SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1999
Commission File Number 0-17838
Hudson Hotels Corporation
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 16-1312167
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State or other jurisdiction of I.R.S. Employer
in corporation or organization Identification
No.
300 Bausch & Lomb Place, Rochester, New York 14604
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(Address or principal executive offices) (Zip Code)
(716) 454-3400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 12, 1999 the Registrant had issued and outstanding 6,399,161
shares of its $.001 par value common stock.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND 1998 AND THE SIX MONTHS ENDED JUNE
30, 1999 AND 1998 (unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Hotel operating revenues $ 12,974,401 $ 14,156,930 $ 24,247,453 $ 25,753,648
Management fees 445,342 297,516 801,086 474,216
Royalties 441,187 293,849 728,186 490,214
Other -- 39,657 -- 77,157
------------ ------------ ------------ ------------
Total operating revenues 13,860,930 14,787,952 25,776,725 26,795,235
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Direct 7,601,177 8,862,751 14,572,937 16,470,893
Corporate 1,101,781 859,236 2,247,667 1,556,038
Depreciation and amortization 1,478,750 1,392,170 2,974,039 2,791,428
------------ ------------ ------------ ------------
Total operating costs and expenses 10,181,708 11,114,157 19,794,643 20,818,359
------------ ------------ ------------ ------------
Income from operations 3,679,222 3,673,795 5,982,082 5,976,876
OTHER INCOME (EXPENSE):
Interest income 66,751 54,435 122,083 108,180
Interest expense (3,190,983) (3,275,258) (6,353,514) (6,493,687)
Gain on sale of property and equipment -- 74,523 -- 74,523
------------ ------------ ------------ ------------
Total other expense (3,125,232) (3,146,300) (6,231,431) (6,310,984)
------------ ------------ ------------ ------------
Income (Loss) from operations, before
income taxes, minority interest and
equity on income taxes, minority
interest and equity in income of
affiliates 553,990 527,495 (249,349) (334,108)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 832 219,640 3,303 (128,872)
------------ ------------ ------------ ------------
Income (Loss) from operations, before
minority interest and equity in
income of affiliates 553,158 307,855 (252,652) (205,236)
MINORITY INTEREST (22,980) (26,225) (44,524) (52,976)
EQUITY IN INCOME OF AFFILIATES 46,999 70,265 40,460 64,904
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 577,177 $ 351,895 $ (256,716) $ (193,308)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC &
DILUTED $ 0.09 $ 0.06 (0.05) $ (0.05)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1999 and December 31, 1998
(unaudited)
- --------------------------------------------------------------------------------
ASSETS
1999 1998
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 1,345,360 $ 1,751,580
Cash - restricted 5,063,821 3,013,617
Accounts receivable - trade 1,305,998 931,212
Prepaid expenses and other 1,410,639 1,356,730
------------- -------------
TOTAL CURRENT ASSETS 9,125,818 7,053,139
INVESTMENTS IN PARTNERSHIP INTERESTS 1,771,507 1,781,218
LAND AND REAL ESTATE DEVELOPMENT 780,822 2,430,880
PROPERTY AND EQUIPMENT, NET 122,941,236 124,434,369
OTHER ASSETS 6,820,881 6,976,612
------------- -------------
TOTAL ASSETS $ 141,440,264 $ 142,676,218
============= =============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Lines of credit $ 400,000 $ 400,000
Current portion of long-term debt 2,515,650 6,017,698
Accounts payable - trade 679,307 1,112,851
Other accrued expenses 6,296,503 6,026,744
------------- -------------
TOTAL CURRENT LIABILITIES 9,891,460 13,557,293
LONG-TERM DEBT 128,789,543 128,039,543
DEFERRED REVENUE - LAND SALE 185,055 185,055
LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP 1,060,836 1,060,581
SHAREHOLDERS' INVESTMENT:
Preferred stock 295 295
Common stock 6,410 5,743
Additional paid-in capital 21,872,593 19,873,260
Accumulated deficit (20,324,677) (20,004,301)
------------- -------------
1,554,621 (125,003)
Less: 10,000 shares of common
stock in treasury, at cost at
June 30, 1999 (41,251) (41,251)
------------- -------------
TOTAL SHAREHOLDERS' INVESTMENT 1,513,370 (166,254)
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' INVESTMENT $ 141,440,264 $ 142,676,218
============= =============
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999
(unaudited)
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<TABLE>
<CAPTION>
SERIES A ADDITIONAL ADDITIONAL
PREFERRED PAID-IN CAPITAL COMMON PAID-IN CAPITAL ACCUMULATED TREASURY
STOCK PREFERRED STOCK COMMON DEFICIT STOCK TOTAL
----- --------- ----- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1998 $295 $1,560,705 $5,743 $18,312,555 $(20,004,301) $(41,251) ($166,254)
Net Loss -- -- -- -- (256,716) -- (256,716)
Issuance of Stock -- -- 667 1,999,333 -- -- 2,000,000
Cash dividends paid on preferred
stock -- -- -- -- (63,660) -- (63,660)
---- ---------- ------ ----------- ------------ -------- -----------
BALANCE, JUNE 30, 1999 $295 $1,560,705 $6,410 $20,311,888 $(20,324,677) $(41,251) $1,513,370
==== ========== ====== =========== ============ ======== ===========
</TABLE>
Stock balances at December 31, 1998:
Common stock: 5,732,495 shares; Preferred stock: 294,723 shares
Stock balances at June 30, 1999:
Common stock: 6,399,161 shares; Preferred stock: 294,723 shares
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1999 and 1998
(unaudited)
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
---- ----
Net Loss $ (256,716) $ (193,308)
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred tax provision -- (128,997)
Depreciation and amortization 2,974,039 2,791,428
Gain on sale of property and equipment -- (74,523)
Minority interest in operations 44,524 52,976
Non-cash consulting -- 12,885
Equity in operations (46,999) (64,904)
Capital distributions from unconsolidated
partnership interests 53,072 96,026
(Increase) decrease in assets -
Accounts receivable - trade (374,786) (19,777)
Prepaid expenses and other (53,909) (395,311)
Increase (decrease) in liabilities -
Accounts payable (433,544) (154,396)
Other accrued expenses 269,759 641,687
----------- -----------
Net cash provided by operating activities 2,175,440 2,563,786
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land/real estate development -- (29,216)
Increase in restricted cash (2,050,204) (765,622)
Cash collected on sale of property and equipment 1,650,058 2,051,831
Change in affiliates accounts and notes receivable -- (1,553,011)
Purchase of equipment (1,175,123) (842,773)
Deposits and other assets (145,966) (195,326)
Change in non-affiliate accounts receivable -- 489,517
----------- -----------
Net cash used in investing activities (1,721,235) (844,600)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgages (752,048) (482,364)
Distributions to limited partners (44,717) (53,500)
Proceeds from stock options exercised -- 15,000
Dividends paid (63,660) (63,660)
Repayments on line of credit, net -- (412,537)
----------- -----------
Net cash used in financing activities (860,425) (997,061)
----------- -----------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS (406,220) 722,125
CASH AND CASH EQUIVALENTS - beginning of period 1,751,580 670,736
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 1,345,360 $ 1,392,861
=========== ===========
OTHER INFORMATION:
Cash paid during the period for:
Interest $ 6,244,692 $ 6,365,325
Income taxes $ 41,392 $ 14,372
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1999
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements
reflect, in the opinion of management, all adjustments, which are of a normal
and recurring nature, necessary for a fair presentation of the financial
condition and results of operations and cash flows for the periods presented.
