
TOTAL LIABILITIES 46,594,890 26,072,182 27,123,566
------------ ------------ ------------
NET ASSETS $ 15,237,398 $ 7,734,666 $ 6,627,437
============ ============ ============
COMPANY'S SHARE $ 1,781,218 $ 1,781,621 $ 1,974,900
============ ============ ============
Net revenues 17,794,838 12,387,125 13,668,878
Operating expenses (10,984,777) (7,192,947) (9,301,426)
------------ ------------ ------------
Income from operations 6,810,061 5,194,178 4,367,452
Other income (expense), net (5,546,368) (4,228,999) (3,678,898)
------------ ------------ ------------
NET INCOME $ 1,263,693 $ 965,179 $ 688,554
============ ============ ============
COMPANY'S SHARE $ 198,910 $ 65,835 $ 17,527
============ ============ ============
</TABLE>
5. LAND AND REAL ESTATE DEVELOPMENT:
Real estate held for development or sale is summarized as follows at December
31:
<TABLE>
<CAPTION>
1998 1997 ACRES
---- ---- -----
<S> <C> <C> <C>
Cost of land under development:
Tonawanda, New York $ 780,822 $ 780,822 6.87
Irving, Texas 472,932 472,932 2.02
Plano, Texas 595,661 595,661 2.00
Plano, Texas 677,697 677,697 2.00
Arlington, Texas 604,629 604,629 2.00
Tucson, Arizona 478,851 478,851 2.00
----------- ----------
3,610,592 3,610,592
Development costs 638,499 536,559
----------- ----------
Total real estate development in process 4,249,091 4,147,151
Less: Valuation allowance (1,818,211) --
----------- ----------
Total real estate development in process $ 2,430,880 $4,147,151
=========== ==========
</TABLE>
35
<PAGE>
Development costs include land and site development costs that are accumulated
by specific site. Upon sale to a specific ownership entity, the Company will be
reimbursed for all land and site development costs specifically associated with
the parcel.
The Company reviews quarterly its land and real estate development in accordance
with the Statement of Financial Accounting Standards No. 121 "Accounting for the
Impairment of Long Lived Assets" to determine if its carrying costs will be
recovered from future operating cash flow. As a result of the sale of five (5)
parcels of land in February 1999, the Company recognized a loss on asset
valuation. See Note 3 for further discussion.
6. LINE OF CREDIT:
The Company has a line of credit note with a commercial bank, with an interest
rate of prime plus 1 1/2%, for a total of $400,000. Amount borrowed is
collateralized by undeveloped land in Tonawanda, New York.
7. DEBT:
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Mortgage payable to Nomura Asset Capital
Corporation, by HH Properties-I, Inc., a
wholly owned subsidiary dated November
27, 1996, due in monthly installments of
$477,257, including principal and
interest at 9.19% over a 25 year period
In 2008, the interest rate recasts at no
less than 14.19%. The mortgage is
collateralized by all of the assets of
HH Properties-I, Inc., one of the
Company's indirect wholly-owned hotel
subsidiaries $ 54,884,544 $ 55,468,137
Mortgage payable to Nomura Asset Capital
Corporation, by HH Properties-II, Inc.,
a wholly owned subsidiary, dated October
31, 1997, due in monthly installments of
$239,147, including principal and
interest at 8.38% over a 25 year period
In 2007, the interest rate recasts at no
less than 13.38%. The mortgage is
collateralized by all of the assets of
HH Properties-II, Inc., one of the
Company's indirect wholly-owned hotel
subsidiaries 29,640,847 29,970,353
Mezzanine note payable to Nomura Asset
Capital Corporation, dated November 27,
1996, payable in monthly installments of
interest only at LIBOR plus 6%. On
October 31, 1997, the Company borrowed
an additional $18.0 million at LIBOR
plus 6% interest only. As part of the
additional borrowing, the Company and
the lender agreed to pay monthly
installments of interest only in year
one and two, at an interest rate of
LIBOR plus 6% and additionally $583,333
monthly of minimum principal in years
three through five. The note is due
October 11, 2002. This note is
collateralized by substantially all
assets of the Company. Subsequent to
December 31, 1998 the Note was amended
to provide that principal payments would
not begin until April 11, 2000 35,000,000 35,000,000
7.5% convertible subordinated debenture
due July 1, 2001 7,500,000 7,500,000
Two $2.0 million notes due April 30,
1999. Subsequent to year-end one of
these notes was converted into 666,666
shares of the Company's common stock 4,000,000 --
10% subordinated note payable to Equity
Inns Partnership, L.P. by the Company,
payable in monthly installments of
interest only. Principal payments of
$250,000 are due January 31, April 30,
July 31, October 31 of each year with
the unpaid balance due October 31, 2000
The note is collateralized by 2,000,000
shares of the Company's common stock
issued in the name of Hudson Hotels
Properties Corp., a wholly owned
subsidiary 2,884,052 3,884,052
4.4% Town of Tonawanda bonds with yearly
principal payments of $22,169 through
1997 and yearly principal payments of
$18,745 thereafter until 2006 147,798 169,966
------------- -------------
Total long-term debt 134,057,241 131,992,508
Less - current portion (6,017,698) (3,433,217)
------------- -------------
$ 128,039,543 $ 128,559,291
============= =============
</TABLE>
36
<PAGE>
The conversion price of the 7.5% convertible subordinated debenture due July 1,
2001, reset on December 31, 1998 based on 125% of the average volume weighted
price over the last thirty days having 150,000 shares of trading volume. A
maximum and minimum conversion price for common shares is set at $7.50 and
$4.50, respectively. As a result of the reset, the new conversion price is $4.50
per common share.
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 remained at 10%.
As a result of postponing the initial public offering of Hudson Hotels Trust and
its relationship with Hudson Hotels Trust, the Company is required to
consolidate the financial statements of Hudson Hotels Trust that includes $4.0
million in promissory notes. The promissory notes consist of two (2) 12% notes
payable to 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. 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 note holders as an inducement for amounts loaned
other than the pledge of the stock. The Company is not obligated to repay the
principal or interest on these notes, however.
