<PAGE>
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.............................................September 30, 2000
Commission File Number.................................................. 0-17838
Hudson Hotels Corporation
--------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 16-1312167
--------------------------------------------------------------------------------
State or other jurisdiction of I.R.S. Employer
in corporation or organization Identification No.
300 Bausch & Lomb Place, Rochester, New York 14604
--------------------------------------------------------------------------------
(Address or principal executive offices) (Zip Code)
(716) 454-3400
--------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ____
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 27, 2000, the Registrant had issued and outstanding
2,729,523 shares of its $.001 par value common stock.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
OPERATING REVENUES:
Hotel operating revenues $ 12,872,943 $ 12,839,061 $ 36,809,902 $ 37,086,514
Management fees 532,812 603,890 1,398,725 1,404,976
Royalties 548,327 568,297 1,391,972 1,296,483
Other 18,962 23,221
------------ ------------ ------------ ------------
Total operating revenues 13,973,044 14,011,248 39,623,820 39,787,973
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Direct 7,967,207 7,864,089 23,047,426 22,437,026
Corporate 1,082,547 1,212,766 3,462,364 3,460,433
Non-recurring costs 0 695,037 0 695,037
Depreciation and amortization 1,678,140 1,515,915 4,950,260 4,489,954
------------ ------------ ------------ ------------
Total operating costs and expenses 10,727,894 11,287,807 31,460,050 31,082,450
------------ ------------ ------------ ------------
Income from operations 3,245,150 2,723,441 8,163,770 8,705,523
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 95,819 78,958 237,997 201,041
Interest expense (2,059,004) (3,101,169) (7,974,120) (9,454,683)
Loss on disposition of assets (260,622) (414,304) --
Change in fair value of callable/puttable warrants (359,100) (470,600) --
------------ ------------ ------------ ------------
Total other expense (2,582,907) (3,022,211) (8,621,027) (9,253,642)
------------ ------------ ------------ ------------
Income(Loss) from operations, before
income taxes, minority interest, equity
in income of affiliates and extraordinary item 662,243 (298,770) (457,257) (548,119)
INCOME TAXES 28,198 4,920 59,952 8,223
------------ ------------ ------------ ------------
Income (Loss) before minority interest and equity in income of
affiliates 634,045 (303,690) (517,209) (556,342)
MINORITY INTEREST (24,121) (23,902) (68,675) (68,426)
EQUITY IN INCOME OF AFFILIATES 52,916 79,458 73,416 119,918
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE EXTRAORDINARY GAIN 662,840 $ (248,134) (512,468) $ (504,850)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT 0 4,089,465 0 4,089,465
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 662,840 $ 3,841,331 $ (512,468) $ 3,584,615
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC
Income(Loss) before extraordinary gain $.23 $(0.13) $(.24) $(0.29)
Extraordinary gain 0 $ 1.91 $ 0 $ 1.98
------------ ------------ ------------ ------------
Net income (loss) $.23 $ 1.78 $(.24) $ 1.69
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - DILUTED
Income(Loss) before extraordinary gain $ .11 $ (0.13) $ (.24) $ (0.29)
Extraordinary gain 0 $ 1.91 0 $ 1.98
------------ ------------ ------------ ------------
Net income (loss) $ .11 $ 1.78 $ (.24) $ 1.69
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2000 and December 31, 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
2000 1999
---- ----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,056,932 $ 1,489,438
Cash - restricted 6,592,424 3,847,208
Accounts receivable - trade 1,342,968 992,505
Prepaid expenses and other 736,903 1,441,892
------------- -------------
TOTAL CURRENT ASSETS 9,729,227 7,771,043
INVESTMENTS IN PARTNERSHIP INTERESTS 1,715,332 1,591,283
LAND FOR REAL ESTATE DEVELOPMENT 200,000 780,822
PROPERTY AND EQUIPMENT, NET 118,735,409 121,728,780
OTHER ASSETS 5,926,249 6,339,628
------------- -------------
TOTAL ASSETS $ 136,306,217 $ 138,211,556
============= =============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Note payable $ 196,000 $ 400,000
Current portion of long-term debt 2,520,000 3,178,401
Accounts payable - trade 1,449,457 1,376,111
Other accrued expenses 6,122,115 6,337,369
------------- -------------
TOTAL CURRENT LIABILITIES 10,287,572 11,291,881
------------- -------------
LONG-TERM DEBT 111,959,263 123,609,313
------------- -------------
DEFERRED REVENUE - LAND SALE 185,055 185,055
------------- -------------
LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP 1,031,680 1,060,613
------------- -------------
CALLABLE/PUTTABLE WARRANTS 8,370,600
0
------------- -------------
SHAREHOLDERS' INVESTMENT:
Preferred stock 295 295
Common stock 8,195 6,507
Additional paid-in capital 24,979,844 21,966,221
Accumulated deficit (20,475,036) (19,867,078)
------------- -------------
4,513,298 2,105,945
Less: 3,333 shares of common stock in treasury,
at cost at September 30, 2000 and December 31, 1999 (41,251) (41,251)
------------- -------------
TOTAL SHAREHOLDERS' INVESTMENT 4,472,047 2,064,694
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 136,306,217 $ 138,211,556
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000
--------------------------------------------------------------------------------
<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, 1999 $ 295 $ 1,560,705 $ 6,507 $ 20,405,516
Net Loss -- -- -- --
Issuance of Stock -- -- 1,688 3,013,623
Cash dividends paid on preferred stock -- -- -- --
------------ ------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2000 $ 295 $ 1,560,705 $ 8,195 $ 23,419,139
============ ============ ============ ============
<CAPTION>
ACCUMULATED TREASURY
DEFICIT STOCK TOTAL
------- ----- -----
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1999 $(19,867,078) $ (41,251) $ 2,064,694
Net Loss (512,468) -- (512,468)
Issuance of Stock -- -- 3,015,311
Cash dividends paid on preferred stock (95,490) -- (95,490)
------------ ------------ ------------
BALANCE, SEPTEMBER 30, 2000 $(20,475,036) $ (41,251) $ 4,472,047
============ ============ ============
</TABLE>
Stock balances at December 31, 1999:
Common stock: 2,165,634 shares; Preferred stock: 294,723 shares
Stock balances at September 30, 2000:
Common stock: 2,729,523 shares; ; Preferred stock: 294,723shares
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000 AND 1999
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CASH FLOWS FROM OPERATING ACTIVITIES: 2000 1999
---- ----
<S> <C> <C>
Net Income/(Loss) $ (512,468) $ 3,584,615
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,950,260 4,489,954
Loss on disposition of assets 414,304
Minority interest in operations 68,675 68,426
Change in fair value of callable/puttable warrants 470,600 0
Non-cash consulting and employee compensation 0 51,188
Equity in operations (73,416) (119,918)
Extraordinary gain on debt extinguishment 0 (4,089,465)
Capital distributions from unconsolidated
partnership interests 14,000 103,235
(Increase) decrease in assets -
Accounts receivable - trade (350,463) (433,838)
Prepaid expenses and other 704,989 470,959
Increase (decrease) in liabilities -
Accounts payable 73,346 (377,871)
Other accrued expenses (215,254) 10,124
----------- -----------
Net cash provided by operating activities 5,544,573 3,757,409
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (2,745,216) (2,430,548)
Cash collected on disposition of assets 262,200 1,650,058
Purchase of equipment (1,610,612) (2,120,945)
Other assets (497,236) (11,374)
----------- -----------
Net cash used in investing activities 4,590,864 (2,912,809)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of warrants 250,000 0
Repayment of mortgages (1,230,050) (1,096,731)
Distributions to limited partners (106,675) (68,612)
Dividends paid (95,490) (95,490)
Repayments on line of credit, net (204,000) 0
----------- -----------
Net cash used in financing activities (1,386,215) (1,260,833)
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (432,506) (416,233)
CASH AND CASH EQUIVALENTS - beginning of period 1,489,438 1,751,580
----------- -----------
CASH AND CASH EQUIVALENTS - end of period 1,056,932 $ 1,335,347
=========== ===========
OTHER INFORMATION:
Cash paid during the period for:
Interest $ 7,794,121 $ 9,305,353
Income taxes $ 59,952 $ 59,656
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE>
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
The accompanying 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, 1999 Forms 10-K and 10-K/A.
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, 1999 Forms 10-K and 10-K/A.
The presentation of these financial statements reflects a 1 for 3 reverse stock
split, which became effective September 14, 2000. All share and per share
amounts in this Form 10Q have been restated to reflect this change.
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. 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.
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 segments of hotel
operations and management.
In 1995, the Company entered into an agreement with US Franchise Systems, Inc.
("USFS") pursuant to which USFS purchased worldwide franchising and
administration for the Microtel hotel chain (the "USFS Agreement"). Following
this transaction, the Company ceased its franchising activities. Although the
agreement was entitled Joint Venture Agreement, the transaction was structured
as an outright sale of the Company's franchising rights. Pursuant to the
Agreement, 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.
Following the sale of its franchising system, the Company has focused its
efforts on acquisition, development, and management of various hotel products,
including Microtel Inns, which had been the Company's strength. During 1996,
1997, and 1998, the Company's acquisition and development program included
several acquisitions and development of six (6) Microtel Inns through a joint
venture partnership.
<PAGE>
3. CAPITAL RESOURCES AND LIQUIDITY
In December 1998 and the first quarter of 1999, the Company took certain actions
which resulted in default under its $35 million Mezzanine Loan. In April 1999,
the Company entered into an Agreement with the holder of its Mezzanine Loan
pursuant to which the holder agreed to forbear from exercising its rights and
remedies as a result of those defaults until April 11, 2000. On April 14, 2000,
RHD Capital Ventures, LLC, an affiliate of a large shareholder of the Company,
purchased the Mezzanine Loan.
On May 24, 2000, Hudson Hotels Corporation (the "Company") sold to RHD Capital
Ventures LLC for an aggregate consideration of $1,000,000, a Warrant to purchase
5,000,000 common shares of Company stock for a per share exercise price of
$1.00. The Warrant is exercisable at any time until May 23, 2005. The purchaser
paid $250,000 in cash and delivered a Note for the balance of the purchase price
of $750,000. Simultaneously, with the sale of the Warrant, the Company and RHD
entered into a Put and Call Agreement, pursuant to which the Company has the
right to purchase the Warrants from RHD upon payment in full of any and all
outstanding debt obligation to RHD, and RHD has the right to require the Company
to repurchase the Warrants upon repayment in full of all debt of the Company to
RHD, or upon the occurrence of an Event of Default, as defined in any document
or instrument evidencing or securing any debt from the Company to RHD. The
purchase price of the repurchase of the Warrants is calculated by a formula
taking into account the amount of debt outstanding to RHD, a scheduled repayment
amount, and the average market price of Hudson common stock, as related to a
target stock price. The Warrant purchase price increases over time. Using the
current stock price, the put price of the warrant as of February 2002 will be
approximately $10,500,000. Following the Company's one for three reverse split,
the number of shares subject to the warrant have been reduced to 1,666,667 and
the exercise price adjusted upward accordingly.
On June 2, 2000, the Company entered into a Mezzanine Loan Restructuring
Agreement with RHD Capital Ventures, LLC, and in connection therewith a Second
Amended and Restated Mezzanine Note, a Second Amended and Restated Mezzanine
Loan Agreement, and related amendments to collateral documents. The
Restructuring Agreement reduced the stated principal of the Mezzanine Loan from
$35,000,000 to $25,000,000 (including offset of the $750,000 Note given by RHD
to the Company as partial consideration for the Warrant), reduced the stated
interest rate to 6.53%, and fixed a maturity date of February 2, 2002. The
security interest in the Company's assets was spread to cover the amounts which
may become due under the Put and Call Agreement, as well.