The preparation of financial statements in accordance with generally accepted
accounting principals ("GAAP") requires management to make estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities, as well as the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
The accounting policies followed by the Company are set forth in Note 2 to the
Company's financial statements in the December 31, 1998 10-K.
Other footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and notes
included in the Company's December 31, 1998 10-K.
2. The Company
Hudson Hotels Corporation (the "Company") was organized as Microtel Franchise
and Development Corporation to develop and franchise a national chain of economy
limited service lodging facilities ("Microtels"), using the service mark
"MICROTEL". 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 thirteen (13) 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 thus receive all royalties on a total of fifty (50) Microtels
(twenty-eight (28) existing hotels and twenty-two (22) new hotels to be
undertaken
<PAGE>
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 included several acquisitions and the development of
six (6) Microtel Inns through a joint venture partnership.
3. 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" in
the December 31, 1998 10-K 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 required Hudson to use the proceeds of asset sales to pay down
the mezzanine debt; however, Hudson 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 caused the Company
to default in its obligations to Equity Inns as of May 1, 1999; however, under
the subordination agreement with Equity Inns, that firm is currently prevented
from taking legal action to enforce the payment of its debt. In May 1999 Equity
Inns notified the Company that it has declared this debt in default and has
accelerated the debt and is seeking default interest. Also, after default,
Equity Inns can obtain 2,000,000 shares of Hudson Hotels common stock, which is
collateral for this debt.
Additionally, upon default (which has already occurred), the holder of a $2.0
million debt in Hudson Hotels Trust can convert his debt into a total of 666,666
shares of Hudson common stock. Another Hudson Hotels Trust debt holder has
already converted $2.0 million of Hudson Hotels Trust 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
the mezzanine 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 base, and
ultimately, a return of profitability.
The Company is currently in discussions with its lenders about its debt
obligations and activities to restructure its debt. There is negative working
capital of $765,642 at June 30, 1999 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 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 Company's 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.
<PAGE>
4. Summarized Financial Information - Investments in Partnership Interests
The following is a summary of condensed statement of operation for the
unconsolidated partnerships that the Company does not control for the six month
period ended June 30, 1999 and 1998 and balance sheets for June 30, 1999 and
December 31, 1998.
1999 1998
---- ----
Property and equipment, net of
Accumulated depreciation $ 56,908,026 $ 57,248,847
Current assets 4,672,082 3,495,286
Other assets 986,739 1,088,155
------------ ------------
TOTAL ASSETS 62,566,847 61,832,288
------------ ------------
Mortgage and notes payable - current 246,585 550,524
Other current liabilities 2,745,311 2,429,449
Mortgage and notes payable - noncurrent 43,593,787 43,614,917
------------ ------------
TOTAL LIABILITIES 46,585,683 46,594,890
------------ ------------
NET ASSETS $ 15,981,164 $ 15,237,398
============ ============
COMPANY'S SHARE $ 1,771,507 $ 1,781,218
============ ============
Net revenues $ 11,616,002 $ 6,657,619
Operating expenses 7,650,130 4,042,236
------------ ------------
Income from operations 3,965,872 2,615,383
Other expenses, net (2,634,798) (2,167,118)
------------ ------------
NET INCOME $ 1,331,074 $ 448,265
============ ============
COMPANY'S SHARE $ 40,460 $ 64,904
============ ============
5. 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. The amount borrowed is
collateralized by undeveloped land in Tonawanda, New York.
6. Long Term Debt
Future minimum repayments under long-term debt are as follows:
Remainder of 1999 $ 2,515,650
2000 9,897,670
2001 13,713,286
2002 6,325,594
2003 and thereafter 98,852,993
7. Commitments and Contingencies
The Company has various operating lease arrangements for automobiles and office
space. Total rent expense under operating leases amounted to $241,634 and
$89,506 for the periods ending June 30, 1999 and 1998, respectively. Future
minimum lease payments under operating leases are approximately: 1999 remainder
- - $246,875; 2000 - $470,160; 2001 - $446,043; 2002 - $420,000; and thereafter -
$420,000.
The Company is required to remit monthly royalty fees from 2% to 4% of gross
room revenue, plus
<PAGE>
additional monies for marketing assessments and reservation fees to its
franchisors based on franchise agreements which extend from ten to sixteen
years. Some of these agreements specify restrictions on transferability of the
franchise and liquidated damages upon termination of franchise agreement due to
the franchisee's default. Total fees were approximately $1,300,000 and
$1,321,000 for the six months ended June 30, 1999 and 1998, respectively.
In 1996, the Company acquired a hotel and assumed a ground lease for the land on
which the hotel stands in Statesville, NC. The initial term of this lease
commenced in February 1984 and expires April 30, 2005. The Company renewed the
lease at its option, for three additional ten year periods ending April 30,
2035. The annual rental during the final ten years of the initial term and each
extension is the greater of $22,000 plus one-half percent of gross room rentals
from the Statesville hotel during the 1991 lease year of the lease term or four
percent of gross room rentals from the Statesville hotel during each lease year.
