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, 2001
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 in corporation or organization | I.R.S. Employer 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 August 3, 2001 the Registrant had issued and outstanding 2,749,523 shares of its $.001 par value common stock.
| HUDSON HOTELS CORPORATION & SUBSIDIARIES | |||||||||||||||||||||||
| CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||||||||||||
| FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000 AND THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000 | |||||||||||||||||||||||
| THREE MONTHS ENDED JUNE 30 | SIX MONTHS ENDED JUNE 30 | ||||||||||||||||||||||
| 2001 | 2000 | 2001 | 2000 | ||||||||||||||||||||
| OPERATING REVENUE: | |||||||||||||||||||||||
| Hotel operations | $ | 12,056,787 | $ | 12,867,989 | $ | 23,419,238 | $ | 23,936,959 | |||||||||||||||
| Mgmt. fees | 442,547 | 464,331 | 756,157 | 865,913 | |||||||||||||||||||
| Royalties | 440,609 | 469,678 | 812,320 | 843,645 | |||||||||||||||||||
| Miscellaneous | 583 | 600 | 4,095 | 4,259 | |||||||||||||||||||
| Total operating revenue | 12,940,526 | 13,802,598 | 24,991,810 | 25,650,776 | |||||||||||||||||||
| OPERATING EXPENSES: | |||||||||||||||||||||||
| Direct expenses | 7,711,466 | 7,805,505 | 15,178,494 | 15,080,219 | |||||||||||||||||||
| Corporate expenses | 869,782 | 815,854 | 1,816,346 | 2,379,817 | |||||||||||||||||||
| Depreciation and amortization | 1,621,289 | 1,595,519 | 3,198,037 | 3,272,120 | |||||||||||||||||||
| Total operating expense | 10,202,537 | 10,216,878 | 20,192,877 | 20,732,156 | |||||||||||||||||||
| Income from operations | 2,737,989 | 3,585,720 | 4,798,933 | 4,918,620 | |||||||||||||||||||
| OTHER INCOME (EXPENSE): | |||||||||||||||||||||||
| Interest income | 55,815 | 71,543 | 140,255 | 142,178 | |||||||||||||||||||
| Interest expense | (2,143,705 | ) | (2,798,487 | ) | (4,155,489 | ) | (5,915,116 | ) | |||||||||||||||
| Change in fair market value of warrants | (535,276 | ) | (111,500 | ) | (964,712 | ) | (111,500 | ) | |||||||||||||||
| Gain (Loss) on disposal of | |||||||||||||||||||||||
| property and equipment | - | - | - | (153,682 | ) | ||||||||||||||||||
| Total other income (expense) | (2,623,166 | ) | (2,838,444 | ) | (4,979,946 | ) | (6,038,120 | ) | |||||||||||||||
| Income (Loss) before income taxes, minority interest and equity in operations of affiliates | 114,823 | 747,276 | (181,013 | ) | (1,119,500 | ) | |||||||||||||||||
| INCOME TAXES | (2,544 | ) | - | (17,684 | ) | (31,754 | ) | ||||||||||||||||
| Income (Loss) before minority interest and equity in operations of affiliates | 112,279 | 747,276 | (198,697 | ) | (1,151,254 | ) | |||||||||||||||||
| MINORITY INTEREST | - | (21,157 | ) | (22,810 | ) | (44,554 | ) | ||||||||||||||||
| EQUITY IN OPERATIONS OF AFFILIATES | (39,281 | ) | 37,562 | (60,395 | ) | 20,500 | |||||||||||||||||
| NET INCOME (LOSS) | $ | 72,998 | $ | 763,681 | $ | (281,902 | ) | $ | (1,175,308 | ) | |||||||||||||
| NET INCOME (LOSS) PER COMMON SHARE | |||||||||||||||||||||||
| BASIC | $ | 0.01 | $ | 0.27 | $ | (0.13 | ) | $ | (0.45 | ) | |||||||||||||
| DILUTED | $ | 0.00 | $ | 0.18 | $ | (0.13 | ) | $ | (0.45 | ) | |||||||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | |||||||||||||||||||||||
| HUDSON HOTELS CORPORATION & SUBSIDIARIES | ||||||||||||
| CONSOLIDATED BALANCE SHEETS | ||||||||||||
| JUNE 30, 2001 AND DECEMBER 31, 2000 | ||||||||||||
| 2001 | 2000 | |||||||||||
| ASSETS | ||||||||||||
| CURRENT ASSETS: | ||||||||||||
| Cash and cash equivalents | $ | 621,657 | $ | 1,724,950 | ||||||||
| Current portion of restricted cash | 4,656,871 | 3,561,136 | ||||||||||
| Accounts receivable-trade | 1,178,920 | 1,308,539 | ||||||||||
| Prepaid expenses and other | 1,198,116 | 1,193,605 | ||||||||||
| Total current assets | 7,655,564 | 7,788,230 | ||||||||||
| PROPERTY AND EQUIPMENT, net | 115,056,509 | 117,184,428 | ||||||||||
| OTHER ASSETS: | ||||||||||||
| Restricted cash, net of current portion | 1,815,429 | 1,666,699 | ||||||||||
| Investments in partnerships | 1,463,975 | 1,514,715 | ||||||||||
| Mortgage costs | 2,075,069 | 2,298,404 | ||||||||||
| Beach club operation | 2,418,260 | 2,498,422 | ||||||||||
| Other assets | 534,494 | 1,316,128 | ||||||||||
| Total other assets | 8,307,227 | 9,294,368 | ||||||||||