Equity Inns, LP, is the holder of a Promissory Note from Hudson Hotels
Properties Corp., guaranteed by the Company, with a current principal balance of
$2,634,052. During 1999, the Company defaulted in payments of principal under
that Note. Equity Inns served notice of default upon the Company, but declined
to take any other actions to collect upon the Note. Equity Inns is entitled to
take 666,667 shares of common stock of Hudson Hotels Corporation, which was
pledged as security for the Note. On April 12, 2000, Equity Inns and the Company
executed a Note Modification Agreement which modified the terms of repayment and
reinstated the Note in good standing. The Note Modification Agreement became
effective upon the purchase of the mezzanine loan by RHD Capital Ventures.
Oppenheimer Convertible Securities Fund was the holder of the Company's
$3,000,000 Convertible Debenture, due April 12, 2000. The Company did not have
the capital resources to pay this obligation at maturity. On April 13, 2000,
Oppenheimer and the Company executed an agreement pursuant to which it agreed to
convert the principal of the Debenture into 1,666,667 shares (555,556 after one
for three reverse stock split) of common stock of the Company, in accordance
with the terms of the Debenture, in partial consideration of the Company's
agreement to register with the SEC all of the shares issued upon conversion. The
Agreement was contingent upon the Company paying outstanding interest upon the
Debenture through April 15, 2000. On April 14, 2000, the Company paid the
interest. Oppenheimer delivered notice of conversion to the Company on April 20,
2000.
Despite these achievements, the Company's long-term financial success is
dependent upon its ability to further refinance and restructure its debt. There
can be no assurances the Company's restructuring efforts will be successful, or
that its 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 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. 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.
In 1998, Hudson Hotels Trust executed a Promissory Note in the amount of
$2,000,000, which is currently in default. The Company pledged 222,222 shares
after the reverse split of common stock as security for repayment of the Note.
The holder has sued both Hudson Hotels Trust and the Company for repayment of
the principal and interest; the Company has denied liability for repayment, and
summary judgment against the Company was denied by the court. The Note holder
has filed notice of appeal. There can be no assurance as to the outcome of this
lawsuit.
<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 nine month
period ended September 30, 2000 and 1999 and balance sheets for September 30,
2000 and December 31, 1999.
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
Property and equipment, net of
accumulated depreciation $ 55,875,453 $ 56,908,026
Current assets 4,524,836 4,672,082
Other assets 746,253 986,739
------------ ------------
TOTAL ASSETS 61,146,542 62,566,847
------------ ------------
Mortgage and notes payable - current 19,477,965 246,585
Other current liabilities 1,563,604 2,745,311
Mortgage and notes payable - noncurrent 25,236,049 43,593,787
------------ ------------
TOTAL LIABILITIES $ 46,277,618 $ 46,585,683
------------ ------------
NET ASSETS $ 14,868,924 $ 15,981,164
============ ============
Net revenues 16,511,402 $ 18,386,215
Operating expenses 11,434,082 11,922,533
------------ ------------
Income from operations 5,077,320 6,463,682
Other expenses, net (4,119,464) (4,294,705)
------------ ------------
NET INCOME $ 957,856 $ 2,168,977
============ ============
</TABLE>
5. LINE OF CREDIT
The Company has a line of credit with a commercial bank, with an interest rate
of prime plus 1 1/2%, for a total of $196,000. 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 for the 12 months
ending September 30:
2000 $ 2,520,000
2001 1,444,200
2002 28,972,047
2003 1,777,882
2004 1,896,383
Thereafter 77,868,751
On May 24, 2000, Hudson Hotels Corporation (the "Company") sold to RHD Capital
Ventures LLC ("RHD") for an aggregate consideration of $1,000,000, a Warrant to
purchase 5,000,000 common shares of Company stock for a per share exercise price
of $1.00. The Warrant is exercisable at any time until May 23, 2005. The
purchaser paid $250,000 in cash and delivered a Note for the balance of the
purchase price of $750,000. RHD Capital Ventures, LLC is an affiliate of M, L, R
& R, a large shareholder of the Company. After the reverse split, the number of
shares subject to the warrant is 1,666,667. Upon exercise of the Warrant, and
assuming no other exercise of outstanding options or warrants (including those
held by M, L, R & R), RHD and its affiliates would own approximately 48% of the
outstanding common stock of the Company.
<PAGE>
Simultaneously with the sale of the Warrant, the Company and RHD entered into a
Put and Call Agreement, pursuant to which the Company has the right to purchase
the Warrants from RHD upon payment in full of any and all outstanding debt
obligations to RHD, and RHD has the right to require the Company to repurchase
the Warrants upon repayment of all debt of the Company to RHD, or upon the
occurrence of an Event of Default, as defined in any document or instrument
evidencing or securing any debt from the Company to RHD. The purchase price for
the repurchase of the Warrants is calculated by a formula taking into account
the amount of debt outstanding to RHD, a scheduled repayment amount, and the
average market price of Hudson common stock, as related to a target stock price.
The Warrant purchase price increases over time. Using the current stock price,
the put price of the warrant as of February 2002 will be approximately
$10,500,000.
On June 2, 2000, the Company entered into a Mezzanine Loan Restructuring
Agreement with RHD Capital Ventures LLC, and in connection therewith a Second
Amended and Restated Mezzanine Note, a Second Amended and Restated Mezzanine
Loan Agreement, and related amendments to collateral documents. The
Restructuring Agreement reduced the stated principal of the Mezzanine Loan from
$35,000,000 to $25,000,000 (including offset of the $750,000 Note given by RHD
to the Company as partial consideration for the Warrant), reduced the stated
interest rate to 6.53%, and fixed a maturity date of February 2, 2002. The
security interest in the Company's assets was spread to cover the amounts which
may become due under the Put and Call Agreement, as well.
For accounting purposes, the Company adjusted the carrying value of the debt to
$27,350,000, the sum of the future cash payments specified by the terms of the
debt agreement. The reduction in the debt ($6,900,000) was credited to the
callable/puttable warrant to reflect the warrant at its estimated fair market
value. Changes in the estimated fair market value of the warrant are reflected
in the Company's Statement of Operations.
7. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease arrangements for automobiles and office
space. Total rent expense under operating leases amounted to $260,970 and
$362,451 for the periods ended September 30, 2000 and 1999, respectively. Future
minimum lease payments under operating leases are approximately: 2000 remainder
- $78,200; 2001 - $457,160; 2002 - $426,084; and 2003 - $210,000.
The Company is required to remit monthly royalty fees from 2% to 4% of gross
room revenue, plus additional monies for marketing assessments and reservation
fees to its franchisors based on franchise agreements which extend from ten to
sixteen years. Some of these agreements specify restrictions on transferability
of the franchise and liquidated damages upon termination of franchise agreement
due to the franchisee's default. Total fees were approximately $982,388 and
$993,939 for the nine months ended September 30, 2000 and 1999, 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 $45,384 and $45,937 for the nine month periods ended September 30,
2000, and 1999, respectively.
<PAGE>
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 2000 $ 5,500
2001 22,000
2002 22,000
2003 22,000
2004 22,000
Thereafter 682,000
--------
$775,500
========
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 September 30, 2000, the Company has net operating loss carryforwards for
income tax purposes of approximately $2,450,000 and a capital loss carryforward
of $3,400,000 that may be used to offset future taxable income. These loss
carryforwards will begin to expire in 2004.
9. 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 nine months ended September 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
2000 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 36,810 $ 4,669 $ (1,855) $ 39,624
EBITDA $ 11,908 $ 1,207 -- $ 13,115
Depreciation and amortization $ 4,640 $ 310 -- $ 4,950
Interest expense $ 7,604 $ 370 -- $ 7,974
Capital expenditures $ 1,573 $ 38 -- $ 1,611
Total assets $ 123,203 $ 51,893 $ (38,790) $ 136,306
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1999 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 37,087 $ 4,543 $ (1,842) $ 39,788
EBITDA $ 12,841 $ 355 -- $ 13,196
Depreciation and amortization $ 4,252 $ 238 -- $ 4,490
Interest expense $ 8,658 $ 797 -- $ 9,455
Capital expenditures $ 1,987 $ 134 -- $ 2,121
Total assets $ 125,917 $ 59,441 $ (44,696) $ 140,662
</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, equity in
income of affiliates, and extraordinary item:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
EBITDA
Hotel operations $ 11,908 $ 12,841
Management and other 1,207 355
Interest (7,974) (9,455)
Depreciation and amortization (4,950) (4,490)
Other (648) 201
-------- --------
Loss before income taxes, minority interest, equity in income
of affiliates, and extraordinary item $ (457) $ (548)
======== ========
</TABLE>
The following table presents revenues and other financial information by
business segment for the three months ended September 30, 2000 and 1999 (in
thousands):
<TABLE>
<CAPTION>
2000 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 12,873 $ 1,749 $ (649) $ 13,973
EBITDA $ 4,257 $ 667 -- $ 4,924
Depreciation and amortization $ 1,570 $ 108 -- $ 1,678
Interest expense $ 1,995 $ 64 -- $ 2,059
Capital expenditures $ 842 $ 0 -- $ 842
Total assets $ 123,203 $ 51,893 $ (38,790) $ 136,306
<CAPTION>
1999 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
---- ---------------- ------------------ --------------- ------------
<S> <C> <C> <C> <C>
Revenues $ 12,840 $ 1,812 $ (641) $ 14,011
EBITDA $ 4,408 $ (169) -- $ 4,239
Depreciation and amortization $ 1,443 $ 73 -- $ 1,516
Interest expense $ 2,903 $ 198 -- $ 3,101
Capital expenditures $ 900 $ 46 -- $ 946
Total assets $ 125,917 $ 59,441 $ (44,696) $ 140,662
</TABLE>
(A) Eliminations represent inter-company management fees and inter-company
receivables/payables and investments in subsidiaries
<PAGE>
The following presents the segments' performance measure to the Company's
consolidated income from operations before taxes, minority interest, equity in
income of affiliates, and extraordinary item:
<TABLE>
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
EBITDA
Hotel operations $ 4,257 $ 4,408
Management and other 667 (169)
Interest (2,059) (3,101)
Depreciation and amortization (1,678) (1,516)
Other (524) 79
------- -------
Income before income taxes, minority interest, and
equity in income of affiliates, and extraordinary item $ 663 $ (299)
======= =======
</TABLE>
10. EARNINGS PER SHARE CALCULATION
For purposes of calculating earnings per share, the potential dilutive
effect of the callable/puttable warrant is computed using the reverse
treasury stock method. Under that method, the incremental number of
shares outstanding is computed as the number of shares that would have
to be issued for cash at the average market price to obtain cash to
settle the callable/puttable warrant. At September 30, 2000, the
additional shares used in this computation was 3,054,927 shares.
<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/A 1999 Annual Report. Particular
attention should be directed to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999:
Total operating revenues decreased $38,204, or less than 1%, to $13,973,044 for
the three months ended September 30, 2000, from $14,011,248 for the three months
ended September 30, 1999, reflecting changes in revenue categories, as discussed
below.
HOTEL OPERATIONS were $12,872,943 for the three months ended September 30, 2000,
an increase of $33,882, or less than 1%, from $12,839,061 for the three months
ended September 30, 1999. Hotel operations consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Hotel room revenue $11,459,149 $11,475,463
Beach club revenue 424,748 342,263
Food and beverage revenue 510,502 515,027
Other 478,544 506,308
------------ ------------
Total $12,872,943 $12,839,061
=========== ===========
</TABLE>
Hotel room revenues were $11,459,149 for the three month period ended September
30, 2000, a decrease of $16,314, from $11,475,463 for the three month period
ended September 30, 1999. The third quarter ended 2000 and 1999 room revenues
for the same hotels remained flat. Occupancy, average daily room rates and
revPar for the Company owned hotels were 69.9%, $61.74 and $43.13, respectively,
for the three months ended September 30, 2000, and 71.7%, $60.44 and $43.31,
respectively, for the three months ended September 30, 1999.
