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.................................................March 31, 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 May 10, 2000 the Registrant had issued and outstanding 8,188,569 shares of
its $.001 par value common stock.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
2000 1999
------------ ------------
OPERATING REVENUES:
Hotel operations 11,068,970 $ 11,273,052
Management fees 401,582 355,744
Royalties 373,967 286,901
Other 3,659 98
------------ ------------
Total operating revenues 11,848,178 11,915,795
------------ ------------
OPERATING COSTS AND EXPENSES
Direct 7,274,714 6,971,760
Corporate 1,563,963 1,145,886
Depreciation and amortization 1,676,601 1,495,289
------------ ------------
Total operating costs and expenses 10,515,278 9,612,935
------------ ------------
Income from operations 1,332,900 2,302,860
------------ ------------
OTHER INCOME (EXPENSE):
Interest income 70,635 56,332
Interest expense (3,116,629) (3,162,531)
(Loss) on disposition of property and equipment (153,682) --
------------ ------------
Total other expense (3,199,676) (3,106,199)
------------ ------------
Loss from continuing operations, before income taxes,
minority interest and equity on net losses of affiliates (1,866,776) (803,339)
PROVISION FOR INCOME TAXES 31,754 2,471
------------ ------------
Loss from continuing operations, before minority interest
and equity on net losses of affiliates (1,898,530) (805,810)
MINORITY INTEREST (23,397) (21,544)
EQUITY IN OPERATIONS OF AFFILIATES (17,062) (6,539)
------------ ------------
NET LOSS $ (1,938,989) $ (833,893)
============ ============
NET LOSS PER COMMON SHARE - BASIC AND DILUTED $ (.30) $ (.15)
============ ============
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
2000 1999
------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 886,106 $ 1,489,438
Cash - restricted 4,136,194 3,847,208
Accounts receivable - trade 1,331,801 992,505
Prepaid expenses and other 834,756 1,441,892
------------- -------------
TOTAL CURRENT ASSETS 7,188,857 7,771,043
INVESTMENTS IN PARTNERSHIP INTERESTS 1,567,924 1,591,283
LAND AND REAL ESTATE DEVELOPMENT 780,822 780,822
PROPERTY AND EQUIPMENT, NET 120,711,873 121,728,780
OTHER ASSETS 6,087,699 6,339,628
------------- -------------
TOTAL ASSETS $ 136,337,175 $ 138,211,556
============= =============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Lines of credit $ 400,000 $ 400,000
Current portion of long-term debt 2,875,809 3,178,401
Accounts payable - trade 2,206,050 1,376,111
Other accrued expenses 5,927,321 6,337,369
------------- -------------
TOTAL CURRENT LIABILITIES 11,409,180 11,291,881
------------- -------------
LONG-TERM DEBT 123,562,438 123,609,313
------------- -------------
DEFERRED REVENUE - LAND SALE 185,055 185,055
------------- -------------
LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP 1,071,314 1,060,613
------------- -------------
SHAREHOLDERS' INVESTMENT:
Preferred stock 295 295
Common stock 6,532 6,507
Additional paid-in capital 21,981,509 21,966,221
Accumulated deficit (21,837,897) (19,867,078)
------------- -------------
150,439 2,105,945
Less: 10,000 shares of common stock in treasury,
at cost at March 31, 2000 and December 31, 1999 (41,251) (41,251)
------------- -------------
TOTAL SHAREHOLDERS' INVESTMENT 109,188 2,064,694
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 136,337,175 $ 138,211,556
============= =============
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000
(UNAUDITED)
- --------------------------------------------------------------------------------
ADDITIONAL ADDITIONAL
SERIES A PAID-IN PAID-IN
PREFERRED CAPITAL COMMON CAPITAL ACCUMULATED TREASURY
STOCK PREFERRED STOCK COMMON DEFICIT STOCK TOTAL
----- --------- ----- ------ ------- ----- -----
BALANCE, DECEMBER 31, 1999 $295 $1,560,705 $6,507 $20,405,516 $(19,867,078) $(41,251) $ 2,064,694
Net Loss -- -- -- -- (1,938,989) -- (1,938,989)
Issuance of stock -- -- 25 15,288 -- -- 15,313
Cash dividends paid on preferred stock -- -- -- -- (31,830) -- (31,830)
---- ---------- ------ ----------- ------------ -------- -----------
BALANCE, MARCH 31, 2000 $295 $1,560,705 $6,532 $20,420,804 $(21,837,897) $(41,251) $ 109,188