| TOTAL ASSETS | $ | 131,019,300 | $ | 134,267,026 | ||||||||
| LIABILITIES AND SHAREHOLDERS' EQUITY | ||||||||||||
| CURRENT LIABILITIES: | ||||||||||||
| Demand note payable | $ | 180,063 | $ | 192,252 | ||||||||
| Current portion of long-term debt | 9,044,755 | 8,861,188 | ||||||||||
| Accounts payable | 2,306,868 | 1,133,318 | ||||||||||
| Accrued expenses | 4,877,128 | 5,064,106 | ||||||||||
| Deferred revenue | 670,181 | 1,669,451 | ||||||||||
| Total current liabilities | 17,078,995 | 16,920,315 | ||||||||||
| LONG TERM LIABILITIES: | ||||||||||||
| Long-term debt, net of current portion | 101,257,831 | 104,262,987 | ||||||||||
| Callable/ puttable warrant | 9,650,986 | 8,686,274 | ||||||||||
| Limited partners' interest in consolidated partnerships | - | 1,020,400 | ||||||||||
| Total long-term liabilities | 110,908,817 | 113,969,661 | ||||||||||
| SHAREHOLDERS' EQUITY | ||||||||||||
| Preferred stock | 295 | 295 | ||||||||||
| Common stock | 2,750 | 2,750 | ||||||||||
| Additional paid-in capital | 25,003,111 | 25,003,111 | ||||||||||
| Accumulated deficit | (21,933,417 | ) | (21,587,855 | ) | ||||||||
| 3,072,739 | 3,418,301 | |||||||||||
| Less: Treasury stock (3,334 shares at cost) | (41,251 | ) | (41,251 | ) | ||||||||
| Total shareholders' equity | 3,031,488 | 3,377,050 | ||||||||||
| TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 131,019,300 | $ | 134,267,026 | ||||||||
| The accompanying notes are an integral part of these consolidated financial statements. | ||||||||||||
| HUDSON HOTELS CORPORATION & SUBSIDIARIES | ||||||||||||||
| CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY | ||||||||||||||
| FOR THE SIX MONTH PERIOD ENDED JUNE 30, 2001 | ||||||||||||||
| BALANCE 12/31/00 | NET LOSS FOR SIX MONTHS ENDED 6/30/01 | PREFERRED STOCK DIVIDENDS PAID | BALANCE 6/30/01 | |||||||||||
| Preferred Stock – Series A | $ | 295 | $ | - | $ | - | $ | 295 | ||||||
| Common Stock | 2,750 | - | - | 2,750 | ||||||||||
| Additional Paid-In Capital – Preferred | 1,560,705 | - | - | 1,560,705 | ||||||||||
| Additional Paid-In Capital – Common | 23,442,406 | - | - | 23,442,406 | ||||||||||
| Accumulated Deficit | (21,587,855 | ) | (281,902 | ) | (63,660 | ) | (23,933,417 | ) | ||||||
| Subtotal | 3,418,301 | (281,902 | ) | (63,660 | ) | 3,072,739 | ||||||||
| Less: Treasury Stock | (41,251 | ) | - | - | (41,251 | ) | ||||||||
| Total Shareholders’ Equity | $ | 3,377,050 | $ | (281,902 | ) | $ | (63,660 | ) | $ | 3,031,488 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| HUDSON HOTELS CORPORATION AND SUBSIDIARIES | |||||||||||
| CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||||||
| FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND JUNE 30, 2000 | |||||||||||
| 2001 | 2000 | ||||||||||
| CASH FLOW FROM OPERATING ACTIVITIES: | |||||||||||
| Net income (loss) | $ | (281,902 | ) | $ | (1,175,308 | ) | |||||
| Adjustments to reconcile net income (loss) to net cash flow from operating activities: | |||||||||||
| Depreciation and amortization | 3,198,037 | 3,272,120 | |||||||||
| Loss on disposal of property & equipment | - | 153,682 | |||||||||
| Change in FMV puttable warrants | 964,712 | 111,500 | |||||||||
| Minority interest | 22,810 | 44,554 | |||||||||
| Equity in operations of affiliates | 60,395 | (20,500 | ) | ||||||||
| Changes in: | |||||||||||
| Accounts receivable - trade | 129,619 | (381,496 | ) | ||||||||
| Prepaid expenses and other | (4,511 | ) | 144,176 | ||||||||
| Accounts payable | 1,173,550 | 630,334 | |||||||||
| Accrued expenses | (186,978 | ) | 163,240 | ||||||||
| Deferred revenue | (999,270 | ) | (478,620 | ) | |||||||
| Net cash flow from operating activities | 4,076,462 | 2,463,682 | |||||||||
| CASH FLOW FROM INVESTING ACTIVITIES: | |||||||||||
| Purchase of equipment | (802,435 | ) | (769,344 | ) | |||||||
| Change in restricted cash | (1,244,465 | ) | (1,546,622 | ) | |||||||
| Change in other assets | 775,983 | (69,682 | ) | ||||||||
| Purchase of warrants | - | 250,000 | |||||||||
| Cap. distributions from unconsolidated partnerships | 9,000 | 14,000 | |||||||||
| Net cash flow from investing activities | (1,261,917 | ) | (2,121,648 | ) | |||||||
| CASH FLOW FROM FINANCING ACTIVITIES: | |||||||||||
| Repayment of long-term debt | (2,821,589 | ) | (762,842 | ) | |||||||
| Repayment on demand note payable | (12,189 | ) | - | ||||||||