The Beach Club revenue, which totaled $424,748 for the three month period ended
September 30, 2000, and relates to the operation of the beach club at the
Seagate Hotel and Beach Club, increased $82,845, or 34%, from $342,263 for the
three months ended September 30, 1999. The increase is specifically attributable
to increases in dues and initiation fees being charged.
Food and beverage revenue was $510,502 for the three months ended September 30,
2000, compared to $515,027 for the three months ended September 30, 1999, a
decrease of $4,525, or 1%. The net decrease is primarily a result of reduced
occupancy.
Other hotel revenue decreased $27,764, or 5% to $478,544 for the three months
ended September 30, 2000 from $506,308 for the three months ended September 30,
1999. The decrease is primarily due to reduced occupancy.
ROYALTIES for the three month period ended September 30, 2000, have decreased
$19,970, or 3%, to $548,327 from $568,297 for the three month period ended
September 30, 1999. The decrease is attributable to approximately $30,000 that
was determined to be uncollectible. The royalties are attributable to two
hundred (200) franchised Microtel Inns in operation, as opposed to one hundred
fifty-nine (159) in operation at September 30, 1999. The Company receives all
royalties on twenty-seven (27) of the two hundred (200) franchised Microtel Inns
and on the remaining one hundred seventy-three (173) 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.
In addition, the Company has retained the right to franchise, construct and
collect franchise placement fees on an additional twenty-three (23) Microtel Inn
properties (for a total of 50 properties) properties and will receive royalties
when the facilities are opened and operating. However, the Company does not
currently have the necessary capital to undertake the development of these
properties.
<PAGE>
MANAGEMENT FEES for the three month period ended September 30, 2000 decreased
$71,078, or 12%, to $532,812, compared to management fees of $603,890 for the
three-month period ended September 30, 1999. This decrease was due to a
reduction in the number of managed properties. The schedule of owned and managed
hotels is summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Owned 25 25
Managed with financial interest 9 12
Other managed 10 13
-- ---
44 50
== ===
</TABLE>
Management fees of approximately $548,462 and $641,267 were generated by the
twenty-five (25) owned hotels for the three month period ended September 30,
2000, and September 30, 1999, respectively, which were eliminated for
consolidation purposes.
OTHER REVENUE for the three month period ended September 30, 2000, increased
$18,962, or 100%, from $-0- for the three month period ended September 30, 1999.
This is primarily a result of miscellaneous commissions received.
The Company plans to enhance its revenue by maintaining the following
strategies: (i) improve operating performance of its existing hotels owned or
under management, (ii) pursue third-party management contracts.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues,
less direct expenses; departmental expenses, undistributed expenses, property
occupancy costs and insurance costs) for the three months ended September 30,
2000, was 38%, compared to 39% for the three months ended September 30, 1999.
CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses decreased
$130,219, or 11%, to $1,082,547 for the three months ended September 30, 2000
from $1,212,766 for the three months ended September 30, 1999. The decrease is
primarily a result of a reduction of the corporate staff and a reduction in
rental expense.
NON-RECURRING COSTS. During the third quarter of 1999, the Company recorded
$695,037 of costs associated with certain restructuring costs. During the third
quarter of 2000, no such expenses were incurred.
DEPRECIATION AND AMORTIZATION for the three month period ended September 30,
2000, increased $162,225, or 11%, to $1,678,140 from $1,515,915 for the three
month period ended September 30, 1999. The increase is a result of capital
improvements made in 1998 and 1999, which increased the depreciation expense.
OTHER EXPENSE for the three months ended September 30, 2000, was reduced by
$439,304, or 15%, to $2,582,907 from $3,022,211 for the three months ended
September 30, 1999. This reduction is the result of amortization of long-term
debt resulting in less interest expense on the outstanding principal balances at
September 30, 2000. In addition, the Company's mezzanine debt was restructured
in June 2000, and the Company no longer records interest expense related to this
debt. Of the $2,059,000 in total interest expense, 96% relates to mortgages and
notes held on the owned hotels. The remaining interest expense is on a line of
credit, bond issue, and interest accrued on notes payable of Hudson Hotels
Trust, which the Company is required to accrue for accounting purposes, but
which the Company believes it has no obligation to pay. Included in other
expense is the adjustment for the fair value of the callable/puttable warrants
(see Note 6). This expense amounted to $359,100 for the three months ended
September 30, 2000. In addition, a loss on the sale of land in Tonawanda, New
York, was included, amounting to $260,600.
INCOME TAXES - For the three month period ended June 30, 2000, 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.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT - In July 1999, the Company
replaced its outstanding $7.5 million convertible subordinated debenture with a
new $3.0 million convertible subordinated debenture. As a result, the Company
recognized an extraordinary gain of $4,089,465 or $1.91 per common share - basic
during the three-month period ended September 30, 1999. No similar gain was
recognized during the three-month period ended September 30, 2000.
<PAGE>
NET INCOME/(LOSS) - As a result of the above factors, the net income decreased
$3,178,491 from the three month period ended September 30, 1999 to a net income
of $662,840 for the three month period ended September 30, 2000. The resulting
net income per common share - basic of $0.23 for the three month period ended
September 30, 2000, compared to a net income per common share - basic of $1.78
for the three month period ended September 30, 1999.
NINE MONTHS ENDED SEPTEMBER 30, 2000, COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1999:
Total operating revenues decreased $164,153, or less than 1%, to $39,623,820 for
2000 from $39,787,973 for the nine months ended September 30 1999, reflecting
changes in revenue categories, as discussed below.
HOTEL OPERATIONS were $36,809,902 for the nine months ended September 30, 2000,
a decrease of $276,612, or 1%, from $37,086,514 for the nine months ended
September 30, 1999. Hotel operations consisted of the following:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Hotel room revenue $32,128,802 $ 32,684,724
Beach club revenue 1,313,169 1,111,168
Food and beverage revenue 1,943,120 1,910,623
Other 1,424,811 1,379,999
------------ ------------
Total $36,809,902 $ 37,086,514
=========== ============
</TABLE>
Hotel room revenues were $32,128,802 for the nine month period ended September
30, 2000, a decrease of $555,922, or 2%, from $32,684,724 for the nine month
period ended September 30, 1999. The net decrease is the result of a decrease in
overall occupancy. Occupancy, average daily room rates and revPar for the
Company owned hotels were 65.7%, $61.76 and $40.60, respectively, for the nine
months ended September 30, 2000, and 68.5%, $60.53 and $41.49, respectively, for
the nine months ended September 30, 1999.
