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, 2000
Commission File Number...................................................0-17838
Hudson Hotels Corporation
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 16-1312167
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State or other jurisdiction of I.R.S. Employer
in corporation or organization Identification No.
300 Bausch & Lomb Place, Rochester, New York 14604
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(Address or principal executive offices) (Zip Code)
(716) 454-3400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 1, 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 JUNE 30, 2000 AND 1999 AND THE SIX MONTHS ENDED JUNE
30, 2000 AND 1999
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
2000 1999 2000 1999
---- ---- ---- ----
OPERATING REVENUES:
Hotel operations $ 12,867,989 $ 12,974,401 $ 23,936,959 $ 24,247,453
Management fees 464,331 445,342 865,913 801,086
Royalties 469,678 441,187 843,645 728,186
Other 600 0 4,259 0
------------ ------------ ------------ ------------
Total operating revenues 13,802,598 13,860,930 25,650,776 25,776,725
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Direct 7,805,505 7,601,177 15,080,219 14,572,937
Corporate 815,854 1,101,781 2,379,817 2,247,667
Depreciation and amortization 1,595,519 1,478,750 3,272,120 2,974,039
------------ ------------ ------------ ------------
Total operating costs and expenses 10,216,878 10,181,708 20,732,156 19,794,643
------------ ------------ ------------ ------------
Income from operations 3,585,720 3,679,222 4,918,620 5,982,082
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 71,543 66,751 142,178 122,083
Interest expense (2,798,487) (3,191,983) (5,915,116) (6,353,514)
Loss on disposition of assets 0 0 (153,682) 0
Change in fair value of callable/puttable
warrants (111,500) 0 (111,500) 0
------------ ------------ ------------ ------------
Total other expense (2,838,444) (3,125,232) (6,038,120) (6,231,431)
------------ ------------ ------------ ------------
Income (Loss) from operations, before
income taxes, minority interest and
equity in income of affiliates 747,276 553,990 (1,119,500) (249,349)
PROVISION FOR INCOME TAXES 0 832 31,754 3,303
------------ ------------ ------------ ------------
Income (Loss) from operations, before
minority interest and equity in
income of affiliates 747,276 553,158 (1,151,254) (252,652)
MINORITY INTEREST (21,157) (22,980) (44,554) (44,524)
EQUITY IN INCOME OF AFFILIATES 37,562 46,999 20,500 40,460
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 763,681 $ 577,177 $ (1,175,308) $ (256,716)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.09 $ 0.09 $ (0.17) $ (0.05)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.07 $ 0.09 $ (0.17) $ (0.05)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2000 and December 31, 1999
(unaudited)
- ---------------------------------------------------------------------------------------
ASSETS
- ------
2000 1999
---- ----
CURRENT ASSETS:
Cash and cash equivalents $ 921,507 $ 1,489,438
Cash - restricted 5,393,830 3,847,208
Accounts receivable - trade 1,374,001 992,505
Prepaid expenses and other 1,297,716 1,441,892
------------- -------------
TOTAL CURRENT ASSETS 8,987,054 7,771,043
INVESTMENTS IN PARTNERSHIP INTERESTS 1,635,546 1,591,283
LAND FOR REAL ESTATE DEVELOPMENT 780,822 780,822
PROPERTY AND EQUIPMENT, NET 119,702,363 121,728,780
OTHER ASSETS 6,107,781 6,339,628
------------- -------------
TOTAL ASSETS $ 137,213,566 $ 138,211,556
============= =============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
- ----------------------------------------
CURRENT LIABILITIES:
Lines of credit $ 400,000 $ 400,000
Current portion of long-term debt 2,677,398 3,178,401
Accounts payable - trade 2,006,445 1,376,111
Other accrued expenses 6,021,989 6,337,369
------------- -------------
TOTAL CURRENT LIABILITIES 11,105,832 11,291,881
------------- -------------
LONG-TERM DEBT 113,039,371 123,609,313
------------- -------------
DEFERRED REVENUE - LAND SALE 185,055 185,055
------------- -------------
LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP 1,030,771 1,060,613
------------- -------------
CALLABLE/PUTTABLE WARRANTS 8,011,500 0
------------- -------------
SHAREHOLDERS' INVESTMENT:
Preferred stock 295 295
Common stock 8,199 6,507
Additional paid-in capital 24,979,840 21,966,221