The Company's mezzanine loan agreement requires Hudson to use the proceeds of
asset sales to pay down the debt; however, Hudson has instead used these
proceeds for working capital. This violation of the mezzanine loan agreement
gave the lender the right to demand immediate repayment of the mezzanine
loan. In April 1999 the Company entered into an agreement with this lender,
which waives these violations of the mezzanine loan agreement if the Company
fulfills certain conditions. One of these conditions is that the Company is
not to make any principal payments to creditors which are subordinated to
this lender, including Equity Inns, LP ("Equity Inns") for its 10%
subordinated note or on the $7.5 million convertible subordinated debenture
or for the obligations of Hudson Hotels Trust. Such requirements will cause
the Company to default in its obligations to Equity Inns. However, under the
subordination agreement with Equity Inns, that company is currently prevented
from taking legal action to enforce the payment of its debt. After default,
Equity Inns could obtain 2,000,000 shares of Hudson Hotels common stock,
which is collateral for this debt. Additionally, upon default, the holders of
$4.0 million debt in Hudson Hotels Trust can convert their debt into a total
of 1,333,332 shares of Hudson common stock. One of these holders, in 1999,
has already converted $2.0 million of this debt into 666,666 shares of Hudson
common stock. Additionally, the Company at December 31, 1998 had certain
portions of its mezzanine debt that would begin to amortize in the fourth
quarter of 1999. As a result of the recent agreement with the holder of this
debt, the amortization of this debt now begins in the second quarter of 2000,
which amortization the Company will not, at current operating levels, be able
to service. Therefore, the Company's viability is dependent upon the
restructuring of its debt obligations and strengthening its equity and asset
base, and ultimately, a return of profitability.
At December 31, 1998 future minimum repayments under long-term debt are as
follows:
1999 6,017,698
2000 9,147,670
2001 13,713,286
2002 6,325,594
Thereafter 98,852,993
------------
TOTAL $134,057,241
============
8. SHAREHOLDERS' INVESTMENT:
(A) PREFERRED STOCK
At December 31, 1998, the Company's authorized preferred shares were 10,000,000
at $.001 par value, of which 294,723 were issued and outstanding at December 31,
1998 and 1997, respectively.
37
<PAGE>
Series A Preferred Stock - 294,723 shares are issued and outstanding and
includes a liquidation preference of $5.40 per share. Dividends are paid at
$.432 per share annually and are cumulative, subject to Board declaration.
Voting rights are co-equal with Common Shares; 1 share, 1 vote. Each Preferred
Share is convertible at the option of the holder into one share of the Company's
Common Stock, with antidilution protection. The Preferred Shares are redeemable
at the option of the Company for debentures.
(B) COMMON STOCK
At December 31, 1998, the Company's authorized common shares were 20,000,000 at
$.001 par value per share, of which 5,732,495 and 5,155,162 were issued and
outstanding at December 31, 1998 and 1997, respectively.
The Company has established the following stock option plans, authorized by the
Board of Directors and approved by shareholders:
--1988 Employee Stock Option Plan, whereby 100,000 shares of the
Company's common stock are reserved for issuance under plan provisions
to Directors, Officers and key employees pursuant to the exercise of
qualified stock options, non-qualified stock options and direct
purchase of stock. The granted options vest over a two year period,
with 1/3 vesting immediately, 1/3 vesting at each of the first and
second anniversary.
--1993 Employee Stock Option Plan, whereby 550,000 shares of the
Company's common stock are reserved for issuance under plan provisions
to Officers and key employees pursuant to the exercise of qualified
stock options, non-qualified stock options and direct purchase of
stock. The granted options vest over a two year period, with 1/3
vesting immediately, 1/3 vesting at each of the first and second
anniversary. In 1996, the Board of Directors authorized the issuance of
an additional 300,000 shares, which was approved by shareholders at the
annual meeting. At December 31, 1998, 185,500 shares were available for
grant under this plan.
--1993 Directors Stock Option Plan, whereby 135,000 shares of the
Company's common stock are reserved for issuance under plan provisions
to outside Directors. The granted options vest over a two year period
with 1/3 vesting immediately, with an additional 1/3 vesting at the
first and second anniversaries. In 1998, the Board of Directors
authorized the issuance of an additional 81,000 shares, which was
approved by shareholders at the annual meeting. At December 31, 1998,
108,000 shares were available for grant under this plan.
--1998 Long-Term Incentive Compensation Plan, whereby 1,500,000 shares
of the Company's common stock are reserved for issuance under plan
provisions to officers and key employees pursuant to the issuance of
non-qualified stock options, stock appreciation rights, restricted
stock awards, phantom stock and direct purchase of stock. The purpose
of the plan is to attract, retain and motivate key employees of the
Company by offering incentive compensation tied to the performance of
the Company and its share price and, therefore, more closely align with
the interests of shareholders. At December 31, 1998, all of these
shares have been committed to be granted but the grants had not yet
been made, therefore -0- shares were available for grant under this
plan.
In addition, the Company, from time to time, grants warrants to non-employees,
at a price equal to or greater than the fair market value at the date of grant.
The Chairman of the Board and Chief Executive Officer of the Company has
purchased 211,875 warrants from non-affiliate third parties.
A summary of changes in common stock options and warrants during the year ended
December 31, 1998, 1997 and 1996 is:
38
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF SHARES PRICE PER SHARE
---------------- ---------------
<S> <C> <C>
Outstanding at December 31, 1995 1,308,000 $1.50 - $8.375
----------
Granted 128,500 $7.00 - $7.375
Exercised/Expired (28,833) $2.00
----------
Outstanding at December 31, 1996 1,407,667 $1.50 - $8.375
Granted 627,000 $5.50 - $10.00
Exercised/Expired (283,000) $2.00 - $6.00
----------
Outstanding at December 31, 1997 1,751,667 $1.50 - $10.00
Granted 520,000 $4.00 - $4.50
Exercised/Expired/Forfeited (312,575) $4.125 - $7.00
----------
Outstanding at December 31, 1998 1,959,092 $1.50 - $10.00
==========
Options and warrants exercisable at:
December 31, 1998 1,952,133
==========
December 31, 1997 1,648,134
==========
December 31, 1996 1,250,500
==========
</TABLE>
The FASB has issued SFAS No. 123, Accounting for Stock-Based Compensation
effective for the fiscal years beginning after December 15, 1995. The Company
has adopted the disclosure provisions of the Statement.
The Company accounts for its stock-based compensation plans under APB No. 25,
under which no compensation expense has been recognized because all employee
stock options have been granted with the exercise prices equal to the fair
value of the Company's Class A common stock on the date of grant. The Company
adopted SFAS No. 123 for disclosure purposes only in 1996. During the
phase-in period of SFAS No. 123, pro forma disclosures may not be indicative
of future amounts until the new rules are applied to all awards. For SFAS No.