The Beach Club revenue, which totaled $1,313,169 for the nine month period ended
September 30, 2000, and relates to the operation of the beach club at the
Seagate Hotel and Beach Club, increased $202,001, or 18%, from $1,111,168 for
the nine months ended September 30, 1999. The increase is specifically
attributable to increases in dues and initiation fees being charged.
Food and beverage revenue was $1,943,120 for the nine months ended September 30,
2000, compared to $1,910,623 for the nine months ended September 30, 1999, an
increase of $32,497, or 2%. The net increase is primarily a result of increased
prices being charged.
Other hotel revenue increased $44,812, or 3%, to $1,424,811 for the nine months
ended September 30, 2000, from $1,379,999 for the nine months ended September
30, 1999. The increase is primarily the result of increased telephone revenues.
These were generated by improving and upgrading the telephone systems.
ROYALTIES for the nine month period ended September 30, 2000, have increased
$95,489, or 7%, to $1,391,972 from $1,296,483 for the nine month period ended
September 30, 1999. The increase is attributable to two hundred (200) franchised
Microtel Inns in operation at September 30, 2000, as opposed to one hundred
fifty-nine (159) franchised Microtel Inns in operation at September 30, 1999.
The Company receives all royalties on twenty-seven (27) of the two hundred (200)
franchised Microtel Inns and on the remaining one hundred seventy-three (173)
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.
In addition, the Company has retained the right to franchise, construct and
collect franchise placement fees on an additional twenty-three (23) Microtel Inn
properties and will receive the royalties when the facilities are opened and
operating. However, the Company does not currently have the necessary working
capital to undertake the development of these properties.
<PAGE>
MANAGEMENT FEES for the nine month period ended September 30, 2000, decreased
$6,251, or less than 1%, to $1,398,725, compared to management fees of
$1,404,976 for the same nine month period ended September 30, 1999. The decrease
is primarily the result of a reduction in managed properties at September 30,
2000. The schedule of owned and managed hotels is summarized below:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Owned 25 25
Managed with financial interest 9 12
Other managed 10 13
-- --
44 50
== ==
</TABLE>
Management fees of approximately $1,855,000 and $1,842,207 were generated by the
twenty-five (25) owned hotels for the nine month period ended September 30,
2000, and September 30, 1999, respectively, which were eliminated for
consolidation purposes.
OTHER REVENUE for the nine month period ended June 30, 1999 increased $23,221,
or 100% to $23,221 from $0 for the nine month period ended September 30, 1999.
This is primarily a result of commissions earned.
The Company plans to enhance its revenue by maintaining the following
strategies: (i) improve operating performance of its existing hotels owned or
under management, and (ii) pursue third-party management contracts.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues,
less direct expenses; departmental expenses, undistributed expenses, property
occupancy costs and insurance costs) for the nine months ended September 30,
2000, was 37%, compared to 40% for the nine months ended September 30, 1999. The
decrease was due to a reduction in occupancy and increased operating costs,
primarily labor.
CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses increased
$1,931, or less than 1%, to $3,462,364 for the nine months ended September 30,
2000, from $3,460,433 for the nine months ended September 30, 1999. The increase
is primarily a result of the following: (1) increased professional fees,
including legal and accounting, and (2) payroll costs that included $250,000 of
severance benefits and has been offset by reductions in rent expense and travel
and entertainment.
NON-RECURRING COSTS during the nine-month period ended September 30, 1999. The
Company recorded $695,037 of costs associated with its review of strategic
alternatives and one-time charges. No such costs were incurred during the third
quarter of 2000.
DEPRECIATION AND AMORTIZATION for the nine month period ended September 30,
2000, increased $460,306, or 2%, to $4,950,260 from $4,489,954 for the nine
month period ended September 30, 1999. The increase is a result of capital
improvements in 1997, 1998, and 1999, which increased depreciation expense.
OTHER INCOME (EXPENSE) for the nine months ended September 30, 2000, was reduced
by $632,615, or 7%, to $8,621,027 from $9,253,642 for the nine months ended
September 30, 1999. The improvements are a result of amortization of long-term
debt resulting in less interest expense on the outstanding principal balances at
September 30, 2000. In addition, the Company's mezzanine debt was restructured
in June 2000, and the Company no longer records interest expense related to this
debt. Of the $7,974,000 in total interest expense, 78% relates to mortgages and
notes held on the owned hotels. The remaining interest is on a line of credit,
bond issue, mezzanine debt and interest accrued on notes payable to Hudson
Hotels Trust, which the Company is required to accrue for accounting purposes,
but which the Company believes it has no obligation to pay. Included in other
expense is the adjustment for the fair value of the callable/puttable warrants
(See Note 6). This expense amounted to $470,600. In addition, other expense
includes losses on the disposition of assets totaling $414,300.
INCOME TAXES - The provision for income tax of $59,952 includes minimum state
taxes for the nine month period ended September 30, 2000. 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.
<PAGE>
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT - In July 1999 the Company replaced
its outstanding $7.5 million convertible subordinated debenture with a new $3.0
million convertible subordinated debenture. As a result, the Company recognized
an extraordinary gain of $4,089,465 or $1.98 per common share - basic during the
nine-month period ended September 30, 1999. No similar gain was recognized
during the nine-month period ended September 30, 2000.
NET INCOME/(LOSS) - As a result of the above factors, the net income decreased
$4,097,083 from the nine month period ended September 30, 1999 to net loss of
$512,468 for the nine month period ended September 30, 2000. The resulting net
loss per common share - basic and diluted of $(0.24) for the nine month period
ended September 30, 2000, compared to a net income per common share - basic and
diluted of $1.69 for the nine month period ended September 30, 1999.