Accumulated deficit (21,106,046) (19,867,078)
------------- -------------
3,882,288 2,105,945
Less: 10,000 shares of common stock in treasury,
at cost at June 30, 2000 and December 31, 1999 (41,251) (41,251)
------------- -------------
TOTAL SHAREHOLDERS' INVESTMENT 3,841,037 2,064,694
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 137,213,566 $ 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 SIX MONTH PERIOD ENDED JUNE 30, 2000
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------
SERIES A ADDITIONAL ADDITIONAL
PREFERRED PAID-IN CAPITAL COMMON PAID-IN CAPITAL ACCUMULATED
STOCK PREFERRED STOCK COMMON DEFICIT
----- --------- ----- ------ -------
BALANCE, DECEMBER 31, 1999 $ 295 $1,560,705 $ 6,507 $ 20,405,516 $(19,867,078)
Net Loss -- -- -- -- (1,175,308)
Issuance of Stock -- -- 1,692 3,013,619 --
Cash dividends paid on preferred stock -- -- -- -- (63,660)
------- ---------- -------- ------------ ------------
BALANCE, JUNE 30, 2000 $ 295 $1,560,705 $ 8,199 $ 23,419,135 $(21,106,046)
======= ========== ======== ============ ============
- -----------------------------------------------------------------------
TREASURY
STOCK TOTAL
----- -----
BALANCE, DECEMBER 31, 1999 $ (41,251) $ 2,064,694
Net Loss -- (1,175,308)
Issuance of Stock -- 3,015,311
Cash dividends paid on preferred stock (63,660)
--------- ------------
BALANCE, JUNE 30, 2000 $ (41,251) $ 3,841,037
========= ============
Stock balances at December 31, 1999:
Common stock: 6,496,902 shares; Preferred stock: 294,723 shares
Stock balances at June 30, 2000:
Common stock: 8,188,569 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 SIX MONTH PERIOD ENDED JUNE 30, 2000 AND 1999
(UNAUDITED)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 2000 1999
---- ----
Net Loss $(1,175,308) $ (256,716)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization 3,272,120 2,974,039
Loss on disposition of assets 153,682 0
Change in fair value of warrants 111,500 0
Minority interest in operations 44,554 44,524
Equity in income of affiliates (20,500) (40,460)
Capital distributions from unconsolidated
partnership interests 14,000 53,072
(Increase) decrease in assets -
Accounts receivable - trade (381,496) (374,786)
Prepaid expenses and other 144,176 (53,909)
Increase (decrease) in liabilities -
Accounts payable 630,334 (433,544)
Other accrued expenses (315,380) 263,220
----------- -----------
Net cash provided by operating activities 2,477,682 2,175,440
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in restricted cash (1,546,622) (2,050,204)
Cash collected on sale of property and equipment 0 1,650,058
Purchase of equipment (769,344) (1,175,123)
Deposits and other assets (69,682) (145,966)
Sale of Warrants 250,000 0
----------- -----------
Net cash used in investing activities (2,135,648) (1,721,235)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgages and debt (762,842) (752,048)
Distributions to limited partners (83,463) (44,717)
Dividends paid (63,660) (63,660)
----------- -----------
Net cash used in financing activities (909,965) (860,425)
----------- -----------
NET (DECREASE) IN CASH AND CASH
EQUIVALENTS (567,931) (406,220)
CASH AND CASH EQUIVALENTS - beginning of period 1,489,438 1,751,580
----------- -----------
CASH AND CASH EQUIVALENTS - end of period $ 921,507 $ 1,345,360
=========== ===========
OTHER INFORMATION:
Cash paid during the period for:
Interest $ 6,027,490 $ 6,244,692
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
JUNE 30, 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. On April 14, 2000,
RHD Capital Ventures, LLC, an affiliate of a large shareholder of the Company,
purchased the Mezzanine Loan.
On June 2, 2000, the Company entered into a Mezzanine Loan Restructuring
Agreement with RHD Capital Ventures, LLC, and in connection therewith a Second
Amended and Restated Mezzanine Note, a Second Amended and Restated Mezzanine
Loan Agreement, and related amendments to collateral documents. The
Restructuring Agreement reduced the stated principal of the Mezzanine Loan from
$35,000,000 to $25,000,000 (including offset of the $750,000 Note given by RHD
to the Company as partial consideration for the Warrant), reduced the stated
interest rate to 6.53%, and fixed a maturity date of February 2, 2002. The
security interest in the Company's assets was spread to cover the amounts which
may become due under the Put and Call Agreement, as well.