The Company has a right of first refusal to buy the land subject to the ground
lease from the lessor during the lease term subject to the first refusal rights
of Roses Department Stores, Inc., or its successors. Rent expense on the ground
lease was $11,000 for the six month period ended June 30, 1999 and 1998.
The future minimum ground lease rental payments, assuming no gross room rentals
during the initial lease term and no increases in the consumer price index, are
as follows for the years ended December 31:
Remainder 1999 $ 11,000
2000 22,000
2001 22,000
2002 22,000
2003 22,000
Thereafter 704,000
----------
$ 803,000
==========
8. Income Taxes
Income taxes are provided in accordance with Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes", which requires an asset and
liability approach to financial accounting and reporting for income taxes. The
Statement requires that deferred income taxes be provided to reflect the impact
of "temporary differences" between the amount of assets and liabilities for
financial reporting purposes and such amounts as measured by current tax laws
and regulations. A valuation allowance is established to reduce deferred tax
assets to the amount expected to be realized.
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.
At June 30, 1999, the Company has net operating loss carryforwards for income
tax purposes of approximately $9,100,000 that may be used to offset future
taxable income. These loss carryforwards will begin to expire in 2003.
9. Shareholders Investment
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 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. In March 1999 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. Hudson Trust did not repay the remaining
<PAGE>
loan when it came due April 30, 1999.
10. Supplemental Information for Non-Cash Financing Activities
In March 1999, a $2.0 million note from Hudson Trust was converted to 666,666
shares of Hudson Hotels Corp. Common Stock. See Note 9 for further details.
11. Business Segments
As described in Note 2, 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 six months ended June 30, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 Hotel Operations Management & Other Elimination (A) Consolidated
---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 24,247 $ 2,731 $ (1,201) $ 25,777
EBITDA $ 8,433 $ 523 -- $ 8,956
Depreciation and amortization $ 2,809 $ 165 -- $ 2,974
Interest expense $ 5,755 $ 599 -- $ 6,354
Capital expenditures $ 1,087 $ 88 -- $ 1,175
Total assets $ 126,804 $ 60,602 $ (45,966) $ 141,440
<CAPTION>
1998 Hotel Operations Management & Other Elimination (A) Consolidated
---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 25,754 $ 2,250 $ (1,209) $ 26,795
EBITDA $ 8,074 $ 693 -- $ 8,767
Depreciation and amortization $ 2,688 $ 103 -- $ 2,791
Interest expense $ 5,740 $ 754 -- $ 6,494
Capital expenditures $ 775 $ 68 -- $ 843
Total assets $ 127,205 $ 66,495 $ (51,024) $ 142,676
</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 loss from operations before taxes, minority interest, and equity in
income of affiliates:
1999 1998
---- ----
EBITDA
Hotel operations $ 8,433 $ 8,074
Management and other 523 693
Interest (6,354) (6,494)
Depreciation and amortization (2,974) (2,791)
Other 123 184
------- -------
Loss before income taxes, minority interest,
and equity in income of affiliates $ (249) $ (334)
======= =======
<PAGE>
The following table presents revenues and other financial information by
business segment for the three months ended June 30, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
1999 Hotel Operations Management & Other Elimination (A) Consolidated
---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 12,974 $ 1,527 $ (640) $ 13,861
EBITDA $ 4,693 $ 465 -- $ 5,158
Depreciation and amortization $ 1,405 $ 74 -- $ 1,479
Interest expense $ 2,893 $ 298 -- $ 3,191
Capital expenditures $ 638 $ 36 -- $ 674
Total assets $ 126,804 $ 60,602 $ (45,966) $ 141,440
<CAPTION>
1999 Hotel Operations Management & Other Elimination (A) Consolidated
---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 14,155 $ 1,262 $ (629) $ 14,788
EBITDA $ 4,663 $ 402 -- $ 5,065
Depreciation and amortization $ 1,341 $ 51 -- $ 1,392
Interest expense $ 2,830 $ 445 -- $ 3,275
Capital expenditures $ 517 $ 50 -- $ 567
Total assets $ 127,205 $ 66,495 $ (51,024) $ 142,676
</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 from operations before taxes, minority interest, and equity
in income of affiliates:
1999 1998
---- ----
EBITDA
Hotel operations $ 4,693 $ 4,663
Management and other 465 402
Interest (3,191) (3,275)
Depreciation and amortization (1,479) (1,392)
Other 66 129
------- -------
Income before income taxes, minority interest,
and equity in income of affiliates $ 554 $ 527
======= =======
12. Subsequent Event
On July 23, 1999 the Company replaced its outstanding $7.5 million Convertible
Subordinated Debenture to Oppenheimer Convertible Securities Fund with a new
Convertible Subordinated Debenture bearing the following terms: principal
balance of $3.0 million; interest rate of 18.75%; maturity date of April 15,
2000; and a conversion price of $1.80 per share.
As a result, the Company will report an extraordinary gain from debt
restructuring of approximately $4 million in its Third Quarter September 30,
1999 10-Q.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis should be read in conjunction
with the entire Form 10-Q and Form 10-K 1998 Annual Report. Particular attention
should be directed to the Consolidated Financial Statements found at Item 8 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations found at Item 7.
As a result of the sale of (i) the Cricket Inn Virginia Beach in May 1998, and
(ii) the Company's leasehold interest in the Canandaigua Inn on the Lake in
December 1998, a significant portion of the current results are not directly
comparable to prior year results, specifically hotel operations and direct
costs.
RESULTS OF OPERATIONS
Three months ended June 30, 1999, compared to the three months ended June 30,
1998:
Total operating revenues decreased $927,022, or 6% to $13,860,930 for the three
months ended June 30, 1999, from $14,787,952 for the three months ended June 30,
1998, reflecting changes in revenue categories, as discussed below.