CAPITAL RESOURCES AND LIQUIDITY
At September 30, 2000, the Company had a $196,000 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 September 30, 2000, the Company had $1,056,932 of cash and cash equivalents
compared with $1,489,438 at December 31, 1999.
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 September 30, 2000, was $6,592,426 and $3,847,208 on December
31, 1999. At September 30, 2000, approximately $348,000 was escrowed to permit
the Company to prosecute an appeal of a judgement against the Company.
Net cash flows provided by operating activities was $5,544,573 for the nine
months ended September 30, 2000, compared to cash flows provided by operating
activities of $3,757,409 for the nine months ended September 30, 1999.
Net cash flows used in investing activities was $4,590,864 for the nine months
ended September 30, 2000, compared to net cash flows used in investing
activities of $2,912,809 for the nine months ended September 30, 1999. Net cash
flow used in investing activities for the nine months ended September 30, 2000,
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 nine months ended September 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 flows used in financing activities was $1,386,215 for the nine months
ended September 30, 2000, compared to net cash flows provided by financing
activities of $1,260,833 for the nine months ended September 30, 1999. Net cash
flows used in financing activities for the nine months ended September 30, 2000,
reflects the repayment of mortgages and notes, preferred stock dividends,
distributions to limited partners and repayment of line of credit. Net cash
flows used in financing activities for the nine months ended September 30, 1999
reflects repayment of mortgages, preferred dividends and distributions to
limited partners.
EBITDA decreased by $81,447, or 1%, to $13,114,030 for the nine months ended
September 30, 2000, compared to $13,195,477 for the nine months ended September
30, 1999. 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.
LIQUIDITY
In December 1998 and the first quarter of 1999, the Company took certain actions
which resulted in default under its $35,000,000 Mezzanine Loan. In April 1999,
the Company entered into an Agreement with the holder of its Mezzanine Loan
pursuant to which the holder agreed to forbear from exercising its rights and
remedies as a result of those defaults until April 11, 2000. On April 14, 2000,
RHD Capital Ventures, LLC, an affiliate of a large shareholder of the Company,
purchased the Mezzanine Loan.
On May 24, 2000, Hudson Hotels Corporation (the "Company) sold to RHD Capital
Ventures, LLC, for an aggregate consideration of $1,000,000, a Warrant to
purchase 5,000,000 common shares of Company stock for a per share exercise
<PAGE>
price of $1.00. The Warrant is exercisable at any time until May 23, 2005. The
purchaser paid $250,000 in cash and delivered a Note for the balance of the
purchase price of $750,000. Simultaneously, with the sale of the Warrant, the
Company and RHD entered into a Put and Call Agreement, pursuant to which the
Company has the right to purchase the Warrants from RHD upon payment in full of
any and all outstanding debt obligation to RHD, and RHD has the right to require
the Company to repurchase the Warrants upon repayment in full of all debt of the
Company to RHD, or upon the occurrence of an Event of Default, as defined in any
document or instrument evidencing or securing any debt from the Company to RHD.
The purchase price of the repurchase of the Warrants is calculated by a formula
taking into account the amount of debt outstanding to RHD, a scheduled repayment
amount, and the average market price of Hudson common stock, as related to a
target stock price. The Warrant purchase price increases over time. Using the
current stock price, the put price of the warrant as of February 20002 (due
date) will be approximately $10,500,000. Following the Company's one for three
reverse split, the number of shares subject to the warrant have been reduced to
1,666,667, and the exercise price adjusted upward accordingly.
On June 2, 2000, the Company entered into a Mezzanine Loan Restructuring
Agreement with RHD Capital Ventures, LLC, and in connection therewith, a Second
Amended and Restated Mezzanine Note, a Second Amended and Restated Mezzanine
Loan Agreement, and related amendments to collateral documents. The
Restructuring Agreement reduced the stated principal of the Mezzanine Loan from
$35,000,000 to $25,000,000 (including offset of the $750,000 Note given by RHD
to the Company as partial consideration for the Warrant), reduced the stated
interest to 6.53% and fixed a maturity date of February 2, 2002. The security
interest in the Company's assets was spread to cover the amounts which may
become due under the Put and Call Agreement, as well.
Equity Inns, LP, is the holder of a Promissory Note from Hudson Hotels
Properties Corp., guaranteed by the Company, with a current principal balance of
$2,634,052. During 1999, the Company defaulted in payments of principal under
that Note. Equity Inns served notice of default upon the Company, but declined
to take any other actions to collect upon the Note. Equity Inns is entitled to
take 666,667 shares of common stock of Hudson Hotels Corporation, which was
pledged as security for the Note. On April 12, 2000, Equity Inns and the Company
executed a Note Modification Agreement which modified the terms of repayment and
reinstated the Note in good standing.
Oppenheimer Convertible Securities Fund is the holder of the Company's
$3,000,000 Convertible Debenture, due April 12, 2000. The Company did not have
the capital resources to pay this obligation at maturity. On April 13, 2000,
Oppenheimer executed an agreement pursuant to which it agreed to convert the
principal of the Debenture into 1,666,667 shares (555,556 shares after one
for three reverse split) of common stock of the Company, in accordance with
the terms of the Debenture, in partial consideration of the Company's
agreement to register with the SEC all of the shares issued upon conversion.
In 1998, Hudson Hotels Trust executed a Promissory Note in the amount of
$2,000,000, which is currently in default. The Company pledged 222,222 shares
after the reverse split of common stock as security for repayment of the Note.
The holder has sued both Hudson Hotels Trust and the Company for repayment of
the principal and interest; the Company has denied liability for repayment, and
summary judgment against the Company was denied by the court. The Noteholder has
filed notice of appeal. There can be no assurance as to the outcome of this
lawsuit.
Despite the foregoing changes, the Company's viability is dependent upon the
further refinancing and restructuring of its debt obligations as they become due
and strengthening its equity and asset base.
The Company is also restricted in accessing the cash flows generated from
revenues as they are trapped for application against required escrows for debt,
tax, insurance, and capital asset reserve. Cash in excess of the required
escrows is released to the Company on a periodic basis for working capital
needs.