On May 24, 2000, Hudson Hotels Corporation (the "Company") sold to RHD Capital
Ventures LLC for an aggregate consideration of $1,000,000, a Warrant to purchase
5,000,000 common shares of Company stock for a per share exercise price of
$1.00. The Warrant is exercisable at any time until May 23, 2005. The purchaser
paid $250,000 in cash and delivered a Note for the balance of the purchase price
of $750,000. Simultaneously, with the sale of the Warrant, the Company and RHD
entered into a Put and Call Agreement, pursuant to which the Company has the
right to purchase the Warrants from RHD upon payment in full of any and all
outstanding debt obligation to RHD, and RHD has the right to require the Company
to repurchase the Warrants upon repayment in full of all debt of the Company to
RHD, or upon the occurrence of an Event of Default, as defined in any document
or instrument evidencing or securing any debt from the Company to RHD. The
purchase price of the repurchase of the Warrants is calculated by a formula
taking into account the amount of debt outstanding to RHD, a scheduled repayment
amount, and the average market price of Hudson common stock, as related to a
target stock price. The Warrant purchase price increases over time.
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 refinance and restructure its debt. There
can be no assurances the Company's restructuring efforts will be successful, or
that its lenders will agree to a course of action consistent with the Company's
requirements in restructuring the obligations. Even if such agreement is reached
it may require agreements of other creditors and shareholders of the Company,
none of which is assured. Furthermore, there can be no assurance that
restructuring of the Company's debt can be successfully accomplished on terms
acceptable to the Company. If the Company is unsuccessful in these efforts, it
may be unable to make its future obligations associated with its principal
payments, as well as other obligations, making it necessary to undertake such
other actions including seeking court protection as may be appropriate to
preserve asset value.
In 1998, Hudson Hotels Trust executed a Promissory Note in the amount of
$2,000,000, which is currently in default. The Company pledged 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 statement of operation for the
unconsolidated partnerships that the Company does not control for the six month
period ended June 30, 2000 and 1999 and balance sheets for June 30, 2000 and
December 31, 1999.
2000 1999
---- ----
Property and equipment, net of
accumulated depreciation $56,172,298 $56,908,026
Current assets 4,590,008 4,672,082
Other assets 807,794 986,739
------------ -----------
TOTAL ASSETS 61,570,100 62,566,847
------------ -----------
Mortgage and notes payable - current 18,842,944 246,585
Other current liabilities 2,116,861 2,745,311
Mortgage and notes payable - noncurrent 25,657,572 43,593,787
------------ -----------
TOTAL LIABILITIES $46,617,377 $46,585,683
=========== ===========
NET ASSETS $14,952,723 $15,981,164
=========== ===========
COMPANY'S SHARE $ 1,130,127 $ 1,771,507
============ ===========
Net revenues $ 8,887,388 $11,616,002
Operating expenses 6,201,696 7,650,130
------------ -----------
Income from operations 2,685,692 3,965,872
Other expenses, net (2,541,351) (2,634,798)
------------- -------------
NET INCOME $ 144,341 $ 1,331,074
============ ===========
COMPANY'S SHARE $ 20,500 $ 40,460
============ =============
The financial information does not include three (3) hotels. The financial data
for these hotels was not available for inclusion in the filing.
5. LINE OF CREDIT
The Company has a line of credit with a commercial bank, with an interest rate
of prime plus 1 1/2%, for a total of $400,000. The amount borrowed is
collateralized by undeveloped land in Tonawanda, New York.
6. LONG TERM DEBT
Future minimum repayments under long-term debt are as follows at June 30, 2000:
2000 (current) $ 2,677,398
2001 1,444,200
2002 28,972,047
2003 1,777,882
2004 1,896,383
Thereafter 78,948,859
On May 24, 2000, Hudson Hotels Corporation (the "Company") sold to RHD Capital
Ventures LLC ("RHD") for an aggregate consideration of $1,000,000, a Warrant to
purchase 5,000,000 common shares of Company stock for a per share exercise price
of $1.00. The Warrant is exercisable at any time until May 23, 2005. The
purchaser paid $250,000 in cash and delivered a Note for the balance of the
purchase price of $750,000. RHD Capital Ventures, LLC is an affiliate of M, L, R
& R, a large shareholder of the Company. Upon exercise of the Warrant, and
assuming no other exercise of outstanding options or warrants (including those
held by M, L, R & R), RHD and its affiliates would own approximately 48% of the
outstanding common stock of the Company.