| Distributions to limited partners | (1,020,400 | ) | (83,463 | ) | |||||||
| Dividends paid | (63,660 | ) | (63,660 | ) | |||||||
| Net cash flow from financing activities | (3,917,838 | ) | (909,965 | ) | |||||||
| NET CHANGE IN CASH AND CASH EQUIVALENTS | (1,103,293 | ) | (567,931 | ) | |||||||
| CASH AND CASH EQUIVALENTS - beg. of period | 1,724,950 | 1,489,438 | |||||||||
| CASH AND CASH EQUIVALENTS - end of period | $ | 621,657 | $ | 921,507 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2001
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 U.S. 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 3 to the Company's financial statements in the December 31, 2000 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, 2000 10-K.
The presentation of these financial statements reflect a one for three reverse stock split, which became effective September 15, 2000. All share and per share amounts in this Form 10-Q have been restated to reflect this change.
2. Narrative Description of Business
Hudson Hotels Corporation (the "Company") was organized as Microtel Franchise and Development Corporation to develop and franchise a national chain of economy limited-service lodging facilities ("Microtels"), using the service mark "MICROTEL". The Company was incorporated in New York State on June 5, 1987.
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 hotel operations and management industry segments.
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.
As a result of the sale of its franchising system pursuant to the USFS Agreement, the Company has focused its efforts on development, acquisition and management of various hotel products, including Microtel Inns.
As of June 30, 2001, the Company managed forty-six (46) hotel properties located primarily in the Northeast and Southeast United States. Of the forty-six (46) hotel properties under management, twenty five (25) are owned by the Company. These properties range from super budget “Microtel Inns” to full-service hotels. The Company competes for management contracts with other hotel management companies, many of which have significantly larger organizations and greater financial resources. In some cases, hotel owners may require the hotel management company to invest in or advance funds to the hotel in order to obtain the management contract.
In these cases, the Company may be at a competitive disadvantage.
The management contracts entered into vary from month-to-month to ten years, some of which may be cancelled with penalty upon sale of the property. They provide for a full range of hotel management services (including operations management, personnel and staffing, sales and marketing, business systems, financial management, and food and beverage management) for a fee, typically a percentage of gross revenues.
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, the Company sold to RHD Capital Ventures, LLC, for 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. Following the Company’s one for three reverse stock split, the number of shares subject to the warrant have been reduced to 1,666,667 and the exercise price has been adjusted to $3.00 per share. 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 obligations 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 form 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 Company’s average stock price for the quarter ended June 30, 2001, the put price of the warrant as of February 2003 (the due date of the debt obligations to RHD) will be approximately $16,550,000.
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 (see next paragraph). 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.
Effective June 2, 2001, the Company renegotiated a modification and extension of its Mezzanine Note with RHD Capital Ventures, LLC. The maturity date of the note was extended to February 2, 2003 and the monthly payment will remain at $364,583 until March 2, 2002. Effective March 2, 2002 the payment will increase to $541,364 until the note matures. The interest rate remains at 6.53% until maturity.
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 $2,608,228. During 1999 the Company defaulted in payments of principal under the 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 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.