There can be no assurances that in 2000 or 2001 the Company's restructuring
efforts will be successful, or that its 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 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>
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") problem concerned the inability of information systems to
properly recognize and process date-sensitive information beyond January 1,
2000. As a result, the Y2K problem could have affected any system that uses date
data, including mainframes, PCs, and embedded microprocessors that control
security systems, call-processing systems, building climate systems, elevators,
office equipment and even fire alarms.
Since January 1, 2000, the Company has not experienced any disruption to its
business operations as a result of Y2K compliance problems. The Company's
response to the Year 2000 problem consisted of three phases that addressed the
state of readiness, Year 2000 costs, risks and contingency plans.
Phase I included a plan to respond to the Year 2000 problem, including the
following areas (the "Focus Areas"): (i) telephone and call accounting systems;
(ii) credit card readers; (iii) sprinkler systems and fire suppression systems;
(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 created a task force and procedures to survey,
test and report results for management's review.
The Company completed Phase II of its assessment of the Year 2000 problem. Phase
II involved 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 involved the testing of the Company's
computer systems. The Company has conducted tests on the systems identified in
Phase I and did not encounter any Year 2000 compliance issue which were not
corrected before January 1, 2000.
Phase III of the Company's assessment of the Year 2000 problem included 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 was 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 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 mailed a questionnaire to third party vendors to assess third party
risks. The Company 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.
Throughout 2000, the Company plans to review its systems inventory against
hardware and software component manufacturer upgrade releases to assure that its
systems have the most current Y2K upgrades. The cost of the Company's Y2K
activities, which was budgeted at $500,000, totaled approximately $300,000.
For the third quarter ended September 30, 2000, no additional Y2K costs were
incurred.
<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 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 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). The case came to trial in late February 2000; the judge declared a
mistrial before the trial had commenced. The case has been put back on the trial
calendar for trial during January 2001.
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, South Carolina, 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. Subsequently, on June 18,
1999, the plaintiffs, Nathaniel Davis III, Jennifer Curry, Shiona Drummer,
Renoalda Bray and Corey-Khalil Horden commenced a civil suit against the Company
and Security Masters, Inc., in the United States District Court, District of
South Carolina, Greenville Division, alleging violations of Titles II and III of
the Civil Rights Act of 1964 and seeking unspecified actual and compensatory
damages, attorneys fees and costs and punitive damages. The Company has appeared
in this action, and plaintiffs have sought leave to amend their complaint. The
Company's insurance company has assumed the defense of this action, but has
reserved as to coverage.
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 of
the 666,666 shares of the Company's common stock. The parties argued plaintiff's
motion for summary judgement on August 13, 1999. The judge granted summary
judgment in favor of the plaintiff against Hudson Hotels Trust, but denied
summary judgment against Hudson
<PAGE>
Hotels Corporation. Thereafter, Plaintiff filed an amended complaint naming
additional parties, including M,L,R & R and HH Bridge, L.P., and stating new
causes of action against the additional parties. The Company has answered the
amended complaint and depositions are scheduled for December 2000.
R. R. Donnelly & Sons, a financial printer, sued the Company and Hudson Hotels
Trust in New York Supreme Court, Monroe County, by complaint filed October 14,
1999, for services rendered in preparation and printing of the registration
statement and prospectus for the aborted initial public offering of Hudson
Hotels Trust. Donnelly had claimed damages of $279,682.34, plus 18% interest,
from May 10, 1999. The Company answered the Complaint on November 22, 1999. On
July 13, 2000, the judge in this case granted summary judgment against the
Company. The Company is appealing the ruling and has escrowed $347,000 with the
court to bond the appeal.
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 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 September 14,
2000, the stockholders of the Company approved the following:
1. To elect five (5) directors for a term of one (1) year or until their
successors have been elected and qualified.
2. To consider and act upon a proposal to permit the Board of Directors to
amend the Company's Certificate of Incorporation to effect a reverse stock
split of the Company's issued common stock in which one new share of Common
Stock would be exchanged for every three shares of Common Stock currently
issued and outstanding (the "Reverse Stock Split"), all fractional shares
to be rounded up to the next whole share, all as more fully described in
the accompanying Proxy Statement.
3. To consider and act upon a proposal to amend the Company's 1993
Director's Stock Option Plan.
4. To consider and act upon a proposal to appoint Bonadio & Co., LLP, as the
Company's independent public accountants for the year ending December 31,
2000.
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 September 14, 2000, shareholders'
meeting:
NOMINEE FOR AUTHORITY WITHHELD
------- --- ------------------
E. Anthony Wilson 4,089,706 110,870
Richard C. Fox 4,089,706 110,870
Ted Filer 4,087,706 112,870
Ralph L. Peek 4,089,706 110,870
Alan S. Lockwood 4,089,706 110,870
As to the proposal to amend the Certificate of Incorporation to effect a
reverse split of one share for every three:
4,754,572 Shares have voted FOR
151,005 Shares have voted AGAINST
14,999 Shares have ABSTAINED
<PAGE>
As to the proposal to approve the proposal to amend the 1993 Director's Stock
Option Plan:
4,580,286 Shares have voted FOR
328,691 Shares have voted AGAINST
11,599 Shares have ABSTAINED
As to the proposal to appoint Bonadio & Co., LLP, as the Company's independent
public accountant for the year ending December 31, 2000:
4,839,643 Shares have voted FOR
70,938 Shares have voted AGAINST
9,995 Shares have ABSTAINED
ITEM 5. OTHER INFORMATION - None
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
September 14, 2000, Item 5, Other Events
May 24, 2000, Item 5, Other Events, including Proforma Balance
Sheet as of May 31, 2000.
<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: November 14, 2000 /s/ E. ANTHONY WILSON
E. Anthony Wilson, Chairman of the Board and
Chief Executive Officer
Date: November 14, 2000 /s/ RALPH L. PEEK
Ralph L. Peek, Executive Vice President and
Chief Accounting Officer