==== ========== ====== =========== ============ ======== ===========
Stock balances at December 31, 1999:
Common stock: 6,496,902 shares;
Preferred stock: 294,723 shares
Stock balances at March 31, 2000:
Common stock: 6,521,902 shares;
Preferred stock: 294,723 shares
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 2000 AND 1999
(UNAUDITED)
- --------------------------------------------------------------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(1,938,989) $ (833,893)
Adjustments to reconcile net loss to net
cash from operating activities:
Depreciation and amortization 1,676,601 1,495,289
Minority interest in operations 23,397 21,544
Loss in disposal of assets 153,682 --
Equity in operations 17,062 6,539
Capital distributions from unconsolidated
partnership interests 14,000 4,724
(Increase) decrease in assets -
Accounts receivable - trade (339,296) (217,382)
Prepaid expenses and other 390,757 (338,749)
Increase (decrease) in liabilities -
Accounts payable 829,939 (293,661)
Other accrued expenses (410,048) (87,511)
----------- -----------
Net cash provided (used in) by operating activities 417,105 (243,100)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (288,986) (1,081,573)
Cash collected on sale of land -- 1,650,058
Change in affiliates accounts and notes receivable -- 166,056
Capital contribution to unconsolidated partnership -- (1,500)
Purchase of equipment (602,083) (500,569)
Change in other assets 251,929 (141,908)
----------- -----------
Net cash provided by (used in) investing activities (639,140) 90,564
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgages and debt (349,467) (518,737)
Distributions to limited partners -- (22,552)
Dividends paid (31,830) (31,830)
----------- -----------
Net cash provided by/(used in)financing activities (381,297) (573,119)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (603,332) (725,655)
CASH AND CASH EQUIVALENTS - beginning of period 1,489,438 1,751,580
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 886,106 $ 1,025,925
=========== ===========
OTHER INFORMATION:
Cash paid during the period for:
Interest $ 3,000,212 $ 3,159,157
Income taxes $ 31,754 $ 41,392
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2000
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial
statements reflect, in the opinion of management, all adjustments, which
are of a normal and recurring nature, necessary for a fair presentation of
the financial condition and results of operations and cash flows for the
periods presented. The preparation of financial statements in accordance
with generally accepted accounting principals ("GAAP") requires management
to make estimates and assumptions. Such estimates and assumptions affect
the reported amounts of assets and liabilities, as well as the disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. The
results of operations for the interim periods are not necessarily
indicative of the results for the entire year.
The accounting policies followed by the Company are set forth in Note 2 to
the Company's financial statements in the December 31, 1999 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 10-K and 10-K/A.
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 segment 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 five (5) Microtel
Inns through a joint venture partnership.
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. A condition of the forbearance was that the Company repay
a total of $5,508,567 on April 11, 2000. The Company did not have the
capital reserves to make this payment. On April 14, 2000, RHD Capital
Ventures, LLC, an affiliate of a large shareholder of the Company,
purchased the Mezzanine Loan. The Company and RHD have extended the
forbearance agreement through April 11, 2001.
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 2,000,000 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 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 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 666,667
shares 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; 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.
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
three month periods ended March 31, 2000 and 1999.