123 purposes, the fair value of each employee options grant has been
estimated as of the date of grant using the Black-Scholes option pricing
model and the following weighted average assumptions: risk-free interest rate
of 6.25%, expected life of five (5) years, no dividends and expected
volatility of 33.1%. Using these assumptions, the fair value of the employee
stock options granted in 1998, 1997, and 1996 is $152,000, $168,000 and
$384,000, respectively, which would be amortized as compensation expense over
the vesting period of the options. Had compensation cost been determined in
accordance with SFAS No. 123, utilizing the assumptions detailed above, the
Company's net income (loss) and net income (loss) per share would have been
reduced to the following pro forma amounts for the period ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss):
As reported $ (15,165,194) $ (1,891,754) $ 636,050
Pro forma (15,317,487) (2,069,452) 426,650
Net income (loss) per share - basic:
As reported $ (2.86) $ (0.40) $ 0.13
Pro forma $ (2.89) $ (0.44) $ 0.08
</TABLE>
9. COMMITMENTS:
Certain office space and automobiles are rented under non-cancelable operating
leases that expire at various dates through 2003. The following is a schedule of
future minimum annual rentals on non-cancelable operating leases:
1999 $475,854
2000 470,160
2001 446,043
2002 420,000
Thereafter 420,000
39
<PAGE>
Total rent expense for the year ended December 31, 1998, 1997 and 1996, was
$307,773, $159,566 and $148,102, respectively.
As a partner in the partnerships disclosed in Note 4, the Company has guaranteed
portions of mortgages payable relating to the partnerships. Amounts guaranteed
by the Company related to the partnerships' mortgages payable were approximately
$3.6 million and $3.7 million at December 31, 1998 and 1997, respectively.
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
seventeen 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 $2,731,604, $1,567,564 and $146,000 for the years ended December
31, 1998, 1997 and 1996, respectively.
10. 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.
The components of the provision/(benefit) for income taxes are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CURRENT:
Federal $ -- $ -- $195,539
State 33,182 9,629 10,708
DEFERRED:
Federal 1,094,465 (765,864) 196,232
State 293,410 (244,614) 69,535
---------- ----------- --------
TOTAL $1,421,057 $(1,000,849) $472,014
========== =========== ========
</TABLE>
Deferred tax (liabilities) assets are comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Depreciation $(1,581,218) $(1,079,515)
Minority interest (11,888) (7,288)
----------- -----------
Gross deferred tax liability (1,593,106) (1,086,803)
----------- -----------
Loss carryforwards 3,511,081 1,799,384
Accrued expenses 1,051,893 212,000
Deferred revenue 73,975 74,112
Deferred consulting -- 45,054
Bad debt reserve 236,424 221,916
Tax credit 79,751 79,884
Financing costs 62,566 --
Writedown of assets 2,044,569 --
Miscellaneous 42,636 42,379
----------- -----------
Gross deferred tax assets 7,102,895 2,474,729
----------- -----------
Valuation allowance (5,509,789) --
----------- -----------
Net deferred tax asset $ -0- $ 1,387,926
=========== ===========
</TABLE>
40
<PAGE>
The deferred tax consequences of temporary differences in reporting items for
financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period and its history of
taxable earnings. Management has considered these factors in reaching its
conclusion as to the valuation allowance for financial reporting purposes.
The provision for income taxes differs from the amount of income tax determined
by applying the applicable US statutory federal income tax rate to pretax income
as a result of the following differences:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory US tax rates $(4,673,006) $ (938,485) $376,742
Increase (decrease) in rates resulting from:
State income taxes, net of federal income tax (634,924) (155,090) 66,495
Change in valuation allowance 5,509,789 -- --
Permanent differences 1,291,238 72,080 --
Other (72,040) 20,646 28,777
----------- ----------- --------
Provision/(Benefit) for income taxes $ 1,421,057 $(1,000,849) $472,014
=========== =========== ========
</TABLE>
At December 31, 1998, the Company has tax net operating loss carryforwards of
approximately $8,800,000 that may be used to offset future taxable income. These
loss carryforwards will begin to expire in 2003.
11. LITIGATION:
The Company and its subsidiaries are parties to various legal actions and
complaints arising in the ordinary course of business. No such pending matters
are expected to have a material adverse effect on the Company's financial
position, results of operations, or cash flows.
12. LEASEHOLD INTEREST:
The Company provided a $450,000 cash deposit to secure a ten year operating
lease through 2006 and management contract of a full-service hotel located in
Canandaigua, New York from the hotel's owner a non-affiliated limited liability
company, M,L,R&R. In December of 1998 the Company sold its leasehold interest in
this property and received its $450,000 cash deposit and began to manage the
property pursuant to a Management Agreement entered into with M,L,R&R.
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 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
$59,167 for the year ended December 31, 1998, and $57,417 for the year ended
December 31, 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:
1999 $ 22,000
2000 22,000
2001 22,000
2002 22,000
2003 22,000
Thereafter 704,000
--------
$814,000
========
41
<PAGE>
13. ACQUISITION:
On August 14, 1998, HH Bridge, L.P. ("the Partnership"), a limited partnership
in which the Company had a 42% interest, completed the acquisition of three (3)
hotel properties from an unrelated third party for approximately $26.6 million,
plus other indirect costs. 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 had the right, prior to July 14, 1999, to cause the
Company to purchase M,L,R&R's entire partnership interest for $6.0 million
(the "Put"). If the Put would have been exercised, the closing of the
purchase of M,L,R&R's partnership interest would take place on August 14,
1999. The Company had the right to purchase M,L,R&R's entire partnership
interest for $6.0 million by November 13, 1999, after such time the purchase
price of $6.0 million would have increased $66,667 for each month thereafter.
The Company would have been required to purchase M,L,R&R's partnership
interest on August 13, 2003, for $9.0 million if not sooner purchased.
However, M,L,R&R also had the right to acquire the Company's limited
partnership interest in HH Bridge, L.P. for $1 in the event the Company
defaulted in any of its obligations to M,L,R&R.
As of December 31, 1998, the partnership was unable to make certain "guaranteed
return" payments to this third party, who then exercised its rights to acquire
the Company's 41% limited partnership interest for $1. As a result, the
operations of HH Bridge, L.P. have been consolidated by the Company from August
14, 1998, to December 31, 1998, however, the balance sheet has been
deconsolidated at December 31, 1998 and a loss on asset valuation were taken for
the Company's investment in the partnership of $3.4 million in the fourth
quarter of 1998. Presently the Company owns a 1% interest in HH Bridge, L.P., as
a general partner.
14. INDIRECT OPERATING COSTS:
During the fourth quarter of 1998 the Company had charges of $577,074 as a
result of indirect costs. This amount is comprised of a one-time non-cash charge
of $529,764 associated with warrants issued and valued as a result of two $2.0
million notes issued. The remaining indirect operating costs are associated with
corporate moving expenses with relocation to new office space.