Simultaneously with the sale of the Warrant, the Company and RHD entered into a
Put and Call Agreement,
pursuant to which the Company has the right to purchase the Warrants from RHD
upon payment in full of any and all outstanding debt obligations to RHD, and RHD
has the right to require the Company to repurchase the Warrants upon repayment
of all debt of the Company to RHD, or upon the occurrence of an Event of
Default, as defined in any document or instrument evidencing or securing any
debt from the Company to RHD. The purchase price for the repurchase of the
Warrants is calculated by a formula taking into account the amount of debt
outstanding to RHD, a scheduled repayment amount, and the average market price
of Hudson common stock, as related to a target stock price. The Warrant purchase
price increases over time.
On June 2, 2000, the Company entered into a Mezzanine Loan Restructuring
Agreement with RHD Capital Ventures LLC, and in connection therewith a Second
Amended and Restated Mezzanine Note, a Second Amended and Restated Mezzanine
Loan Agreement, and related amendments to collateral documents. The
Restructuring Agreement reduced the stated principal of the Mezzanine Loan
from $35,000,000 to $25,000,000 (including offset of the $750,000 Note given
by RHD to the Company as partial consideration for the Warrant), reduced the
stated interest rate to 6.53%, and fixed a maturity date of February 2, 2002.
The security interest in the Company's assets was spread to cover the amounts
which may become due under the Put and Call Agreement, as well.
For accounting purposes, the Company adjusted the carrying value of the debt to
$27,350,000, the sum of the future cash payments specified by the terms of the
debt agreement. The reduction in the debt ($6,900,000) was credited to the
callable/puttable warrant to reflect the warrant at its estimated fair market
value. Future changes in the estimated fair market value of the warrant will be
reflected in the Company's Statement of Operations.
7. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease arrangements for automobiles and office
space. Total rent expense under operating leases amounted to $186,657 and
$241,634 for the periods ending June 30, 2000 and 1999, respectively. Future
minimum lease payments under operating leases are approximately: 2000 remainder
- - $165,000; 2001 - $457,160; 2002 - $426,084; and 2003 - $210,000.
The Company is required to remit monthly royalty fees from 2% to 4% of gross
room revenue, plus additional monies for marketing assessments and reservation
fees to its franchisors based on franchise agreements which extend from ten to
sixteen years. Some of these agreements specify restrictions on transferability
of the franchise and liquidated damages upon termination of franchise agreement
due to the franchisee's default. Total fees were approximately $609,800 and
$627,100 for the six months ended June 30, 2000 and 1999, respectively.
In 1996, the Company acquired a hotel and assumed a ground lease for the land on
which the hotel stands in Statesville, NC. The initial term of this lease
commenced in February 1984 and expires April 30, 2005. The Company renewed the
lease at its option, for three additional ten year periods ending April 30,
2035. The annual rental during the final ten years of the initial term and each
extension is the greater of $22,000 plus one-half percent of gross room rentals
from the Statesville hotel during the 1991 lease year of the lease term or four
percent of gross room rentals from the Statesville hotel during each lease year.
The Company has a right of first refusal to buy the land subject to the ground
lease from the lessor during the lease term subject to the first refusal rights
of Roses Department Stores, Inc., or its successors. Rent expense on the ground
lease was $30,706 and $28,056 for the six month periods ended June 30, 2000, and
1999, respectively.
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 $ 11,000
2001 22,000
2002 22,000
2003 22,000
2004 22,000
Thereafter 682,000
--------
$781,000
--------
--------
8. INCOME TAXES
Income taxes are provided in accordance with Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes", which requires an asset and
liability approach to financial accounting and reporting for income taxes. The
Statement requires that deferred income taxes be provided to reflect the impact
of "temporary differences" between the amount of assets and liabilities for
financial reporting purposes and such amounts as measured by current tax laws
and regulations. A valuation allowance is established to reduce deferred tax
assets to the amount expected to be realized.
The deferred tax consequences of temporary differences in reporting items for
financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period and its history of
taxable earnings. Management has considered these factors in reaching its
conclusion as to the valuation allowance for financial reporting purposes.
At June 30, 2000, the Company has net operating loss carryforwards for income
tax purposes of approximately $2,450,000 and a capital loss carryforward of
$3,400,000 that may be used to offset future taxable income. These loss
carryforwards will begin to expire in 2004.