| 4. | Summarized Financial Information - Investments in Partnership Interests |
| The following is a summary of condensed financial information for the unconsolidated partnerships that the Company does not control for the six-month periods ended June 30, 2001 and 2000. |
| 2001 | 2000 | ||||||
| Property and equipment, net of accumulated depreciation | $ | 58,969,598 | $ | 56,172,298 | |||
| Current assets | 3,474,430 | 4,590,008 | |||||
| Other assets | 1,111,181 | 807,794 | |||||
| TOTAL ASSETS | 63,555,209 | 61,570,100 | |||||
| Mortgage and notes payable – current | 4,971,181 | 18,842,944 | |||||
| Other current liabilities | 2,736,228 | 2,116,861 | |||||
| Mortgage and notes payable – non-current | 35,691,828 | 25,657,572 | |||||
| TOTAL LIABILITIES | 43,399,237 | 46,617,377 | |||||
| TOTAL EQUITY | $ | 20,155,972 | $ | 14,952,723 | |||
| COMPANY’S SHARE | $ | 1,335,249 | $ | 1,130,127 | |||
| Net revenues | 9,871,609 | 8,887,388 | |||||
| Operating expenses | 7,538,743 | 6,201,696 | |||||
| Income from operations | 2,332,866 | 2,685,692 | |||||
| Other income (expense), net | (2,705,177 | ) | (2,541,351 | ) | |||
| NET INCOME (LOSS) | $ | (372,311 | ) | $ | 144,341 | ||
| COMPANY’S SHARE | $ | (60,395 | ) | $ | 20,500 | ||
5. Demand Note Payable
The Company has a demand note payable to a bank. The amount outstanding bears interest at the bank’s prime rate plus 1 ½%, is due on demand and is collateralized by land in Tonawanda, New York.
6. Long-Term Debt
Minimum future principal payments required under the Company’s long-term debt agreements are as follows for the years ending June 30:
| 2002 | $ | 9,044,755 | |
| 2003 | 19,350,359 | ||
| 2004 | 1,859,811 | ||
| 2005 | 1,992,321 | ||
| 2006 | 2,005,631 | ||
| Thereafter | 76,049,709 | ||
| $ | 110,302,586 | ||
The mortgage notes payable to Nomura Asset Capital Corporation contain various financial covenants, including a requirement that the Company’s accounts payable be less than forty-five days old. The Company was not in compliance with this covenant at June 30, 2001. The Company does not anticipate that the lender will call the debt as a result of this event of non-compliance, and has therefore classified approximately $81 million of the related debt as long-term in the accompanying financial statements.
7. Callable/ Puttable Warrant
On May 24, 2000, the Company sold a warrant to purchase 5,000,000 shares of the Company’s common stock for an exercise price of $1.00 per share to RHD Capital Ventures, LLC (RHD), an affiliate of M, R, R & R, a large shareholder of the Company. Following the reverse stock split, RHD is entitled to purchase 1,666,667 shares at $3.00 per share. The Company received $250,000 in cash and a note for $750,000 in consideration for the warrants, which may be exercised at any time through May 23, 2005.
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 warrant from RHD upon payment in full of all debt obligations to RHD, and RHD has the right to require the Company to repurchase the warrant upon payment in full of all debt obligations to RHD, or upon the occurrence of an event of default, as defined in any document of or instrument evidencing or securing any debt owed to RHD. Amounts due under the warrant are collateralized as is the restructured mezzanine note payable to RHD.
The price for 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 the Company’s common stock, as related to a target stock price. The purchase price increases over time. Using the current stock price, the put price of the warrant will be approximately $16,550,000 on February 2, 2003 (the maturity date of the restructured mezzanine loan payable to RHD).
The Company records the callable/puttable warrant at its estimated fair market value. Changes in the estimated fair market value are reflected in the statement of operations.
8. Commitments
Land Lease:
The Company leases the Statesville, North Carolina, hotel land under the terms of a ground lease that requires annual payments of rent equal to 4% of the hotel’s gross room revenue and expires in April 2035. The Company has an option to purchase this land subject to certain first refusal rights of a third-party. Rent expense attributable to this lease totaled $26,969 and $30,706, for the six-month periods ended June 30, 2001 and 2000, respectively.
Office and Equipment Leases:
The Company has various operating lease arrangements for equipment, vehicles and office space. Total rent expense under operating leases amounted to $329,481 and $186,657 for the periods ending June 30, 2001 and 2000, respectively. Future minimum lease payments under operating leases are approximately: 2001 remainder - - $354,420; 2002- $668,774; 2003 - $432,282; 2004 - $80,580; and 2005 - $50,984; thereafter - $22,662.
Franchise Agreements:
The Company is required to remit monthly royalty fees from 2% to 4% of gross room revenue, plus additional amounts for marketing assessments and reservation fees to its franchisors’ based on franchise agreements which extend from ten to sixteen years. Some of these agreements specify restrictions on transferability of franchise and liquidated damages upon termination of franchise agreement due to the franchisee’s default. Total fees were approximately $1,449,300 and $1,406,500 for the six months ended June 30, 2001 and 2000, respectively.
9. Income Taxes
Income taxes are provided in accordance with Statement of Financial Accounting Standard No. 109, “Accounting for Income Taxes”, which requires an asset and liability approach to financial accounting and reporting for income taxes. The Statement requires that deferred income taxes be provided to reflect the impact of temporary differences between the amount of assets and liabilities for financial reporting purposes and such amounts as measured by current tax laws and regulations. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
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, 2001, the Company had net operating loss carryforwards of approximately $4,335,000 and a capital loss carryforward of $3,440,000 that may be used to offset future taxable income and capital gains. These loss carryforwards will begin to expire in 2018.