2000 1999
------------ ------------
Property and equipment, net of
accumulated depreciation $ 56,213,534 $ 56,947,033
Current assets 4,225,980 4,214,282
Other assets 828,620 1,028,740
------------ ------------
TOTAL ASSETS 61,268,044 62,190,055
------------ ------------
Mortgage and notes payable - current 18,834,325 432,082
Other current liabilities 1,900,825 2,515,187
Mortgage and notes payable - noncurrent 25,762,366 43,593,787
------------ ------------
TOTAL LIABILITIES 46,497,516 46,541,056
------------ ------------
NET ASSETS $ 14,770,528 $ 15,648,999
============ ============
Net revenues 4,928,846 $ 5,334,349
Operating expenses 3,732,058 3,511,821
------------ ------------
Income (loss) from operations 1,196,788 1,822,528
Other income (expense), net (1,517,354) (1,399,035)
------------ ------------
NET INCOME (LOSS) $ (320,566) $ 423,493
============ ============
COMPANY'S SHARE $ (17,062) $ (6,539)
============ ============
5. LINE OF CREDIT
The Company has a line of credit note with a commercial bank, with an
interest rate of prime plus 1 1/2%, for a total of $400,000. 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 at March
31, 2000:
Remainder 2000 $ 2,875,809
2001 36,409,994
2002 1,567,114
2003 1,712,281
2004 1,849,023
7. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease arrangements for automobiles and
office space. Total rent expense under operating leases amounted to
$118,200 and $120,817 for the periods ending March 31, 2000 and 1999,
respectively. Future minimum lease payments under operating leases are
approximately: 2000 remainder - $354,600; 2001 - $450,500; 2002 -
$426,100; 2003 - $420,000; and 2004 - $420,000.
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 franchise and liquidated damages upon
termination of franchise agreement due to the franchisee's default. Total
fees were approximately $428,000 and $433,000 for the three months ended
March 31, 2000 and 1999, respectively.
The Company assumed a ground lease for the land on which a hotel was
acquired by the Company in 1996 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 of 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 $5,500 for the three month period ended March 31, 2000
and 1999.
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 $ 16,500
2001 22,000
2002 22,000
2003 22,000
2004 22,000
Thereafter 682,000
----------
$ 786,500
==========
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, when necessary, 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 March 31, 2000, the Company has net operating loss carryforwards for
income tax purposes of approximately $11,700,000 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 three months ended March 31, 2000 and 1999 (in
thousands):
2000 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
---- ---------------- ------------------ --------------- ------------
Revenues $ 11,069 $ 1,339 $ (560) $ 11,848
EBITDA $ 3,234 $ (224) -- $ 3,010
Depreciation and amortization $ 1,527 $ 150 -- $ 1,677
Interest expense $ 2,940 $ 177 -- $ 3,117
Capital expenditures $ 570 $ 32 -- $ 602
Total assets $124,486 $ 53,824 $(41,973) $136,337
1999 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
---- ---------------- ------------------ --------------- ------------
Revenues $ 11,273 $ 1,204 $ (561) $ 11,916
EBITDA $ 3,740 $ 58 -- $ 3,798
Depreciation and amortization $ 1,404 $ 91 -- $ 1,495
Interest expense $ 2,862 $ 301 -- $ 3,163
Capital expenditures $ 449 $ 52 -- $ 501
Total assets $127,069 $ 61,437 $(47,596) $140,910
(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 before taxes, minority interest, and equity in
operations of partnerships:
2000 1999
------- -------
EBITDA
Hotel operations $ 3,234 $ 3,740
Management and other (224) 58
Interest (3,117) (3,163)
Depreciation and amortization (1,677) (1,495)
Other (83) 57
------- -------
Loss before income taxes, minority interest,
and equity in operations of partnerships $(1,867) $ (803)
======= =======
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. Particular attention should be directed to the
Consolidated Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000, COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1999:
Total operating revenues decreased $67,617, or 1% to $11,848,178 for 2000,
reflecting changes in revenue categories, as discussed below.