9. BUSINESS SEGMENTS
As described in Note 2, the Company operates in two segments: (1) hotel
owner/operator; and (2) hotel management services and other. Revenues,
identifiable assets and capital expenditures of each segment are those that are
directly identified with those operations.
The Company evaluates the performance of its segments based primarily on
earnings before interest, taxes and depreciation and amortization ("EBITDA")
generated by the operations of its Owned Hotels. Interest expense is primarily
related to debt incurred by the Company through its corporate obligations and
collateralized mortgage obligations on its hotel properties. The Company's taxes
are included in the consolidated Federal income tax return of the Company and
are allocated based upon the relative contribution to the Company's consolidated
taxable income/losses and changes in temporary differences.
The following table presents revenues and other financial information by
business segment for the six months ended June 30, 2000 and 1999 (in thousands):
2000 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
---- ---------------- ------------------ --------------- ------------
Revenues $ 23,937 $ 2,920 $ (1,206) $ 25,651
EBITDA $ 7,651 $ 540 -- $ 8,191
Depreciation and amortization $ 3,070 $ 202 -- $ 3,272
Interest expense $ 5,609 $ 306 -- $ 5,915
Capital expenditures $ 731 $ 38 -- $ 769
Total assets $ 123,230 $ 53,510 $ (39,526) $ 137,214
1999 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
---- ---------------- ------------------ --------------- ------------
Revenues $ 24,247 $ 2,731 $ (1,201) $ 25,777
EBITDA $ 8,433 $ 523 -- $ 8,956
Depreciation and amortization $ 2,809 $ 165 -- $ 2,974
Interest expense $ 5,755 $ 599 -- $ 6,354
Capital expenditures $ 1,087 $ 88 -- $ 1,175
Total assets $ 126,804 $ 60,602 $ (45,966) $ 141,440
(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:
2000 1999
---- ----
EBITDA
Hotel operations $ 7,651 $ 8,433
Management and other 540 523
Interest (5,915) (6,354)
Depreciation and amortization (3,272) (2,974)
Other (124) 123
------------ -------------
Loss before income taxes, minority interest,
and equity in income of affiliates $(1,120) $ (249)
======== ===========
The following table presents revenues and other financial information
by business segment for the three months ended June 30, 2000 and 1999
(in thousands):
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 $ 2,669 $ 129 -- $ 2,798
Capital expenditures $ 161 $ 6 -- $ 167
Total assets $ 123,230 $ 53,510 $ (39,526) $ 137,214
1999 HOTEL OPERATIONS MANAGEMENT & OTHER ELIMINATION (A) CONSOLIDATED
---- ---------------- ------------------ --------------- ------------
Revenues $ 12,974 $ 1,527 $ (640) $ 13,861
EBITDA $ 4,693 $ 465 -- $ 5,158
Depreciation and amortization $ 1,405 $ 74 -- $ 1,479
Interest expense $ 2,893 $ 298 -- $ 3,191
Capital expenditures $ 638 $ 36 -- $ 674
Total assets $ 126,804 $ 60,602 $ (45,966) $ 141,440
(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:
2000 1999
---- ----
EBITDA
Hotel operations $ 4,417 $ 4,693
Management and other 764 465
Interest (2,798) (3,191)
Depreciation and amortization (1,595) (1,479)
Other (41) 66
------- -------
Income before income taxes, minority interest,
and equity in income of affiliates $ 747 $ 554
======= =======
10. EARNINGS PER SHARE CALCULATION
For purposes of calculating earnings per share, the potential dilutive
effect of the callable/puttable warrant will be 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. At June 30, 2000, the
additional shares used in this computation was 2,553,115 shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis should be read in conjunction
with the entire Form 10-Q and Form 10-K/A 1999 Annual Report. Particular
attention should be directed to the Consolidated Financial Statements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000, COMPARED TO THE THREE MONTHS ENDED JUNE 30,
1999:
Total operating revenues decreased $58,332, or less than 1%, to $13,802,598 for
the three months ended June 30, 2000, from $13,860,930 for the three months
ended June 30, 1999, reflecting changes in revenue categories, as discussed
below.