10. 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 EBITDA, which the Company defines as total operating revenue less direct and corporate expenses. 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/loss and changes in temporary differences. | |
| The following table presents revenues and other financial information by business segment for the three months ended June 30, 2001 and 2000 (in thousands): |
| 2001 | Hotel Operations | Management & Other | Elimination (A) | Consolidated | ||||||||
| Revenues | $ | 12,057 | $ | 1,496 | $ | (612 | ) | $ | 12,941 | |||
| EBITDA | $ | 3,732 | $ | 627 | — | $ | 4,359 | |||||
| Depreciation and amortization | $ | 1,551 | $ | 70 | — | $ | 1,621 | |||||
| Interest expense | $ | 2,556 | $ | 123 | — | $ | 2,679 | |||||
| Capital expenditures | $ | 529 | $ | 0 | — | $ | 529 | |||||
| Total assets | $ | 118,818 | $ | 48,472 | $ | (36,271 | ) | $ | 131,019 | |||
| 2000 | Hotel Operations | Management & Other | Elimination (A) | Consolidated | ||||||||
| Revenues | $ | 12,868 | $ | 1,581 | $ | (646 | ) | $ | 13,803 | |||
| EBITDA | $ | 4,417 | $ | 764 | — | $ | 5,181 | |||||
| Depreciation and amortization | $ | 1,543 | $ | 52 | — | $ | 1,595 | |||||
| Interest expense | $ | 2,767 | $ | 143 | — | $ | 2,910 | |||||
| Capital expenditures | $ | 161 | $ | 6 | — | $ | 167 | |||||
| Total assets | $ | 123,230 | $ | 53,510 | $ | (39,526 | ) | $ | 137,214 | |||
(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:
| 2001 | 2000 | ||||||
| EBITDA | |||||||
| Hotel operations | $ | 3,732 | $ | 4,417 | |||
| Management and other | 627 | 764 | |||||
| Interest | (2,679 | ) | (2,910 | ) | |||
| Depreciation and amortization | (1,621 | ) | (1,595 | ) | |||
| Other | 56 | 71 | |||||
| Income before income taxes, minority interest, and equity in income of affiliates | $ | 115 | $ | 747 | |||
The following table presents revenues and other financial information by business segment for the six months ended June 30, 2001 and 2000 (in thousands):
| 2001 | Hotel Operations | Management & Other | Elimination (A) | Consolidated | ||||||||
| Revenues | $ | 23,419 | $ | 2,760 | $ | (1,187 | ) | $ | 24,992 | |||
| EBITDA | $ | 7,053 | $ | 944 | — | $ | 7,997 | |||||
| Depreciation and amortization | $ | 3,058 | $ | 140 | — | $ | 3,198 | |||||
| Interest expense | $ | 4,894 | $ | 226 | — | $ | 5,120 | |||||
| Capital expenditures | $ | 802 | $ | 0 | — | $ | 802 | |||||
| Total assets | $ | 118,818 | $ | 48,472 | $ | (36,271 | ) | $ | 131,019 | |||
| 2000 | Hotel Operations | Management & Other | Elimination (A) | Consolidated | ||||||||
| Revenues | $ | 23,937 | $ | 2,920 | $ | — | $ | 25,651 | ||||
| EBITDA | $ | 7,651 | $ | 540 | — | $ | 8,191 | |||||
| Depreciation and amortization | $ | 3,070 | $ | 202 | — | $ | 3,272 | |||||
| Interest expense | $ | 5,707 | $ | 320 | — | $ | 6,027 | |||||
| Capital expenditures | $ | 731 | $ | 38 | — | $ | 769 | |||||
| Total assets | $ | 123,230 | $ | 53,510 | $ | (39,526 | ) | $ | 137,214 | |||
(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:
| 2001 | 2000 | ||||||
| EBITDA | |||||||
| Hotel operations | $ | 7,053 | $ | 7,651 | |||
| Management and other | 944 | 540 | |||||
| Interest | (5,120 | ) | (6,027 | ) | |||
| Depreciation and amortization | (3,198 | ) | (3,272 | ) | |||
| Other | 140 | (12 | ) | ||||
| Loss before income taxes, minority interest, and equity in income of affiliates | $ | (181 | ) | $ | (1,120 | ) | |
11. Earnings Per Share Calculation
For purposes of calculating earnings per share, the potential dilutive effect of the callable/puttable warrant was 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 then current market price to obtain cash to settle the callable/puttable warrant. There were 13,658,530 and 278,625 additional shares used in this calculation for the three months ended June 30, 2001 and 2000, respectively.
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 2000 Annual Report. Particular attention should be directed to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
Three months ended June 30, 2001, compared to the three months ended June 30, 2000:
Total operating revenues decreased $862,072, or 6.2%, to $12,940,526 for the three months ended June 30, 2001, from $13,802,598 for the three months ended June 30, 2000, reflecting changes in revenue categories, as discussed below.