During the fourth quarter of 1997, the Company had charges of $1,225,788 as a
result of indirect costs. This amount is comprised primarily of $835,118 of
non-cash consulting expense relating to investor relations services which
were written off as its expected value of these services in the future
appeared minimal. In addition, this amount is comprised of indirect costs
relating to the acquisition of nine (9) Hampton Inns and the write off of
several deposits which the Company will no longer pursue.
During the fourth quarter of 1996, the Company had charges of $551,149 primarily
as a result of the acquisition of the SB Motel Corp. portfolio.
15. SETTLEMENT OF LITIGATION:
On September 30, 1998, the Company reached a settlement in a long standing
litigation with plaintiffs, Ladenburg, Thalmann Co., whom 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.
16. NON-RECURRING COSTS:
During the third quarter of 1998, the Company recognized charges of $4.8
million. These charges include (i) a deposit and direct costs related to the
terminated acquisition of twenty-six Fairfield Inns by Marriott that were 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.
42
<PAGE>
17. SUBSEQUENT EVENTS:
In February 1999, the Company sold five (5) parcels of land for $1.8 million to
a third party. As a result of the sale, the Company recognized a $1,818,211 loss
on asset valuation at December 31, 1998.
In addition, as of December 31, 1998, the Company failed to make its $250,000
"guaranteed quarterly payment" to a third party for its $5 million contribution
to HH Bridge, L.P. As a result of this non-performance, the independent third
party exercised its right under the agreement to acquire the Company's 41%
limited partnership interest in HH Bridge, L.P. for $1 in January 1999. As a
result of this, the Company recorded a $3,441,490 loss on asset valuation at
December 31, 1998. (See Note 13).
18. BUSINESS SEGMENTS:
As described in Note 1, the Company operates in two segments: (1) hotel
owner/operator; and (2) hotel management services and other. Revenues,
identifiable assets and capital expenditures of each segment are those that
are directly identified with those operations.
The Company evaluates the performance of its segments based primarily on
earnings before interest, taxes and depreciation and amortization ("EBITDA")
generated by the operations of its Owned Hotels. Interest expense is primarily
related to debt incurred by the Company through its corporate obligations and
collateralized mortgage obligations on its hotel properties. The Company's taxes
are included in the consolidated Federal income tax return of the Company and
are allocated based upon the relative contribution to the Company's consolidated
taxable income/losses and changes in temporary differences.
The following table presents revenues and other financial information by
business segment for the years ended December 31, 1996, 1997 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1998 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
- ---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 55,383 $ 4,993 $ (2,736) $ 57,640
EBITDA $ 15,931 $ 674 -- $ 16,605
Depreciation and amortization $ 5,890 $ 240 -- $ 6,130
Interest expense $ 13,177 $ 1,003 -- $ 14,180
Capital expenditures $ 1,775 $ 282 -- $ 2,057
Total assets $127,205 $66,495 $(51,024) $142,676
</TABLE>
<TABLE>
<CAPTION>
1997 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
- ---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 36,923 $ 3,615 $ (1,807) $ 38,731
EBITDA $ 10,307 $ (228) -- $ 10,079
Depreciation and amortization $ 3,877 $ 220 -- $ 4,097
Interest expense $ 8,314 $ 714 -- $ 9,028
Capital expenditures $ 2,479 $ 116 -- $ 2,595
Total assets $132,731 $74,025 $(54,638) $152,118
</TABLE>
<TABLE>
<CAPTION>
1996 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
- ---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 11,730 $ 2,898 $ (480) $ 14,148
EBITDA $ 2,804 $ 85 -- $ 2,889
Depreciation and amortization $ 908 $ 114 -- $ 1,022
Interest expense $ 1,550 $ 519 -- $ 2,069
Capital expenditures $ 568 $ 73 -- $ 641
Total assets $ 92,317 $44,765 $(34,189) $102,893
</TABLE>
(A) Eliminations represent inter-company management fees and inter-company
receivables/payables and investments in subsidiaries
The following presents the segments' performance measure to the Company's
consolidated income (loss) before taxes, minority interest, and equity in
operations of partnerships:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
EBITDA
Hotel Operations $ 15,931 $ 10,307 $ 2,804
Management and Other 674 (228) 85
Interest (14,180) (9,028) (2,069)
Depreciation and Amortization (6,130) (4,097) (1,022)
Loss on Asset Valuation (5,260) - -
Non-recurring costs (4,839) - -
Other (73) 195 1,685
---------- ---------- ----------
Income (loss) before income taxes, minority
interest, and equity in operations of partnerships $ (13,877) $ (2,851) $ 1,483
========== ========== ==========
</TABLE>
43
<PAGE>
ITEM 9. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANTS
On April 22, 1997, the Board of Directors of the Company, upon the
recommendation of the Audit Committee, directed management to engage
PricewaterhouseCoopers LLP for appointment as the Company's principal
accountants to audit the Company's financial statements, as voted during the
Company's annual meeting held on May 29, 1997. This selection followed the
solicitation of proposals for accounting services by the Company from several
accounting firms, and the review of those proposals and the accompanying
presentations. In connection with this designation, the Company's existing
accountants, Bonadio & Co., LLP, were dismissed.
(a)(1)(i) The Company's former accountants, Bonadio & Co., LLP, were dismissed
effective April 22,1997.
(ii) Bonadio & Co., LLP's reports on the Company's financial
statements for the past two years did not contain an
adverse opinion or disclaimer of opinion, nor was either
such opinion modified as to uncertainty, audit scope, or
accounting principles.
(iii) The decision to change accounts was adopted by the Audit
Committee of the Board of Directors and by the full
Board.
(iv) There were no disagreements with Bonadio & Co., LLP on
any matter of accounting principals or practices,
financial statement disclosure, or auditing scope or
procedure.
(a)(2) Effective April 22, 1997, PricewaterhouseCoopers LLP was engaged to
serve as the Company's principal accountants to audit its financial
statements. In connection with its solicitation for proposals, the
Company did not consult with the new accountants regarding either
(1) the application of accounting principals to a specific completed
or contemplated transaction, or the type of audit opinion that might
be rendered on the Company's financial statements, or (2) any
disagreements with the Company's prior accountants.
44
<PAGE>
PART III
As described below, certain information appearing in the Company's Proxy
Statement to be furnished to shareholders in connection with the 1999 Annual
Meeting, is incorporated by reference in this Form 10-K Annual Report.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Certain additional information is incorporated by reference to the "Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance" sections of the
Company's Proxy Statement to be furnished to shareholders in connection with the
1999 Annual Meeting. Information regarding the Company's Executive Officers is
included below.