HOTEL OPERATIONS were $12,867,989 for the three months ended June 30, 2000, a
decrease of $106,412, or 1%, from $12,974,401 for the three months ended June
30, 1999. Hotel operations consisted of the following:
THREE MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Hotel room revenue $11,235,302 $11,436,040
Beach club revenue 442,791 377,827
Food and beverage revenue 710,108 687,709
Other 479,788 472,825
----------- -----------
Total $12,867,989 $12,974,401
=========== ===========
Hotel room revenues were $11,235,302 for the three month period ended June 30,
2000 a decrease of $200,738, or 2%, from $11,436,040 for the three month period
ended June 30, 1999. The net 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 68.9%, $62.04 and $42.75, respectively, for the three
months ended June 30, 2000 and 71.3%, $61.03 and $43.51, respectively, for the
three months ended June 30, 1999.
The Beach Club revenue, which totaled $442,791 for the three month period ended
June 30, 2000 and relates to the operation of the beach club at the Seagate
Hotel and Beach Club, increased $64,964, or 17%, from $377,827 for the three
months ended June 30, 1999. The increase is attributable to increased initiation
fees being charged.
Food and beverage revenue was $710,108 for the three months ended June 30, 2000
compared to $687,709 for the three months ended June 30, 1999, an increase of
$22,399, or 3%. The net increase is primarily a result of increased prices.
Other hotel revenue increased slightly by $6,963, or 1%, to $479,788 for the
three months ended June 30, 2000 from $472,825 for the three months ended June
30, 1999. Telephone charges and movie rentals account for more than 80% of these
revenues.
ROYALTIES for the three month period ended June 30, 2000 have increased $28,491,
or 6% to $469,678 from $441,187 for the three month period ended June 30, 1999.
The increase is attributable to one hundred ninety-six (196) franchised Microtel
Inns in operation, as opposed to one hundred fifty-one (151) in operation at
June 30, 1999. The Company receives all royalties on twenty-seven (27) of the
one hundred ninety-six (196) franchised Microtel Inns and on the remaining one
hundred sixty-nine (169) 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 (for a total of 50 properties) and ten (10) "suite"
properties and will receive royalties when the facilities are opened and
operating. However, the Company does not currently have the necessary capital to
undertake the development of these properties.
MANAGEMENT FEES for the three month period ended June 30, 2000, increased
$18,989, or 4% to $464,331, compared to management fees of $445,342 for the same
three-month period ended June 30, 1999. The increase is primarily the result of
an increase in management contracts. The schedule of owned and managed hotels is
summarized below:
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Owned 25 25
Managed with financial interest 9 12
Other managed 12 8
--- ----
46 45
=== ===
Management fees of approximately $645,000 were generated by the twenty-five (25)
owned hotels for the three month period ended June 30, 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 June 30, 2000
was 39%, compared to 41% for the three months ended June 30, 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 decreased
$285,927, or 26%, to $815,854 for the three months ended June 30, 2000 from
$1,101,781 for the three months ended June 30, 1999. The decrease is primarily a
result of a reduction of the corporate staff and a reduction in rental expense.
DEPRECIATION AND AMORTIZATION for the three month period ended June 30, 2000
increased $116,769, or 8% to $1,595,519 from $1,478,750 for the three month
period ended June 30, 1999. The increase is a result of capital improvements in
1998 and 1999, which increased depreciation expense.
OTHER INCOME (EXPENSE) for the three months ended June 30, 2000 improved by
$286,788, or 9%, to $2,838,444 from $3,125,232 for the three months ended June
30, 1999. This improvement is a result of amortization of long-term debt
resulting in paying less interest expense on reduced principal balances in the
period ended June 30, 2000. Of the $2,798,487 in total interest expense 68%
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 line of credit. Included in
this category is the adjustment for the fair value of the callable/puttable
warrants (see Footnote 6).
INCOME TAXES - For the three month period ended June 30, 2000, the Company did
not record a deferred tax benefit as realization of the future tax benefits
related to the deferred taxes is dependent on many factors, including the
Company's ability to generate taxable income within the net operating loss
carryforward period.
NET INCOME - As a result of the above factors, the net income increased
$186,504, or 32%, from the three month period ended June 30, 1999 to a net
income of $763,681 for the three month period ended June 30,2000. The resulting
net income per common share - basic of $.09 for the three month period ended
June 30, 2000, compared to a net income per common share - basic of $0.09 for
the three month period ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000, COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999:
Total operating revenues decreased $125,949, or 1%, to $25,650,776 for 2000 from
$25,776,725 for the three months ended June 30 1999, reflecting changes in
revenue categories, as discussed below.