HOTEL OPERATIONS were $11,068,970 for the three months ended March 31, 2000, a
decrease of $204,082, or 2%, from $11,273,052 for the three months ended March
31, 1999. Hotel operations consisted of the following:
THREE MONTHS ENDED
------------------
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Hotel room revenue $ 9,434,351 $ 9,773,221
Beach club revenue 445,630 391,078
Food and beverage revenue 722,510 707,887
Other 466,479 400,866
----------- -----------
Total $11,068,970 $11,273,052
=========== ===========
Hotel room revenues were $9,434,351 for the three month period ended March 31,
2000, a decrease of $338,870, or 3%, from $9,773,221 for the three month period
ended March 31, 1999. The net decrease is the result of a drop in occupancy for
the current period. Occupancy and average daily room rates for the Company owned
hotels were 58.6% and $61.47, respectively, for the three months ended March 31,
2000, and 62.6% and $59.97, respectively, for the three months ended March 31,
1999.
The Beach Club revenue, $445,630 for the three month period ended March 31,
2000, and relates to the operation of the beach club at the Seagate Hotel and
Beach Club, increased $54,552, or 14%, from $391,078 for the three months ended
March 31, 1999. The increase is specifically attributable to increase in
initiation fees being charged to new members.
Food and beverage revenue was $722,510 for the three months ended March 31,
2000, compared to $707,887 for the three months ended March 31, 1999, an
increase of $14,623 or 2%. This increase was due primarily to a price increase.
Other hotel revenue increased $65,613, or 16% to $466,479 for the three months
ended March 31, 2000, from $400,866 for the three months ended March 31, 1999.
The increase was due primarily to increased telephone revenues. These were
generated by improving and upgrading the telephone systems.
ROYALTIES for the three month period ended March 31, 2000 have increased
$87,066, or 30% to $373,967 from $286,901 for the three month period ended March
31, 1999. The increase is attributable to one hundred ninety (190) franchised
Microtel Inns in operation, as opposed to one hundred thirty-five (135) during
the same three month period in 1999. The Company receives all royalties on
twenty-seven (27) of the one hundred ninety (190) franchised Microtel Inns and
on the remaining one hundred sixty-three (163) 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-two (22) Microtel Inn
properties and ten (10) "suite" 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.
MANAGEMENT FEES for the three month period ended March 31, 2000, increased
$45,839, or 13% to $401,582, compared to management fees of $355,744 for the
same three-month period ended March 31, 1999. The increase is primarily the
result of increased gross revenues at hotels managed by the Company as
management fees are generally based on a percentage of gross revenue and the
addition of one (1) management contract when compared to the period ended March
31, 1999. The schedule of owned and managed hotels is summarized below:
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
Owned 25 25
Managed with financial interest 10 12
Other managed 9 6
-- --
44 43
== ==
Management fees of approximately $561,000 were generated by the twenty-five (25)
owned hotels for the three month period ended March 31, 2000, which were
eliminated for consolidation purposes.
The Company plans to continue its revenue growth by maintaining the following
strategies: (i) enhance operating performance of its existing hotels owned or
under management 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 three months ended March 31, 2000,
was 29%, compared to 37% for the three months ended March 31, 1999. 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
$418,077, or 36%, to $1,563,963 for the three months ended March 31, 2000, from
$1,145,886 for the three months ended March 31, 1999. The increase is primarily
a result of an increase in professional fees and payroll, including severance
benefits.
DEPRECIATION AND AMORTIZATION for the three month period ended March 31, 2000,
increased $181,312, or 12% to $1,676,601 from $1,495,289 for the three month
period ended March 31, 1999. The increase is a result of capital improvements in
1999 and 1998, which increased depreciation expense. Capital improvements
included product improvements at three (3) Fairfield Inns and technology
upgrades at the corporate office.
OTHER INCOME (EXPENSE) for the three months ended March 31, 2000, increased
$93,477, or 3%, to $3,199,676 from $3,106,199 for the three months ended March
31, 1999. The increase was due to a loss on the disposition of property and
equipment.
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 March 31, 2000, increased $10,523 to $17,062, or 161%, from $6,539 for the
three months March 31, 1999.
INCOME TAXES - The provision for income tax of $31,574 includes minimum state
taxes. The Company did not record 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 increased $1,105,096,
or 133%, from the three month period ended March 31, 1999 to a net loss of
$1,938,989 for the three month period ended March 31, 2000. The resulting net
loss per common share - basic of $0.30 for the three month period ended March
31, 2000, compared to a net loss per common share - basic of $0.15 for the three
month period ended March 31, 1999.