HOTEL OPERATIONS were $12,056,787 for the three months ended June 30, 2001, a decrease of $811,202, or 6.3%, from $12,867,989 for the three months ended June 30, 2000. Hotel operations consisted of the following:
| Three Months Ended | |||||||
| June 30, 2001 | June 30, 2000 | ||||||
| Hotel room revenue | $ | 10,601,832 | $ | 11,235,302 | |||
| Beach club revenue | 486,066 | 442,791 | |||||
| Food and beverage revenue | 622,156 | 710,108 | |||||
| Other | 346,733 | 479,788 | |||||
| Total | $ | 12,056,787 | $ | 12,867,989 | |||
Hotel room revenues were $10,601,832 for the three month period ended June 30, 2001, a decrease of $633,470, or 5.6%, from $11,235,302 for the three month period ended June 30, 2000. The decrease is the result of a drop in the occupancy for the current period. Occupancy, average daily room rates and RevPar for the Company owned hotels were 64.3%; $62.42; and $40.11, respectively, for the three months ended June 30, 2001, and 68.9%, $62.04 and $42.75, respectively, for the three months ended June 30, 2000.
Beach Club revenue, which totaled $486,066 for the three month period ended June 30, 2001, and relates to the operation of the beach club at the Seagate Hotel and Beach Club, increased $43,275, or 9.8%, from $442,791 for the three months ended June 30, 2000. The increase is attributable to increased initiation fees charged to new members.
Food and beverage revenue was $622,156 for the three months ended June 30, 2001, compared to $710,108 for the three months ended June 30, 2000, a decrease of $87,952, or 12.4% The decrease is primarily due to reduced occupancy and increased competition.
Other hotel revenue decreased by $133,055, or 27.7%, to $346,733 for the three months ended June 30, 2001, from $479,788 for the three months ended June 30, 2000. The decrease is due to reduced long distance telephone revenues, as a result of the reduction in long distance telephone expense.
MANAGEMENT FEES for the three month period ended June 30, 2001, decreased $21,784, or 4.7%, to $442,547, compared to management fees of $464,331 for the three-month period ended June 30, 2000. This is the result of a decrease in revenues at the managed properties. The schedule of owned and managed hotels is summarized below:
| June 30, 2001 | June 30, 2000 | |||
| Owned | 25 | 25 | ||
| Managed with financial interest | 12 | 9 | ||
| Other managed | 9 | 12 | ||
| 46 | 46 | |||
Management fees of approximately $612,000 and $645,000 which were generated by the twenty-five (25) owned hotels for the three month period ended June 30, 2001 and June 30, 2000, were eliminated for consolidation purposes.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues, less direct expenses) for the three months ended June 30, 2001, was 36.0%, compared to 39.3% for the three months ended June 30, 2000. The decrease in gross operating margin is a result of reduced occupancy and increased labor and operating costs.
CORPORATE EXPENSE represents general and administrative costs and expenses associated with the corporate office. Corporate costs and expenses increased $53,928, or 6.6%, to $869,782 for the three months ended June 30, 2001, from $815,854 for the three months ended June 30, 2000.
DEPRECIATION AND AMORTIZATION for the three months ended June 30, 2001, increased $25,770, or 1.6%, to $1,621,289 from $1,595,519 for the three months ended June 30, 2000.
OTHER INCOME (EXPENSE) for the three months ended June 30, 2001, decreased by $215,278, or 7.6%, to $2,623,166 from $2,838,444 for the three months ended June 30, 2000. The improvements are a result of the reduction of long-term debt resulting in less interest expense. In addition, the Company’s mezzanine debt was restructured in 2000, and the Company records less interest expense related to this debt for accounting purposes. Of the $2,143,705 in total interest expense, 90% relates to mortgages and notes held on the owned hotels. The remaining interest is on a demand note, bond issue, and $60,000, on notes payable by Hudson Hotels Trust for 2001 and 2000. Also included in other expense for 2001 is the adjustment for the fair market value of the callable/,puttable warrant. This expense amounted to $535,276 and $111,500 for 2001 and 2000, respectively, as the callable/puttable warrant was outstanding for three months during the second quarter of 2001, but only one month during the second quarter of 2000.
EQUITY IN OPERATIONS OF AFFILIATES represents the loss incurred from the Company’s equity investment in various hotels. The loss for the three months ended June 30, 2001, was $39,281 compared to income of $37,562 for the three months ended June 30, 2000.
INCOME TAXES – The provision for income taxes of $2,544 and $0 for the three months ended June 30, 2001 and 2000, respectively, relates primarily to minimum state taxes. The Company has not recorded a deferred tax benefit as realization for the future tax benefits related to deferred taxes is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period.
NET INCOME – As a result of the above factors, the net income decreased $690,683, or 90%, from the three month period ended June 30, 2000, to a net income of $72,998 for the three-month period ended June 30, 2001. The resulting net income per common share – basic of $.01 for the three-month period ended June 30, 2001, compared to a net income per common share – basic of $0.27 for the three-month period ended June 30, 2000.