HOTEL OPERATING REVENUES were $12,974,401 for the three months ended June 30,
1999, a decrease of $1,182,529, or 8%, from $14,156,930 for the three months
ended June 30, 1998. Hotel operations consisted of the following:
Three Months Ended
June 30, 1999 June 30, 1998
------------- -------------
Hotel room revenue $11,436,040 $11,999,665
Beach club revenue 377,827 384,365
Food and beverage revenue 687,709 1,269,224
Other 472,825 503,676
----------- -----------
Total $12,974,401 $14,156,930
=========== ===========
Hotel room revenues were $11,436,040 for the three month period ended June 30,
1999 a decrease of $563,625, or 5%, from $11,999,665 for the three month period
ended June 30, 1998. The net decrease is the result of the sale of the Cricket
Inn Virginia Beach in May 1998 which had $47,630 in room revenue in the second
quarter of 1998 and the sale of the Company's leasehold interest in the
Canandaigua Inn on the Lake in December 1998 which had $659,403 in room revenue
in the second quarter of 1998 offset in part by overall increases in room
revenue at the Company's other hotels. The Company currently manages the
Canandaigua Inn on the Lake pursuant to a Management Agreement. The results of
these two hotels were included in hotel room revenues in 1998 but are not
included in 1999. These decreases were offset by small increases in operating
results for the three months ended June 30, 1999 compared to the three months
ended June 30, 1998. Occupancy, average daily room rates and RevPar for the
Company owned hotels were 71.3%, $61.03 and $43.51, respectively, for the three
months ended June 30, 1999 and 73.4%, $58.45 and $42.91, respectively, for the
three months ended June 30, 1998.
The Beach Club revenue, which totaled $377,827 for the three month period ended
June 30, 1999 and relates to the operation of the beach club at the Seagate
Hotel and Beach Club, decreased $6,538, or 2%, from $384,365 for the three
months ended June 30, 1998. The slight decrease is specifically attributable to
fewer new members.
Food and beverage revenue was $687,709 for the three months ended June 30, 1999
compared to $1,269,224 for the three months ended June 30, 1998, a decrease of
$581,515 or 46%. The net decrease is primarily a result of the sale of the
Company's leasehold interest in the Canandaigua Inn on the Lake in December
1998, which had food and beverage operations. This was offset by increased food
and beverage volume at the Seagate Hotel and Beach Club and assuming the food
and beverage operations of the Brookwood Inn in Pittsford, NY on May 1, 1998
which was leased in prior years to a third party.
<PAGE>
Other hotel revenue decreased $30,851 or 6% to $472,825 for the three months
ended June 30, 1999 from $503,676 for the three months ended June 30, 1998. The
decrease is primarily the result of the sale of the Cricket Inn Virginia Beach
in May 1998 and the sale of the Company's leasehold interest in the Canandaigua
Inn on the Lake in December 1998 whose results are not included in 1999 but were
included in 1998.
ROYALTIES for the three month period ended June 30, 1999 have increased
$147,338, or 50% to $441,187 from $293,849 for the three month period ended June
30, 1998. The increase is attributable to one hundred fifty-one (151) franchised
Microtel Inns in operation, as opposed to ninety-eight (98) in operation at June
30, 1998. The Company receives all royalties on twenty-eight (28) of the one
hundred fifty-one (151) franchised Microtel Inns and on the remaining one
hundred twenty-three (123) franchises established by US Franchise Systems, Inc.,
the Company receives royalty payments from USFS based on the following schedule:
1% of gross room revenues for hotels 0-100; .75% of gross room revenues for
hotels 101-250; and .5% of gross room revenues for hotels 251 and beyond.
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 (for a total of 50 properties) and ten (10) "suite"
properties and retain all royalties on these fifty (50) Microtel Inns
(twenty-eight (28) existing and twenty-two (22) new properties to be undertaken
by the Company) and ten (10) new suites properties. The Company will also
receive royalty payments in the future from US Franchise Systems, Inc., for
franchises they open based on the schedule discussed in the preceding paragraph.
MANAGEMENT FEES for the three month period ended June 30, 1999 increased
$147,826, or 50% to $445,342, compared to management fees of $297,516 for the
same three-month period ended June 30, 1998. The increase is primarily the
result of increased gross revenues at hotels managed by the Company as
management fees are generally based on a percentage of gross revenue and the
addition of six (6) management contracts when compared to the period ended June
30, 1998. The schedule of owned and managed hotels is summarized below:
June 30, 1999 June 30, 1998
------------- -------------
Owned 25 25
Managed with financial interest 12 10
Other managed 8 5
-- --
45 40
== ==
Management fees of approximately $639,000 were generated by the twenty-five (25)
owned hotels for the three month period ended June 30, 1999, which were
eliminated for consolidation purposes.
OTHER REVENUE for the three month period ended June 30, 1999 decreased $39,657,
or 100% to $-0- from $39,657 for the three month period ended June 30, 1998.
This is primarily a result of consulting fees accrued from USFS of $37,500,
which were non-recurring after September 1998.
The Company plans to continue its revenue growth by maintaining the following
strategies: (i) enhance operating performance of its existing hotels owned or
under management (ii) develop and build additional hotels including Microtel
Inns, if financing is obtainable, (iii) opportunistic acquisition of existing
hotels, and (iv) acquire additional hotel management contracts. However, given
the Company's highly leveraged financial condition, it is at a substantial
disadvantage in acquiring or developing 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 three months ended June 30, 1999
was 41%, compared to 37% for the three months ended June 30, 1998. The increase
in gross operating margin is a result of undertaking operational steps to more
effectively and efficiently manage the properties purchased in 1997 and 1996.
CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses increased
$242,545, or 28%, to $1,101,781 for the three months ended June 30, 1999 from
$859,236 for the three months ended June 30, 1998. The increase is primarily a
result of the following: (1) a $222,000 increase in payroll and related expenses
as a result of the addition of employees, and (2) a $71,000 increase in rent
expense associated with leasing
<PAGE>
new office space offset by reduction in various corporate expenses as a result
of cost containment.
DEPRECIATION AND AMORTIZATION for the three month period ended June 30, 1999
increased $86,580, or 6% to $1,478,750 from $1,392,170 for the three month
period ended June 30, 1998. The increase is a result of capital improvements in
1997 and 1998, which increased depreciation expense. Capital improvements
include converting the Cricket Inn Charlotte, NC to a Red Roof Inn and wall
replacement at the Seagate Hotel and Beach Club.