CAPITAL RESOURCES AND LIQUIDITY
At March 31, 2000, the Company had a $400,000 demand note with a commercial
bank, which bears interest at a rate of prime plus 1 1/2%. Amounts borrowed are
collateralized by land.
At March 31, 2000, the Company had $886,106 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 balances
held in escrow on March 31, 2000 and 1999 were $4,136,194 and $4,095,100,
respectively.
Net cash flows from operating activities was $417,105 for the three months ended
March 31, 2000, compared to cash flows used in operating activities of $243,100
for the three months ended March 31, 1999. The net increase is primarily the
result of the increases in accounts payable and decreases in prepaid expenses.
Net cash flows used in investing activities was $639,140 for the three months
ended March 31, 2000, compared to net cash flows provided by investing
activities of $90,564 for the three months ended March 31, 1999. The cash flows
used were increasing restricted cash and the purchase of equipment.
Net cash flows used in financing activities was $381,297 for the three months
ended March 31, 2000, compared to net cash flows used in financing activities of
$573,119 for the three months ended March 31, 1999. The cash flows were used to
repay existing debt and preferred dividends.
EBITDA decreased by $788,648, or 21%, to $3,009,501 for the three months ended
March 31, 2000, compared to $3,798,149 for the three months ended March 31,
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. The decrease is a
result of a decline in occupancy and increased labor and operating costs.
LIQUIDITY - In December 1998 and the first quarter of 1999, the Company took
certain actions which resulted in default under its $35mm 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. A
condition of the forbearance was that the Company repay a total of $5,508,567 on
April 11, 2000. The Company did not have the capital reserves to make this
payment. On April 14, 2000, RHD Capital Ventures, LLC, an affiliate of a large
shareholder of the Company, purchased the Mezzanine Loan. The Company and RHD
have extended the forbearance agreement through April 11, 2001.
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 2,000,000 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 does 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 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 666,667 shares 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; 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 restructuring of its debt obligations as they become due and
strengthening its equity and asset base. The Company is in discussions with RHD
Capital Ventures, LLC, the holder of its Mezzanine debt regarding the
restructuring of that debt.
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 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.
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.
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 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 had been put back on the trial
calendar with no firm date for future proceedings.
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 April 13, 1999, the Company and its subsidiary, Canandaigua Hotel Corp., were
each served with a summons and complaint by Cheryl K. Lee, as administratrix of
the Estate of Eugene R. Guthrie, deceased, alleging negligence relating to the
design and maintenance of the handicapped access ramp at the Inn on the Lake,
which negligence allegedly caused injuries resulting in the death of the
decedent. L,R,R&M, LLC, the owner of the Inn on the Lake, is also a defendant.
The action has been commenced in New York Supreme Court, Monroe County, and
demands damages in the amount of $2,000,000 plus costs and disbursements. This
action has been turned over to the Company's insurance company for defense; the
Company believes that it has adequate insurance to cover any potential loss.
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 Hotels Corporation. The plaintiff has filed
notice of appeal but has not perfected the appeal.
Advocates for the Disabled, Inc. sued Pamela Skinner, the manager of the Seagate
Hotel and Beach Club, in the United States District Court, Southern District of
Florida, seeking injunctive and declaratory relief relating to alleged
violations
of the Americans with Disabilities Act at the Seagate Hotel. The Company engaged
counsel to defend its employee, Ms. Skinner, and engaged an independent
architect to evaluate the alleged deficiencies. This suit has been settled with
the Company being required to make certain improvements. These costs are
estimated to be $25,000.
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, and
intends to vigorously defend the action.
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
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 - 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)
/s/ E. Anthony Wilson
Date: 5/15/00 -------------------------------------
E. Anthony Wilson
President and Chief Operating Officer
/s/ Ralph L. Peek
Date: 5/15/00 -------------------------------------
Ralph L. Peek, Vice President
and Chief Accounting Officer