Total operating revenues decreased $658,966, or 2.6%, to $24,991,810 for the six months ended June 30, 2001, from $25,650,776 for the six months ended June 30, 2000, reflecting changes in revenue categories, as discussed below.
HOTEL OPERATIONS were $23,419,238 for the six months ended June 30, 2001, a decrease of $517,721, or 2.2%, from $23,936,959 for the six months ended June 30, 2000. Hotel operations consisted of the following:
| Six Months Ended | |||||||
| June 30, 2001 | June 30, 2000 | ||||||
| Hotel room revenue | $ | 20,381,736 | $ | 20,669,653 | |||
| Beach club revenue | 1,009,517 | 888,421 | |||||
| Food and beverage revenue | 1,314,708 | 1,432,618 | |||||
| Other | 713,277 | 946,267 | |||||
| Total | $ | 23,419,238 | $ | 23,936,959 | |||
Hotel room revenues were $20,381,736 for the six-months ended June 30, 2001, a decrease of $287,917, or 1.4%, from $20,669,653 for the six-months ended June 30, 2000. The net decrease is the result of a drop in the occupancy. Occupancy, average daily room rates and RevPar for the Company owned hotels were 62.2%, $62.39 and $38.78, respectively, for the six months ended June 30, 2001, and 63.7%, $61.78 and $39.38, respectively, for the six months ended June 30, 2000.
Beach Club revenue, which totaled $1,009,517 for the six-months ended June 30, 2001, and relates to the operation of the beach club at the Seagate Hotel and Beach Club, increased $121,096, or 13.6%, from $888,421 for the six months ended June 30, 2000. The increase is primarily attributable to increases in initiation fees charged to new members.
Food and beverage revenue was $1,314,708 for the six months ended June 30, 2001, compared to $1,432,618 for the six months ended June 30, 2000, a decrease of $117,910, or 8.2%. The decrease is due primarily to a reduction in hotel occupancy and increased competition.
Other hotel revenue decreased $232,990, or 24.6%, to $713,277 for the six months ended June 30, 2001, from $946,267 for the six months ended June 30, 2000. The decrease is due to reduced long distance telephone revenues, as a result of the reduction in long distance telephone expense.
MANAGEMENT FEES for the six-months ended June 30, 2001 decreased $109,756, or 12.7% to $756,157, compared to management fees of $865,913 for the same six-months ended June 30, 2000. This is due to a decrease in revenues at the managed properties. The schedule of owned and managed hotels is summarized below:
| June 30, 2001 | June 30, 2000 | |||
| Owned | 25 | 25 | ||
| Managed with financial interest | 12 | 9 | ||
| Other managed | 9 | 12 | ||
| 46 | 46 | |||
Management fees of approximately $1,187,200 and $1,206,000 were generated by the twenty-five (25) owned hotels for the six months ended June 30, 2001, and June 30, 2000, and were eliminated for consolidation purposes.
ROYALTIES for the six-months ended June 30, 2001, decreased $31,325, or 3.7%, to $812,320 from $843,645 for the six-months ended June 30, 2000. This decrease is due to reduced occupancies.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues, less direct expenses) for the six months ended June 30, 2001, was 35.2%, compared to 37% for the six months ended June 30, 2000. The decrease in gross operating margin is a result of a reduction in occupancy and increased labor and operating costs.
CORPORATE EXPENSE, represents general and administrative costs and related expenses associated with the corporate office. Corporate costs and expenses decreased $563,471, or 23.7%, to $1,816,346 for the six months ended June 30, 2001, from $2,379,817 for the six months ended June 30, 2000. The decrease is primarily a result of the following: (1) decreased professional fees, including legal and accounting, (2) decreased occupancy costs and (3) decreased payroll costs.
DEPRECIATION AND AMORTIZATION for the six-months ended June 30, 2001, decreased $74,083, or 2.3%, to $3,198,037 from $3,272,120 for the six-months ended June 30, 2000.
OTHER INCOME (EXPENSE) for the six months ended June 30, 2001, decreased by $1,058,174, or 17.5%, to $4,979,946 from $6,038,120 for the six months ended June 30, 2000. This improvement is primarily due to a reduction in interest expense as a result of the purchase of the mezzanine loan by RHD Capital Ventures, LLC. Of the $4,155,489 in total interest expense, approximately 90% relates to the mortgages held on the hotels acquired or consolidated by the Company. The remaining amount represents interest on the Company’s outstanding mezzanine financing, notes payable relating to purchase of hotels, notes payable of Hudson Hotels Trust, Tonawanda bond issue and demand note. The adjustment in the fair market value of the callable/ puttable warrant for the six-months ended June 30, 2001, was $964,712.
INCOME TAXES – The provision for income tax of $17,684 includes minimum state taxes. The Company has not recorded a deferred tax benefit as realization of the future tax benefits related to deferred taxes is dependent on many factors, including the Company’s ability to generate taxable income within the net operating loss carryforward period.