OTHER INCOME (EXPENSE) for the three months ended June 30, 1999 improved by
$21,068, or 1%, to $3,125,232 from $3,146,300 for the three months ended June
30, 1998. This improvement is a result of amortization of long-term debt
resulting in paying less interest expense on reduced principal balances and
lower interest rates in effect on variable rate debt in the period ended June
30, 1999. Of the $3,190,983 in total interest expense 60% relates to the
mortgages held on the hotels acquired or consolidated by the Company 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, notes payable of Hudson Hotels Trust, Tonawanda bond issue and line
of credit.
INCOME TAXES - The provision for income tax of $832 includes minimum state
taxes. For the three month period ended June 30, 1999, the Company did not
record a deferred tax benefit as realization of the future tax benefits related
to the deferred taxes is dependent on many factors, including the Company's
ability to generate taxable income within the net operating loss carryforward
period. The provision for income tax of $219,640 for the three month period
ended June 30, 1998 represents federal and state tax income tax expense from the
recognition of deferred tax assets and liabilities on income from continuing
operations before income taxes of $571,535.
NET INCOME - As a result of the above factors, the net income increased
$225,282, or 64%, from the three month period ended June 30, 1998 to a net
income of $577,177 for the three month period ended June 30, 1999. The resulting
net income per common share - basic of $0.09 for the three month period ended
June 30, 1999, compared to a net income per common share - basic of $0.06 for
the three month period ended June 30, 1998.
Six months ended June 30, 1999, compared to the six months ended June 30, 1998:
Total operating revenues decreased $1,018,510, or 4% to $25,776,725 for 1999
from $26,795,235 for the three months ended June 30 1998, reflecting changes in
revenue categories, as discussed below.
HOTEL OPERATIONS were $24,247,453 for the six months ended June 30, 1999, a
decrease of $1,506,195, or 6%, from $25,753,648 for the six months ended June
30, 1998. Hotel operations consisted of the following:
Six Months Ended
June 30, 1999 June 30, 1998
------------- -------------
Hotel room revenue $21,209,261 $22,004,869
Beach club revenue 768,905 761,774
Food and beverage revenue 1,395,596 2,018,952
Other 873,691 968,053
----------- -----------
Total $24,247,453 $25,753,648
=========== ===========
Hotel room revenues were $21,209,261 for the six month period ended June 30,
1999 a decrease of $795,608, or 4%, from $22,004,869 for the six month period
ended June 30, 1998. The net decrease is the result of the sale of the Cricket
Inn Virginia Beach in May 1998 which had $150,067 in room revenue in the first
six months of 1998 and the sale of the Company's leasehold interest in the
Canandaigua Inn on the Lake in December 1998 which had $958,584 in room revenue
in the first six months of 1998 offset in part by overall increases in room
revenue at the Company's other hotels. The Company currently manages the
Canandaigua Inn on the Lake pursuant to a Management Agreement. The results of
these two hotels were included in hotel room revenues in 1998 but are not
included in 1999. These decreases were offset by improved operating results for
the six months ended June 30,
<PAGE>
1999 compared to the six months ended June 30, 1998. Occupancy, average daily
room rates and RevPar for the Company owned hotels were 67.0%, $60.58 and
$40.57, respectively, for the six months ended June 30, 1999 and 66.7%, $58.28
and $38.89, respectively, for the six months ended June 30, 1998.
The Beach Club revenue, which totaled $768,905 for the six month period ended
June 30, 1999 and relates to the operation of the beach club at the Seagate
Hotel and Beach Club, increased $7,131, or 1%, from $761,774 for the six months
ended June 30, 1998. The small increase is specifically attributable to increase
in initiation fees being charged to new members.
Food and beverage revenue was $1,395,596 for the six months ended June 30, 1999
compared to $2,018,952 for the six months ended June 30, 1998, a decrease of
$623,356 or 31%. The net decrease is primarily a result of the sale of the
Company's leasehold interest in the Canandaigua Inn on the Lake in December
1998, which had food and beverage operations. This was offset by increased food
and beverage volume at the Seagate Hotel and Beach Club and assuming the food
and beverage operations of the Brookwood Inn in Pittsford, NY on May 1, 1998
which was leased in prior years to a third party.
Other hotel revenue decreased $94,362 or 10% to $873,691 for the six months
ended June 30, 1999 from $968,053 for the six months ended June 30, 1998. The
decrease is primarily the result of the sale of the Cricket Inn Virginia Beach
in May 1998 and the sale of the Company's leasehold interest in the Canandaigua
Inn on the Lake in December 1998 whose results are not included in 1999 but were
included in 1998.
ROYALTIES for the six month period ended June 30, 1999 have increased $237,972,
or 49% to $728,186 from $490,214 for the six month period ended June 30, 1998.
The increase is attributable to one hundred fifty-one (151) franchised Microtel
Inns in operation at June 30, 1999, as opposed to ninety-eight (98) franchised
Microtel Inns in operation at June 30, 1998. The Company receives all royalties
on twenty-eight (28) of the one hundred fifty-one (151) franchised Microtel Inns
and on the remaining one hundred twenty-three (123) franchises established by US
Franchise Systems, Inc., the Company receives royalty payments from USFS based
on the following schedule: 1% of gross room revenues for hotels 0-100; .75% of
gross room revenues for hotels 101-250; and .5% of gross room revenues for
hotels 251 and beyond.
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 (for a total of 50 properties) and ten (10) "suite"
properties and retain all royalties on these fifty (50) Microtel Inns
(twenty-eight (28) existing and twenty-two (22) new properties to be undertaken
by the Company) and ten (10) new suites properties. The Company will also
receive royalty payments in the future from US Franchise Systems, Inc., for
franchises they open based on the schedule discussed in the preceding paragraph.
MANAGEMENT FEES for the six month period ended June 30, 1999 increased $326,870,
or 69% to $801,086, compared to management fees of $474,216 for the same six
month period ended June 30, 1998. The increase is primarily the result of
increased gross revenues at hotels managed by the Company as management fees are
generally based on a percentage of gross revenue and the addition of six (6)
management contracts when compared to the period ended June 30, 1999. The
schedule of owned and managed hotels is summarized below:
June 30, 1999 June 30, 1998
------------- -------------
Owned 25 25
Managed with financial interest 12 10
Other managed 8 5
-- --
45 40
== ==
Management fees of approximately $1,201,000 were generated by the twenty-five
(25) owned hotels for the six month period ended June 30, 1999, which were
eliminated for consolidation purposes.