HOTEL OPERATIONS were $23,936,959 for the six months ended June 30, 2000, a
decrease of $310,494, or 1%, from $24,247,453 for the six months ended June 30,
1999. Hotel operations consisted of the following:
SIX MONTHS ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Hotel room revenue $20,669,653 $21,209,261
Beach club revenue 888,421 768,905
Food and beverage revenue 1,432,618 1,395,596
Other 946,267 873,691
----------- -----------
Total $23,936,959 $24,247,453
=========== ===========
Hotel room revenues were $20,669,653 for the six month period ended June 30,
2000, a decrease of $539,608, or 3%, from $21,209,261 for the six month period
ended June 30, 1999. 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
63.7%, $61.78 and $39.38, respectively, for the six months ended June 30, 2000,
and 67.0%, $60.58 and $40.57, respectively, for the six months ended June 30,
1999.
The Beach Club revenue, which totaled $888,421 for the six month period ended
June 30, 2000, and relates to the operation of the beach club at the Seagate
Hotel and Beach Club, increased $119,516, or 16%, from $768,705 for the six
months ended June 30, 1999. The increase is primarily attributable to increases
in initiation fees being charged to new members.
Food and beverage revenue was $1,432,618 for the six months ended June 30, 2000,
compared to $1,395,596 for the six months ended June 30, 1999, an increase of
$37,022, or 3%. The net increase is due primarily to a price increase.
Other hotel revenue increased $72,576, or 8%, to $946,267 for the six months
ended June 30, 2000 from $873,691 for the six months ended June 30, 1999. The
increase was due primarily to increased telephone revenues. These were generated
by improving and upgrading the telephone systems.
ROYALTIES for the six month period ended June 30, 2000, have increased $115,459,
or 16%, to $843,645 from $728,186 for the six month period ended June 30, 1999.
The increase is attributable to one hundred ninety-six (196) franchised Microtel
Inns in operation at June 30, 2000, as opposed to one hundred fifty-one (151)
franchised Microtel Inns in operation at June 30, 1999. The Company receives all
royalties on twenty-seven (27) of the one hundred ninety-six (196) franchised
Microtel Inns and on the remaining one hundred sixty-nine (169) 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 six month period ended June 30, 2000, increased $64,827,
or 8% to $865,913, compared to management fees of $801,086 for the same six
month period ended June 30, 1999. The increase is due to an increase in managed
properties. The schedule of owned and managed hotels is summarized below:
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
Owned 25 25
Managed with financial interest 9 12
Other managed 12 8
--- ----
46 45
=== ===
Management fees of approximately $1,206,000 were generated by the twenty-five
(25) owned hotels for the six month period ended June 30, 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 six months ended June 30, 1999 was
37%, compared to 40% for the six months ended June 30, 1999. The decrease in
gross operating margin is a result of a reduction in occupancy and increased
operating costs primarily labor costs.
CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses increased
$132,150, or 6%, to $2,379,817 for the six months ended June 30, 2000, from
$2,247,667 for the six months ended June 30, 1999. The increase is primarily a
result of the following: (1) increased professional fees, including legal and
accounting, and (2) payroll costs that included $250,000 of severance benefits.
DEPRECIATION AND AMORTIZATION for the six month period ended June 30, 2000,
increased $298,081, or 10%, to $3,272,120 from $2,974,039 for the six month
period ended June 30, 1999. The increase is a result of capital improvements in
1998 and 1999, which increased depreciation expense.
OTHER INCOME (EXPENSE) for the six months ended June 30, 2000, improved by
$193,311, or 3%, to $6,038,120 from $6,231,431 for the six months ended June 30,
1999. This improvement is a result of amortization of long-term debt resulting
in paying less interest expense on reduced principal balances in the period
ended June 30, 2000. Of the $5,915,116 in total interest expense, 64% 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 line of credit. Also included is a loss
of $153,682 on the disposition of property and equipment and the adjustment in
the fair value of the callable/puttable warrant of $111,500.
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 $918,592
from the six month period ended June 30, 1999 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 $0.17 for the six month period ended June 30, 2000, compared to a
net loss per common share - basic of $0.05 for the six month period ended June
30, 1999.
CAPITAL RESOURCES AND LIQUIDITY
At June 30, 2000, the Company had a $400,000 working capital demand note with a
commercial bank, which bears interest at a rate of prime plus 1 1/2%. Amounts
borrowed are collateralized by unencumbered land. At June 30, 2000, $400,000 was
borrowed under the terms of this line.
At June 30, 2000, the Company had $921,507 of cash and cash equivalents compared
with $1,489,438 at December 31, 1999.