Name and Title Age Business Experience
E. Anthony Wilson, Chairman of the 54 E. Anthony Wilson serves as the
Chairman of the Board and Chief
Board and Chief Executive
Officer Executive Officer of the
Company. Mr. Wilson was a
co-founder of the Company, has
served as its Chairman of the
Board since its inception, and
as Chief Executive Officer since
January 1993. In 1984 he
co-founded Hudson Hotels Corp.
which was acquired by the
Company in June 1992. In
addition to his hotel
experience, Mr. Wilson was a
founder of S&W Restaurants, and
of Mid-America Properties, which
is the owner of eight Chi Chi's
Restaurants, and was a partner
and developer of the Ocean Club,
a night club and restaurant, and
Union Square, a theme
restaurant. He has over 25 years
experience in the hospitality
and real estate industries as a
developer, owner and manager. As
general partner of Wilson
Enterprises, L.P., a real estate
development firm in Rochester,
New York, he has developed a
significant amount of office,
warehouse, apartments and
related facilities for tenants,
including Xerox Corporation,
Eastman Kodak, Rochester
Telephone Corp., R.T. French,
Champion Products, the United
States Government and other
national corporations. Mr.
Wilson is an alumnus of the
School of Business at Indiana
University. He has served as the
Chairperson of the Strong
Memorial Hospital Children's
Fund, and has been a Director of
the First National Bank of
Rochester, Erdle Perforating
Corp., and the Rochester Family
of Mutual Funds.
Michael T. George, President and 40 Michael T. George serves as the
Company's President and Chief
Chief Operating Officer
Operating Officer. Mr. George is
a Certified Hotel Administrator
with approximately 17 years of
experience in the hotel
industry. From 1997 to 1998, he
served as Chief Operating
Officer of Sunstone Hotel
Properties, the affiliated
lessee of Sunstone Investors,
Inc., a hotel REIT located in
San Clemente, California that
owns hotels under various brand
names, including Marriott,
Hilton, Sheraton, Holiday Inn,
Hawthorn Suites, Residence Inn,
Courtyard Inn by Marriott,
Hampton Inn and Best Western.
From 1995 to 1997, Mr. George
served as Senior Vice President
of Operations for Capstar Hotels
Company located in Washington,
D.C. From 1990 to 1995, Mr.
George served as Vice President
of Operations and ultimately as
Chief Operating Officer for
Devon Hotels Ltd. in Montreal.
Prior to that time, Mr. George
served in various capacities
with Radisson Hotels, Hilton
Hotels and Sheraton Hotels. In
addition, for various durations
over the last six years Mr.
George has served on franchise
operations boards for the
national hotel chains Marriott,
Westin and Hilton. Mr. George
graduated from the Purdue Hotel
and Restaurant Management School
in 1981.
45
<PAGE>
John M. Sabin, Executive Vice 44 John M. Sabin serves as the
President and Chief Financial Officer Company's Executive Vice
President and Chief Financial
Officer since May 1998. From
February 1997 to May 1998, Mr.
Sabin served as Senior Vice
President and Treasurer of
Vistana, Inc., a publicly-owned
company that owns, operates and
develops time share resorts, and
served as Chief Financial
Officer of Vistana from February
1997 to November 1997. From June
1996 to February 1997, Mr. Sabin
served as Vice President -
Finance of Choice Hotels
International, Inc. From June
1995 to February 1997, Mr. Sabin
also served as Vice President -
Mergers and Acquisitions of
Choice Hotels International,
Inc., and, from December 1993 to
October 1996, he served as Vice
President - Finance and
Assistant Treasurer of Manor
Care, Inc., the former parent of
Choice Hotels International,
Inc. From 1990 to December 1993,
Mr. Sabin served as Vice
President - Corporate Mergers
and Acquisitions of Marriott
Corporation. In addition, Mr.
Sabin is a Director and
non-executive Chairman of the
Board of Competitive
Technologies, Inc., a
publicly-owned technology
licensing and transfer company.
Mr. Sabin received B.S., M.Acc.
(Masters of Accountancy) and
M.B.A. degrees from Brigham
Young University and a J.D.
degree from the J. Reuben Clark
Law School at Brigham Young
University.
Ralph L. Peek, CPA, Vice President 50 Ralph L. Peek has been a general
and Treasurer partner of E. Anthony Wilson in
Wilson Enterprises, L.P. since
1978 and he has been involved
with the Company and has served
as a Director of the Company
since it inception in 1987. As
of December 31, 1996 Mr. Peek
was named Vice President and
Treasurer of the Company. Mr.
Peek is also a certified public
accountant and received his
degree from the Rochester
Institute of Technology.
Taras M. Kolcio, CPA, Vice President 33 Taras M. Kolcio serves as the
and Controller Company's Vice President and
Controller. Mr. Kolcio joined
the Company as its Controller in
June 1993, and in November 1996
was named Chief Financial
Officer, a position he held
until May 1998. Prior to that he
was employed at Deloitte &
Touche for six years. Mr. Kolcio
received his Bachelor of Science
degree in Business
Administration from the State
University of New York at
Buffalo, and is licensed as a
certified public accountant in
the State of New York. Mr.
Kolcio is a member of the New
York State Society of Certified
Public Accountants.
ITEM 11. EXECUTIVE COMPENSATION
This information is incorporated by reference to the "Executive Compensation"
section of the Company's Proxy Statement to be furnished to shareholders in
connection with the 1999 Annual Meeting.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information is incorporated by reference to the "Principal Shareholders"
section of the Company's Proxy Statement to be furnished to shareholders in
connection with the 1999 Annual Meeting.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSACTIONS WITH WILSON ENTERPRISES, L.P. AND E. ANTHONY WILSON
On August 28, 1996, the Company completed the acquisition of the remaining
partnership interests in five hotel partnerships in which the Company was the
owner of varying minority general and limited partnership equity interests for
1,170,103 shares of the Company's common stock. Wilson Enterprises, L.P., a
limited partnership which E. Anthony Wilson, the Company's Chairman and Chief
Executive Officer and Ralph L. Peek, the Company's Treasurer, are the general
partners, was a limited partner in several of the acquired partnerships and
received 102,007 shares in exchange for its partnership interests.
46
<PAGE>
Wilson Enterprises, L.P. also shares office space with the Company and
reimburses the Company for the direct costs that are associated therewith.