OTHER REVENUE for the six month period ended June 30, 1999 decreased $77,157, or
100% to $-0- from $77,157 for the six month period ended June 30, 1998. This is
primarily a result of consulting fees
<PAGE>
accrued from USFS of $75,000, which were non-recurring after September 1998.
The Company plans to continue its revenue growth by maintaining the following
strategies: (i) enhance operating performance of its existing hotels owned or
under management (ii) develop and build additional hotels including Microtel
Inns, if financing is obtainable, (iii) opportunistic acquisition of existing
hotels, and (iv) acquire additional hotel management contracts. However, given
the Company's highly leveraged financial condition, it is at a substantial
disadvantage in acquiring or developing 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 six months ended June 30, 1999 was
40%, compared to 36% for the six months ended June 30, 1998. The increase in
gross operating margin is a result of undertaking operational steps to more
effectively and efficiently manage the properties purchased in 1997 and 1996.
CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses increased
$691,629, or 44%, to $2,247,667 for the six months ended June 30, 1999 from
$1,556,038 for the six months ended June 30, 1998. The increase is primarily a
result of the following: (1) a $14,000 increase in professional fees incurred
for the six month period ended June 30, 1999, compared to the six month period
ended June 30, 1998, (2) a $452,000 increase in payroll and related expenses as
a result of the addition of employees, and (3) a $142,000 increase in rent
expense associated with leasing new office space.
DEPRECIATION AND AMORTIZATION for the six month period ended June 30, 1999
increased $182,611, or 7% to $2,974,039 from $2,791,428 for the six month period
ended June 30, 1998. The increase is a result of capital improvements in 1997
and 1998, which increased depreciation expense. Capital improvements include
converting a Cricket Inn Charlotte, NC to a Red Roof Inn and wall replacement at
the Seagate Hotel and Beach Club.
OTHER INCOME (EXPENSE) for the six months ended June 30, 1999 improved by
$79,553, or 1%, to $6,231,431 from $6,310,984 for the six months ended June 30,
1998. This improvement is a result of amortization of long-term debt resulting
in paying less interest expense on reduced principal balances and lower interest
rates in effect on variable rate debt in the period ended June 30, 1999. Of the
$6,353,514 in total interest expense 60% relates to the mortgages held on the
hotels acquired or consolidated by the Company 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, notes payable
of Hudson Hotels Trust, Tonawanda bond issue and line of credit.
INCOME TAXES - The provision for income tax of $3,303 includes minimum state
taxes. For the six month period ended June 30, 1999, the Company did not record
a deferred tax benefit as realization of the future tax benefits related to the
deferred taxes 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 $128,872 for the six month period ended June 30, 1998
represents federal and state tax income tax benefit from the recognition of
deferred tax assets and liabilities on loss from continuing operations before
income taxes of $322,180.
NET LOSS - As a result of the above factors, the net loss increased $63,408, or
33%, from the six month period ended June 30, 1998 to a net loss of $256,716 for
the six month period ended June 30, 1999. The resulting net loss per common
share - basic of $0.05 for the six month period ended June 30, 1999, compared to
a net loss per common share basic of $0.05 for the six month period ended June
30, 1998.
CAPITAL RESOURCES AND LIQUIDITY
At June 30, 1999, the Company had a $400,000 working capital demand 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 June 30, 1999, $400,000 was
borrowed under the terms of this line.
At June 30, 1999, the Company had $1,345,360 of cash and cash equivalents
compared with $1,751,580 at December 31, 1998.
<PAGE>
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 is released
several times monthly for application against current liabilities. The balance
held in escrow on June 30, 1999 was $5,063,821 and $3,013,617 on December 31,
1998.
Net cash flows provided by operating activities was $2,175,440 for the six
months ended June 30, 1999 compared to cash flows provided by operating
activities of $2,563,786 for the six months ended June 30, 1998. The net
decrease is primarily the result of the increase in accounts receivables
associated with management fees and royalties in addition to the paydown of
accounts payables.
Net cash flows used in investing activities was $1,721,235 for the six months
ended June 30, 1999 compared to net cash flows used in investing activities of
$844,600 for the six months ended June 30, 1998. Net cash flow used in investing
activities for the six months ended June 30, 1999 reflects cash received for the
sale of land, changes in restricted cash, collection of deposits and other
assets less the purchase of equipment and the amounts placed into escrow as
required by the loan agreements. Net cash used in investing activities for the
six months ended June 30, 1998, reflects amounts placed into escrow as required
by the loan agreements, capital improvements to the twenty-five (25) hotels
acquired in 1996 and 1997, cash received from (i) the sale of property and
equipment, and (ii) non-affiliates offset by the deposits submitted for the
acquisition of three (3) hotels.
Net cash flows used in financing activities was $860,425 for the six months
ended June 30, 1999 compared to net cash flows used in financing activities of
$997,061 for the six months ended June 30, 1998. Net cash flows used in
financing activities for the six months ended June 30, 1999 reflects the
repayment of mortgages, preferred stock dividends and distributions to limited
partners. Net cash flows used in financing activities for the six months ended
June 30, 1998 reflects cash proceeds from the exercise of options and proceeds
from our line of credit. This was offset by financing costs, repayment of
mortgages and preferred dividends.
EBITDA increased by $187,817, or 2%, to $8,956,121 for the six months ended June
30, 1999, compared to $8,768,304 for the six months ended June 30, 1998. 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
undertaking operational steps to more effectively and efficiently manage the
properties purchased in 1996 and 1997.