NET LOSS – As a result of the above factors, the net loss decreased $893,406 for the six-month period ended June 30, 2001, to a net loss of $(281,902) compared to a net loss of $(1,175,308) for the six-month period ended June 30, 2000. The resulting net loss per common share – basic of $(0.13) for the six-month period ended June 30, 2001, compared to a net loss per common share – basic of $(0.45) for the six-month period ended June 30, 2000.
CAPITAL RESOURCES AND LIQUIDITY
At June 30, 2001, the Company had a $180,063 demand note with a commercial bank, which bears interest at a rate of prime plus 1½%. Amounts borrowed are collateralized by land.
At June 30, 2001, the Company had $621,657 of cash and cash equivalents compared with $1,724,950 at December 31, 2000.
The Company is temporarily restricted from accessing the majority of cash flow from operations because it is required to maintain certain levels of escrowed cash to comply with the terms of its debt agreements. All cash is retained in its property-owning subsidiaries for application against required escrows for debt, taxes, insurance and capital asset reserves. In addition, cash is retained for the mezzanine loan payment. Excess funds are then released several times monthly for payment of operating expenses. The release of excess funds is dependent upon the mandatory monthly escrow payments being made first. The balance held in escrow on June 30, 2001, was $6,472,300 and $5,227,835 on December 31, 2000.
Net cash flows provided by operating activities were $4,071,294 for the six months ended June 30, 2001, compared to cash flows provided by operating activities of $2,463,682 for the six months ended June 30, 2000. The net increase is primarily the results of a smaller net loss and an increase in the change in the fair market value of the callable/ puttable warrant which is a non-cash item.
Net cash flows used in investing activities were $1,256,749 for the six months ended June 30, 2001, compared to net cash flows used in investing activities of $2,121,648 for the six months ended June 30, 2000. Net cash flow used in investing activities for the six months ended June 30, 2001, reflects changes in restricted cash, purchase of equipment, and proceeds received on a mortgage receivable. Net cash used in investing activities for the six months ended June 30, 2000, reflects changes in restricted cash, purchase of equipment and proceeds received from sale of assets.
Net cash flows used in financing activities were $3,917,838 for the six months ended June 30, 2001, compared to net cash flows used in financing activities of $909,965 for the six months ended June 30, 2000. Net cash flows used in financing activities for the six months ended June 30, 2001, and June 30, 2000, reflect the repayment of mortgages, preferred stock dividends and distributions to limited partners in the amount of $1,020,400 from the collection of a mortgage receivable by a consolidated entity with a 99% minority interest.
EBITDA, which the Company defines as total operating revenue less direct and corporate operating expenses decreased, by $193,770, or 2.4%, to $7,996,970 for the six months ended June 30, 2001, compared to $8,190,740 for the six months ended June 30, 2000. The Company believes this definition of EBITDA provides a meaningful measure of its ability to service debt. The decrease is a result of a decline in occupancy and increased labor and operating costs.
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.
PART II - - OTHER INFORMATION
Item 1. Legal Proceedings
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 222,222 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 222,222 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 222,222 shares of the Company’s common stock. The parties argued plaintiff’s motion for summary judgment on August 13, 1999. The judge granted summary judgment in favor of the plaintiff against Hudson Hotels Trust, but denied summary judgment against Hudson Hotels Corporation. The plaintiff has amended its complaint, and discovery is proceeding on the amended complaint.
The Company and its subsidiary, Delray Beach Hotel Corp., have been sued for unspecified damages resulting from an injury suffered on the beach at the Seagate Hotel and Beach Club. This suit is being defended by the Company’s insurance company counsel.
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 - None
(A) Item 5. Other Information
The Company has been notified by Nasdaq that it has failed to meet certain minimum criteria to be listed on the Nasdaq SmallCap Market. Effective August 10, 2001, the Company’s stock will be delisted by Nasdaq and will continue to trade on the OTC bulletin board. Information can be retrieved regarding the stock under the same stock symbol (HUDS) as it now trades.
On May 11, 2001, E. Anthony Wilson, the Company’s Chairman and the Company agreed as follows:
| (i) | The Company’s commitment to loan Mr. Wilson up to $240,000 per year was terminated. |
| (ii) | The Company and Mr. Wilson entered into a promissory note for Mr. Wilson’s total aggregated borrowings of $258,382.67, bearing interest at 6.53% per annum. |
| (iii) | Mr. Wilson agreed to pay $2,500 per month by payroll deduction starting June, 2001, to repay the debt. |
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
| Exhibit No. | Description |
| 11 | Statement re: computation of per share earnings |
| B. Form 8-K: | The following report was filed on Form 8-K - None |
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: | August 14, 2001 | /s/ E. Anthony Wilson |
| E. Anthony Wilson | ||
| President and Chief Operating Officer | ||
| Date: | August 14, 2001 | /s/ Ralph L. Peek |
| Ralph L. Peek, Executive Vice President | ||
| and Chief Financial Officer | ||