During 1998, Wilson Enterprises, L.P. reimbursed the Company $1,200 for such
costs and during 1997 the Company received $4,829 of reimbursement for such
costs.
As of December 31, 1998, E. Anthony Wilson was indebted to the Company in the
amount of $114,935. This amount represents the cumulative unpaid advances made
by the Company to Mr. Wilson. These advances have been made over the years and
have been periodically repaid.
TRANSACTIONS WITH M,L,R&R PARTNERSHIP
M,L,R&R is a New York partnership owned by members of the Sands family. M,L,R&R
and its partners are together the owners of greater than 10% of the Company's
outstanding common stock as reflected on Form 13D filed by them. In addition,
Richard Sands is the husband of Jennifer Sands, the beneficiary of the Q-Tip
Trust of Jennifer L. Ansley, which Q-Tip Trust is a greater than 5% shareholder
of the Company. The Company has entered into a number of transactions with
M,L,R&R or its affiliates, as follows:
HUDSON HOTELS TRUST - In May 1998, Hudson Hotels Trust, a newly-formed Maryland
real estate investment trust, borrowed $2.0 million in seed capital financing
from M,L,R&R to finance its startup operations through its anticipated initial
public offering. The Company intended to enter into a strategic alliance with
this real estate investment trust, which was anticipated to have significant
benefits for the future operations of the Company. In order to induce the
partnership to loan the seed capital money to the trust, the Company issued to
the partnership warrants to purchase 250,000 shares of the Company's common
stock at a strike price of $4.00. This was the approximate trading price of the
stock at issuance of the warrants. In addition, the loan was collateralized by
the pledge of 666,666 shares of common stock of the Company. Subsequent to
December 31, 1999 this loan was converted to 666,666 shares of common stock in
the Company.
ACQUISITION OF HH BRIDGE, L.P. PROPERTIES - In August 1998, the Company
organized a Virginia limited partnership, HH Bridge, L.P., to acquire three
properties. The Company contributed $3.6 million to the capital of the
Partnership for a 1% general partnership interest and a 41.2% limited
partnership interest M,L,R&R contributed $5.0 million for a 57.8% limited
partnership interest. The partnership agreement provided that: M,L,R&R receive a
$250,000 guaranteed payment each quarter; Hudson receive all income of the
partnership in excess of that guaranteed return; M,L,R&R had the right to
require the Company to purchase its partnership interest on August 14, 1999 for
$6.0 million; M,L,R&R had the right to acquire Hudson's interest in the
partnership for $1.00 if: (1) the guaranteed return is not paid, or (b) the
Company is unable to purchase M,L,R&R's interest on August 14, 1999 as required.
On August 14, 1998, the partnership purchased three hotel properties for an
aggregate purchase price of approximately $26.6 million.
SALE OF STOCK - On August 17, 1998 the Company sold 333,334 shares of its common
stock to M,L,R&R for an aggregate consideration of $1,000,000, or $3.00 per
share. The per-share price was approximately the market price of the Company's
shares at the date of sale.
TRANSFER AND SALE OF CERTAIN ASSETS - In December 1998 and January 1999 Hudson
transferred properties and a lease to companies which are affiliates of M,L,R&R.
The Company undertook these transfers to obtain working capital, which it
required to pay operating expenses and debt service during its traditionally
slow first quarter. The transfers were: (i) the lease of the Inn on the Lake,
owned by L,R,R&M L.L.C. by Canandaigua Hotel Corp., a subsidiary of Hudson, and
entered into a management contract for that property; and (ii) H.H. Properties
Southwest, Inc., a subsidiary of Hudson, sold five (5) parcels of vacant land in
Texas and Arizona to Transport Associates.
The Company also was unable to make the guaranteed payment due January 1, 1999
to M,L,R&R and M,L,R&R exercised its right to acquire the Company's limited
partnership interest in HH Bridge, L.P. The Company received or retained
approximately $2.3 million in cash from these transactions.
TRANSACTIONS WITH BOYLAN, BROWN, CODE, FOWLER, VIGDOR & WILSON, LLP
Mr. Lockwood, the Secretary of the Company, is also a partner in Boylan, Brown,
Code, Fowler, Vigdor & Wilson, LLP, which law firm is general counsel to the
Company. In 1998, the Company paid approximately $202,805 to the law firm in
legal fees. In addition, Mr. Lockwood was a limited partner in two of the
limited partnerships acquired on August 28, 1996 and received 8,233 shares in
exchange for his partnership interests.
47
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) The following exhibits are filed as part of this Form 10-K
(1) Financial Statements
The response to this portion of Item 14 is submitted under
Item 8 of this Report on Form 10-K.
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable and therefore have been omitted.
(3) Exhibits
Any shareholder who desires a copy of the following Exhibits
may obtain a copy upon request from the Company at a charge
that reflects the reproduction cost of such Exhibits. Requests
should be made to the Secretary, Hudson Hotels Corporation,
300 Bausch & Lomb Place, Rochester, NY 14604.
EXHIBIT NUMBER
3.1 Restated Certificate of Incorporation of Registrant (a)
3.2 By-Laws of Registrant (a)
3.3 Amendment to Certificate of Incorporation to authorize the
issuance of 10,000,000 shares of Preferred Stock, with a par
value of $.001 (f)
3.4 Amendment to Certificate of Incorporation stating the number,
designation, relative rights, preferences and limitations of
Series A Preferred Shares, with a par value of $.001, to be
issued (f)
3.5 Amendment to Certificate of Incorporation changing the
Company's name to Hudson Hotels Corporation (i)
4.1 Form of Stock Purchase and Loan Agreement, dated September 19,
1988, between the Registrant, the Stockholders named therein
and the Investors identified in the amended Schedule of
Investors attached thereto (a)
4.2 Form of Promissory Note issued on September 19, 1988 to each
Investor identified on the amended Schedule of Investors
included with Exhibit 4.1 (a)
4.3 Form of Registration Agreement, dated September 19, 1988,
between the registrant and each Investor identified on the
amended Schedule of Investors included with Exhibit 4.1 (a)
4.4 Registrant's form of Non-Statutory Stock Option Agreement,
attached to which is an Option Schedule setting forth the
material terms of options granted by the Registrant pursuant
thereto (a)
4.5 Line of Credit Note and Subordination Agreement between the
Registrant and Hudson Hotels Corp. dated December 28, 1988 (a)
4.6 Convertible subordinated debenture due February 1, 2004, with
the Bond Fund for Growth (f)
4.7 Stock Exchange Agreement: 30,500 shares of Common Stock for
16,495 shares of Series A Preferred Stock (f)
4.8 Convertible subordinated debenture due February 1, 2005, with
the Bond Fund for Growth (g)
48
<PAGE>
4.9 Convertible Subordinated Debenture due July 1, 2001 with
Oppenheimer Bond Fund for Growth (k)
9 Voting Trust Agreement (not applicable)
10.1 Franchise Agreement, dated January 10, 1989, between the
Registrant and Lehigh Hotel Corp. (a)
10.2 Employment Agreement, dated December 1, 1988, between the
Registrant and Loren G. Ansley (a)
10.3 Agreement, dated June 1, 1988, between Hudson Hotels Corp. and
the Registrant (a)
10.4 Agreement, dated April 11, 1988, between the Registrant and
Petrus II (a)
10.5 Master Franchise Agreement, dated February 13, 1991, between
the Registrant and Essex Microtel International Lodging,
Inc.(b)
10.6 Exclusive Development Agreement, dated September 30, 1991,
between the Registrant and S&E Hospitality Partnership (c)