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" in the December 31, 1998 10-K 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 required Hudson to use the proceeds of asset
sales to pay down the debt; however, Hudson 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"), for its 10% subordinated note or on the $7.5 million
convertible subordinated debenture or for the obligations of Hudson Hotels
Trust. Such requirements caused the Company to default in its obligations to
Equity Inns as of May 1, 1999. However, under the subordination agreement with
Equity Inns, that firm is currently prevented from taking legal action to
enforce the payment of its debt. In May 1999 Equity Inns notified Hudson that it
has declared this debt in default and has accelerated the debt and is seeking
default interest. Also, after default, Equity Inns can obtain 2,000,000 shares
of Hudson Hotels common stock, which is collateral for this debt.
Additionally, upon default (which has already occurred), the holder of a $2.0
million debt in Hudson Hotels Trust can convert his debt into a total of 666,666
shares of Hudson common stock. Another Hudson Hotels Trust debt holder has
already converted $2.0 million of Hudson Hotels Trust debt into 666,666 shares
of Hudson common stock. Additionally, the Company at December 31, 1998 had
certain
<PAGE>
portions of its mezzanine debt that would begin to amortize in the fourth
quarter of 1999. As a result of this recent agreement with the holder of the
mezzanine 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 base, and
ultimately, a return of profitability.
The Company is currently in discussions with its lenders about its debt
obligations and activities to restructure its debt. There is negative working
capital of $765,642 at June 30, 1999 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 Company's 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.
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 approximately
$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 guestrooms. 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
<PAGE>
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 were completed
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.
<PAGE>
Special Note Regarding Forward-Looking Statements
Certain matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and Capital Resources and
Liquidity are "forward-looking statements" intended to qualify for the safe
harbors from liability established by the Private Securities Litigation Reform
Act of 1996. These forward-looking statements can generally be identified as
such because the context of the statement will include words such as the company
"believes", "anticipates", "expects", or words of similar meaning. Similarly,
statements that describe the Company's future plans, objectives or goals are
also forward-looking statements. Such forward-looking statements are subject to
certain risks, assumptions and uncertainties which are described in close
proximity to such statements and which could cause actual results to differ
materially from those currently anticipated. Shareholders, potential investors
and other readers are urged to consider these risks, assumptions and
uncertainties carefully in evaluating the forward-looking statements are
cautioned not to place undue reliance on such forward-looking statements. The
forward-looking statements made herein are only made as of the date of this Form
10-Q and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 26, 1990, a complaint was filed in Palm Beach County Circuit Court,
Florida, by Seagate Beach Quarters, Inc., a Florida corporation (Bearing Case
#90-12358-AB), seeking 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 again 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 tortuous negotiations between RCSB and Hudson. On
March 17, 1994, the Court granted Summary Judgment in favor of RCSB and Hudson
Hotels which judgment was appealed by Seagate. The Fourth District Court of
Appeal in Florida affirmed the summary judgment on RCSB and reversed the summary
judgment granted in favor of Hudson, remanding the action to Circuit Court for
further consideration. On August 15, 1994, Seagate proceeded to trial against
SHORE in case #90-12358-AB. During the course of the trial, Seagate took a
voluntary dismissal of their action against SHORE. On September 8,1994, Seagate
refiled its lawsuit against SHORE and joined Delray Beach Hotel Properties
Limited, through its general partner, Delray Beach Hotel Corp. (bearing Case
#94-6961-AF). The new case against SHORE was brought essentially on the same
facts as stated above. The claim against Delray Beach Hotel Properties Limited
was identical to the conspiracy and tortuous 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 the fall of
1999.
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
student 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. On June 18, 1999,
five of the students commenced an action in United States District Court,
District of South Carolina, Greenville Division, against the Company and
Security Masters, Inc. alleging violations of federal and South Carolina state
civil rights statutes, assault and battery and various other intentional
torts, seeking unspecified actual and compensatory damages and unspecified
punitive damages. The Company intends to answer the complaint and defend itself
in this action.
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,M&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.
On June 2, 1999 the Company, and its subsidiary Hudson Hotels Properties
Corporation, as well as Hudson Hotels Trust; E. Anthony Wilson, the Company's
Chairman and President; and a significant shareholder were each served with a
summons and complaint by B. Thomas Golisano, the holder of a $2,000,000 note
from Hudson Hotels Trust which is secured by 666,666 shares of common stock of
the Company. The action has been commenced in New York Supreme Court and demands
damages of $2,000,000 plus costs and disbursements. The complaint alleges that
such note is in default and that the Company assumed the obligation of Hudson
Hotels Trust to pay such note. In addition, the complaint alleges that Mr.
Wilson and the significant shareholder of the Company conspired to cause the
Company to breach certain negative covenants that the Company entered into in
connection with the pledge of the 666,666 shares of the Company's common stock.
Hudson Hotels Trust has admitted the default on the $2,000,000 note while the
Company and the other defendants have denied liability except for the pledge
<PAGE>
of the 666,666 shares of the Company's common stock. This case is now in the
discovery phase. The Plaintiff has filed a motion for summary judgement against
Hudson Hotels Trust and the Company which motion is returnable August 13, 1999.
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.
<PAGE>
Item 2. Change in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the stockholders of the Company, held on June 17, 1999
the stockholders of the Company approved the following:
The election of the Board of Directors consisting of five Directors. Each
Director shall hold office until the next annual meeting of shareholders
and until the successor of the Director is duly elected and qualifies.
Amending the Company's Certificate of Incorporation to authorize an
additional 20,000,000 shares of common stock, par value $.001.
The adoption of the Company's 1999 Employee Stock Purchase Plan.
The appointment of PricewaterhouseCoopers, LLP, as the Company's
independent public accountants for the year ending December 31, 1999.
The table below sets forth the number of votes cast for, against or withheld for
each nominee to the Company's Board of Directors, as well as votes cast for
other proposals discussed above at the June 12, 1999 shareholders meeting:
Nominee For Authority Withheld
------- --- ------------------
E. Anthony Wilson 5,090,700 89,941
Richard C. Fox 5,090,950 89,691
Michael T. George 5,090,950 89,691
Ralph L. Peek 5,090,950 89,691
Alan S. Lockwood 5,090,950 89,691
As to the proposal to amend the Certificate of Incorporation to authorize an
additional 20,000,000 shares of common stock, par value $.001:
4,982,393 Shares have voted FOR
189,817 Shares have voted AGAINST
8,431 Shares have ABSTAINED
As to the proposal to approve the 1999 Employee Stock Purchase Plan:
3,432,486 Shares have voted FOR
141,716 Shares have voted AGAINST
22,725 Shares have ABSTAINED
1,583,714 Shares were BROKER NON-VOTES
As to the proposal to appoint PricewaterhouseCoopers, LLP as the Company's
independent public accountant for the year ending December 31, 1999:
5,125,395 Shares have voted FOR
51,217 Shares have voted AGAINST
4,029 Shares have ABSTAINED
<PAGE>
Item 5. Other Information
On July 23, 1999 the Company replaced its outstanding $7.5 million Convertible
Subordinated Debenture to Oppenheimer Convertible Securities Fund with a new
Convertible Subordinated Debenture bearing the following terms: principal
balance of $3.0 million; interest rate of 18.75%; maturity date of April 15,
2000; and a conversion price of $1.80 per share.