10.7 Form of Management Agreement (d)
10.8 Partnership Agreement of Crestmount Associates (d)
10.9 Partnership Agreement of Brookwood Hotel Properties (d)
10.10 Partnership Agreement of Montgomery Group (d)
10.11 Partnership Agreement of Microtel Leray L.P. (d)
10.12 Partnership Agreement of Lehigh Hotel Properties (d)
10.13 Partnership Agreement of Delray Beach Hotel Properties Ltd.
(d)
10.14 Warrant for the Purchase of 125,000 Shares of Common Stock
issued to Ladenburg, Thalmann & Co. Inc. (e)
10.15 Warrant for the Purchase of 25,000 Shares of Common Stock
issued to William R. Lerner (e)
10.16 First Amendment to Master Franchise Agreement between the
Company and Essex Microtel International Lodging, Inc. dated
March 29, 1993 (e)
10.17 Agreement between Microtel and Jennifer L. Ansley, as
Executrix of the Estate of Loren G. Ansley (f)
10.18 Termination of Exclusive Development Agreement (f)
10.19 Second Amendment to Master Franchise Agreement between the
Company and Essex Microtel International Lodging, Inc., dated
April 29, 1994 (f)
10.20 1993 Non-Statutory Employee Stock Option Plan (f)
10.21 Lease agreement between L,R,R&M, L.L.C., and Canandaigua Hotel
Corp. (g)
10.22 Purchase of remaining partnership interest in Crestmount
Associates (g)
10.23 Sale of land to Microtel Partners 1995-I, L.P. (g)
10.24 Joint Venture Agreement Between Microtel Franchise and
Development Corporation and US Franchise Systems, Inc. (h)
49
<PAGE>
10.25 Termination of Master Franchise Agreement
10.26 Three Party Agreement Between Microtel Franchise and
Development Corporation, Stonehurst Capital, Inc. and Essex
Investment Group, Inc.
10.27 Form of Offer Letter, Transfer Agreement and List of Investors
(j)
10.28 Agreement of Purchase and Sale, as amended for the acquisition
of the SB Motel Corp. portfolio (l)
10.29 Hotel Asset Purchase Agreement between the Company and Equity
Inns Partnership, L.P. (m)
10.30 Promissory Note between the Company and Equity Inns
Partnership, L.P. (m)
10.31 Guaranty between the Company and Equity Inns Partnership, L.P.
(m)
10.32 Pledge Agreement between the Company and Equity Inns
Partnership, L.P. (m)
10.33 Amended and Restated Mezzanine Loan Agreement (m)
10.34 Employment Agreement (Wilson)
10.35 Employment Agreement (George)
10.36 Employment Agreement (Sabin)
11 Statement re: Computation of Per Share Earnings
18 Letter on Accounting Change for Revenue Recognition of
Franchise Fees (e)
21 Subsidiaries of the Registrant
24 Power of Attorney (a)
27 Financial Data Schedule
28.1 Form of Consulting Agreement entered into between the
Registrant and the Underwriter (a)
28.2 Form of Employee Stock Plan adopted by the Registrant (a)
- --------------------
(a) Previously filed as part of, and hereby incorporated by
reference to, the Exhibits in the Company's Registration
Statement on Form S-18 (File Number 33-26780-NY), as amended
by Amendment No. 1 (The "Registration Statement")
(b) Filed as an Exhibit to the Company's Form 10-K Annual Report
for the year ended March 31, 1991, and incorporated hereby by
reference
(c) Filed as an Exhibit to the Company's Form 10-K Annual Report
for the year ended March 31, 1992, and incorporated hereby by
reference
(d) Filed as an Exhibit to the Company's Form 8-K Current Report
dated June 26, 1992, and incorporated hereby by reference
(e) Filed as an Exhibit to the Company's Form 10-KSB Annual Report
for the year ended March 31, 1993
(f) Filed as an Exhibit to the Company's Form 10-KSB Annual Report
for the year ended March 31, 1994
50
<PAGE>
(g) Filed as an Exhibit to the Company's Form 10-KSB Annual Report
for the year ended March 31, 1995
(h) Filed as an Exhibit to the Company's Form 10-QSB Quarterly
Report for the Quarter Ended September 30, 1995
(i) Filed as an Exhibit to the Company's Form 10-QSB Quarterly
Report for the quarter ended June 30, 1996
(j) Filed as an Exhibit to the Company's Form 8-K Current Report
dated August 28, 1996
(k) Filed as an Exhibit to the Company's Form 10-QSB Quarterly
Report for the quarter ended September 30, 1996
(l) Filed as an Exhibit to the Company's Form 8-K Current Report
dated November 27, 1996
(m) Filed as an Exhibit to the Company's 8-K Current Report dated
October 31, 1997
(B) Form 8-K - The following report was filed on Form 8-K:
DATE OF REPORT ITEM
-------------- ----
April 22, 1997 Change in Accountants
October 31, 1997 Acquisition of Assets
51
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Dated: April 14, 1999 By: /s/ E. Anthony Wilson
_____________________________________
E. Anthony Wilson
Chief Executive Officer,
President and Director
Dated: April 14, 1999 By: /s/ John M. Sabin
_____________________________________
John M. Sabin
Chief Financial Officer
and Executive Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ E. Anthony Wilson Chairman of the Board,
________________________________ Chief Executive Officer, April 14, 1999
E. Anthony Wilson President and Director
PRINCIPAL FINANCIAL OFFICER:
/s/ John M. Sabin
________________________________ Chief Financial Officer and April 14, 1999
John M. Sabin Executive Vice President
PRINCIPAL ACCOUNTING OFFICER:
/s/ Taras M. Kolcio
________________________________ Chief Accounting Officer and April 14, 1999
Taras M. Kolcio Vice President
/s/ Ralph L. Peek
________________________________ Vice President, Treasurer April 14, 1999
Ralph L. Peek and Director
/s/ Michael T. George
________________________________ President, Chief Operating Officer April 14, 1999
Michael T. George and Director
/s/ Michael Cahill
________________________________
Michael Cahill Director April 14, 1999
/s/ Robert Fagenson
________________________________
Robert Fagenson Director April 14, 1999
</TABLE>
52
<PAGE>
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
12/31/98 12/31/97 12/31/96
-------- -------- --------
<S> <C> <C> <C>
BASIC
-------------
Net earnings applicable to common stock:
Net earnings/(loss) $(15,165,194) $ (1,891,754) $ 636,050