As a result, the Company will report an extraordinary gain from debt
restructuring of approximately $4 million in its Third Quarter September 30,
1999 10-Q.
The following unaudited pro forma condensed balance sheet is presented as if the
transaction above had occurred on June 30, 1999. Such pro forma information is
based upon the balance sheet of Hudson Hotels Corporation at June 30, 1999 and
the terms of the Debenture described above. In management's opinion, all
adjustments necessary to reflect the effects of the debt restructuring have been
made. The following unaudited pro forma condensed balance sheet is not
necessarily indicative of what the actual financial position would have been
assuming such transaction had been completed as of June 30, 1999 nor does it
purport to represent the future financial position of the Company.
ASSETS (A) (B)
PRO FORMA PRO FORMA
JUNE 30, 1999 ADJUSTMENTS JUNE 30, 1999
------------- ----------- -------------
CURRENT ASSETS 9,125,818 -0- 9,125,818
INVESTMENTS IN PARTNERSHIP
INTERESTS 1,771,507 -0- 1,771,507
PROPERTY AND EQUIPMENT, NET 122,941,236 -0- 122,941,236
OTHER ASSETS 7,601,703 -0- 7,601,703
------------ ----------- ------------
TOTAL ASSETS $141,440,264 $ -0- $141,440,264
============ =========== ============
LIABILITIES AND SHAREHOLDERS'
INVESTMENT
TOTAL CURRENT LIABILITIES 9,891,460 -- 9,891,460
LONG-TERM DEBT 128,789,543 (4,054,687) 124,734,856
DEFERRED REVENUE - LAND SALE 185,055 -0- 185,055
LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP 1,060,836 -0- 1,060,836
TOTAL SHAREHOLDERS' INVESTMENT 1,513,370 4,054,687 5,568,057
------------ ----------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' INVESTMENT $141,440,264 $ -0- $141,440,264
============ =========== ============
Notes
(A) Obtained balance sheet from Hudson Hotels Corporation June 30, 1999 10-Q.
(B) This represents a pro forma adjustment as a result of troubled debt
restructuring to the $7.5 million 7.5% Convertible Subordinated Debenture
due July 1, 2001 with its holder.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit No. Description
- ----------- -----------
11 Statement re: computation of per share earnings
27 Financial Data Schedule
B. Form 8-K: The following report was filed on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON HOTELS CORPORATION
-----------------------------------------------
(Registrant)
Date: 7/28/99 /s/ John M. Sabin
-----------------------------------------------
John M. Sabin, Executive Vice President and
Chief Financial Officer
Date: 7/28/99 /s/ Taras M. Kolcio
-----------------------------------------------
Taras M. Kolcio, Vice President, Controller and
Principal Accounting Officer
Exhibit 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------ ----------
6/30/99 6/30/98 6/30/99 6/30/98
------- ------- ------- -------
BASIC
----------------------------------------
<S> <C> <C> <C> <C>
Net earnings applicable to common stock:
Net Income (Loss) $ 577,177 $ 351,985 $ (256,716) $ (193,308)
Deduct preferred stock dividends paid (31,830) (31,830) (63,660) (63,660)
----------- ----------- ----------- -----------
Net earnings/(loss) applicable to common stock $ 545,347 $ 320,155 $ (320,376) $ (256,968)
=========== =========== =========== ===========
Weighted average number of common shares
outstanding 6,399,161 5,157,580 6,093,450 5,156,912
=========== =========== =========== ===========
Earnings/(Loss) per share - Basic & Diluted $ 0.09 $ 0.06 $ (0.05) $ (0.05)
=========== =========== =========== ===========
</TABLE>
The exercise of outstanding stock options, warrants, convertible subordinated
debenture and convertible preferred stock were not included in the calculations
of diluted earnings per share, as their effect would be antidilutive.
Potentially dilutive shares total 5,210,481 and 2,864,826 for the three months
ended June 30, 1999 and 1998, respectively, and 5,210,481 and 2,912,770 for the
six months ended June 30, 1999 and 1998, respectively.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheet, Consolidated Statement of Operations, Consolidated
Statements of Changes in Shareholders' Investment, Consolidated Statements of
Cash Flows and Notes to Consolidated Statements, and is qualified in its
entirety by reference to such financial statements and notes to Consolidated
Statements.
NOTE: If information required by the applicable schedule is not included in the
underlying financial data because it is either immaterial or inapplicable,
the value "0" (zero) will be responded to that item.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 6,409,181
<SECURITIES> 0
<RECEIVABLES> 1,305,998
<ALLOWANCES> 0
<INVENTORY> 725,042
<CURRENT-ASSETS> 9,125,818
<PP&E> 134,928,625
<DEPRECIATION> 11,987,389
<TOTAL-ASSETS> 141,440,264
<CURRENT-LIABILITIES> 9,891,460
<BONDS> 131,305,193
0
295
<COMMON> 6,410
<OTHER-SE> 1,506,665
<TOTAL-LIABILITY-AND-EQUITY> 141,440,264
<SALES> 25,776,725
<TOTAL-REVENUES> 25,776,725
<CGS> 16,820,604
<TOTAL-COSTS> 16,820,604
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,353,514
<INCOME-PRETAX> (249,349)
<INCOME-TAX> 3,303
<INCOME-CONTINUING> (252,652)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (256,716)
<EPS-BASIC> (0.05)
<EPS-DILUTED> (0.05)
</TABLE>