Deduct preferred stock dividends paid (127,320) (127,320) (127,320)
------------ ------------ -----------
Net earnings/(loss) applicable to common stock $(15,292,514) $ (2,019,074) $ 508,730
============ ============ ===========
Weighted average number of common shares outstanding 5,353,078 4,996,694 3,771,702
============ ============ ===========
EARNINGS/(LOSS) PER SHARE - BASIC $ (2.86) $ (0.40) $ 0.13
============ ============ ===========
DILUTED
-------------
Net earnings applicable to common stock on a diluted basis:
Net earnings applicable to common stock per above $ -- $ -- $ 508,730
Add net interest expense related to convertible
debentures -- -- --
Add dividends on convertible preferred stock -- -- --
------------ -----------
Net earnings applicable to common stock on a diluted basis N/A N/A $ 508,730
============ ============ ===========
Total shares diluted:
Shares used in calculating primary earnings per share -- -- 3,771,702
Additional shares assuming conversion of
options and warrants -- -- 478,143
Additional shares to be issued under full
conversion of convertible debentures -- -- --
Additional shares to be issued under full
conversion of preferred stock -- -- --
------------ ------------ -----------
Total shares for diluted N/A N/A 4,249,845
============ ============ ===========
EARNINGS PER SHARE - DILUTED N/A N/A $ 0.12
============ ============ ===========
</TABLE>
The exercise of outstanding stock options, convertible subordinated debenture
and convertible preferred stock were not included in some of the calculations of
diluted earnings per share, as their effect would be antidilutive.
<PAGE>
Exhibit 22
HUDSON HOTELS CORPORATION
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
STATE OF INCORPORATION OR
NAME ORGANIZATION DOING BUSINESS AS
- ---- ------------------------- -----------------
<S> <C> <C>
Watertown Hotel Corp. New York Watertown Hotel Corp.
Delray Beach Hotel Corp. New York Delray Beach Hotel Corp.
Brookwood Funding Corp. New York Brookwood Funding Corp.
Ridge Road Hotel Corp. New York Ridge Road Hotel Corp.
950 Jefferson Hotel Corp. New York 950 Jefferson Hotel Corp.
Victor Hotel Corp. New York Victor Hotel Corp.
Canandaigua Hotel Corp. New York Canandaigua Hotel Corp.
Hudson Tonawanda Corp. New York Hudson Tonawanda Corp.
HHC Management Corp. New York HHC Management Corp.
Hudson Hotels Properties Corp. New York Hudson Hotels Properties Corp.
HH Properties-Southwest, Inc. New York HH Properties-Southwest, Inc.
HH Properties-Tonawanda, Inc. New York HH Properties-Tonawanda, Inc.
HH Properties-I, Inc. New York HH Properties-I, Inc.
HH Properties-II, Inc. New York HH Properties-II, Inc.
HH Bridge G.P., Inc. Virginia HH Bridge Corp.
HHC Bridge, Inc. New York HHC Bridge, Inc.
HHC Perm-I, Inc. New York HHC Perm-I, Inc.
HHC Sub-I, Inc. New York HHC Sub-I, Inc.
</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 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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,751,580
<SECURITIES> 0
<RECEIVABLES> 931,212
<ALLOWANCES> 0
<INVENTORY> 620,831
<CURRENT-ASSETS> 7,053,139
<PP&E> 133,753,502
<DEPRECIATION> 9,319,133
<TOTAL-ASSETS> 142,676,218
<CURRENT-LIABILITIES> 13,557,293
<BONDS> 134,057,241
0
295
<COMMON> 5,743
<OTHER-SE> (160,216)
<TOTAL-LIABILITY-AND-EQUITY> 142,676,218
<SALES> 57,639,638
<TOTAL-REVENUES> 57,639,638
<CGS> 52,424,860
<TOTAL-COSTS> 52,424,860
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,180,437
<INCOME-PRETAX> (13,876,966)
<INCOME-TAX> 1,421,057
<INCOME-CONTINUING> (15,165,194)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,165,194)
<EPS-PRIMARY> (2.86)
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</TABLE>
<PAGE>
EXHIBIT 99
Forward-Looking Statements
The following factors, among others, could cause actual results to differ
materially from those contained in forward-looking statements made in this
report and presented elsewhere by management from time to time.
DEPENDENCE ON OTHERS: The Company's present growth strategy for development and
management of additional lodging facilities entails entering into various
arrangements with present and future property owners. There can be no assurance
that any of the Company's current agreements with property owners will be
continued, or that the Company will be able to enter into future collaborations.
CONTRACT TERMS FOR NEW UNITS: The terms of the operating contacts, distribution
agreements, franchise agreements and leases which relate to the Company's
lodging facilities are influenced by contract terms offered by the Company's
competitors at the time such agreements are entered into. Accordingly, there can
be no assurance that contracts entered into or renewed in the future will be on
terms that are as favorable to the Company as those under existing agreements.
COMPETITION: The profitability of hotels operated by the Company is subject to
general economic conditions, competition, the desirability of particular
locations, the relationship between supply of and demand for hotel rooms, and
other factors. The Company generally operates hotels in markets that contain
numerous competitors, and the continued success of the Company's hotels in their
respective markets will be dependent, in large part, upon those facilities'
ability to compete in such areas as access, location, quality of accommodations,
amenities, and cost.
SUPPLY AND DEMAND: During the 1980s, construction of lodging facilities in the
United States results in an excess supply of available rooms, and the oversupply
had an adverse effect on occupancy levels and room rates in the industry. The
current outlook for the industry indicates that the lodging industry may be
adversely affected in the future by (i) international, national and regional
economic conditions, (ii) changes in travel patterns, (iii) taxes and government
regulations which influence or determine wages, prices, interest rates,
construction procedures and costs, and (iv) the availability of capital.