The Company is required to maintain certain levels of escrowed cash in order to
comply with the terms of its debt agreements. All cash is trapped for
application against required escrows for debt, taxes, insurance and capital
asset reserves. A substantial portion of the escrowed cash funds is released
several times monthly for application against current liabilities. The balance
held in escrow on June 30, 2000, was $5,393,830 and $3,847,208 on December 31,
1999.
Net cash flows provided by operating activities was $2,477,682 for the six
months ended June 30, 2000, compared to cash flows provided by operating
activities of $2,175,440 for the six months ended June 30, 1999. The net
increase is primarily the result of the increase in accounts payable.
Net cash flows used in investing activities was $2,135,648 for the six months
ended June 30, 2000, compared to net cash flows used in investing activities of
$1,721,235 for the six months ended June 30, 1999. Net cash flow used in
investing activities for the six months ended June 30, 2000, reflects changes in
restricted cash and the purchase of equipment. Net cash used in investing
activities for the six months ended June 30, 1999, reflects changes in
restricted cash, purchase of equipment and proceeds received from sale of
assets.
Net cash flows used in financing activities was $909,965 for the six months
ended June 30, 2000, compared to net cash flows used in financing activities of
$860,425 for the six months ended June 30, 1999. Net cash flows used in
financing activities for the six months ended June 30, 2000, and June 30, 1999,
reflect the repayment of mortgages, preferred stock dividends and distributions
to limited partners.
EBITDA decreased by $765,381, or 9%, to $8,190,740 for the six months ended June
30, 2000, compared to $8,956,121 for the six months ended June 30, 1999. EBITDA
is defined as total operating revenues less direct, corporate and indirect
operating costs. The Company believes this definition of EBITDA provides a
meaningful measure of its ability to service debt. 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. On
April 14, 2000, RHD Capital Ventures, LLC, an affiliate of a large shareholder
of the Company, purchased the Mezzanine Loan.
On May 24, 2000, Hudson Hotels Corporation (the "Company") sold to RHD Capital
Ventures LLC for an aggregate consideration of $1,000,000, a Warrant to purchase
5,000,000 common shares of Company stock for a per share exercise price of
$1.00. The Warrant is exercisable at any time until May 23, 2005. The purchaser
paid $250,000 in cash and delivered a Note for the balance of the purchase price
of $750,000. Simultaneously, with the sale of the Warrant, the Company and RHD
entered into a Put and Call Agreement, pursuant to which the Company has the
right to purchase the Warrants from RHD upon payment in full of any and all
outstanding debt obligation to RHD, and RHD has the right to require the Company
to repurchase the Warrants upon repayment in full of all debt of the Company to
RHD, or upon the occurrence of an Event of Default, as defined in any document
or instrument evidencing or securing any debt from the Company to RHD. The
purchase price of the repurchase of the Warrants is calculated by a formula
taking into account the amount of debt outstanding to RHD, a scheduled repayment
amount, and the average market price of Hudson common stock, as related to a
target stock price. The Warrant purchase price increases over time.
On June 2, 2000, the Company entered into a Mezzanine Loan Restructuring
Agreement with RHD Capital Ventures, LLC, and in connection therewith a Second
Amended and Restated Mezzanine Note, a Second Amended and Restated Mezzanine
Loan Agreement, and related amendments to collateral documents. The
Restructuring Agreement reduced the stated principal of the Mezzanine Loan from
$35,000,000 to $25,000,000 (including offset of the $750,000 Note given by RHD
to the Company as partial consideration for the Warrant), reduced the stated
interest rate to 6.53%, and fixed a maturity date of February 2, 2002. The
security interest in the Company's assets was spread to cover the amounts which
may become due under the Put and Call Agreement, as well.
Equity Inns, LP is the holder of a Promissory Note from Hudson Hotels Properties
Corp., guaranteed by the Company, with a current principal balance of
$2,634,052. During 1999, the Company defaulted in payments of principal under
that Note. Equity Inns served notice of default upon the Company, but declined
to take any other actions to collect upon the Note. Equity Inns is entitled to
take 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 did not have
the capital resources to pay this obligation at maturity. On April 13, 2000,
Oppenheimer executed an agreement pursuant to which it agreed to convert the
principal of the Debenture into 1,666,667 shares 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 refinancing and restructuring of its debt obligations as they become due
and strengthening its equity and asset base.
The Company is also restricted in accessing the cash flows generated from
revenues as they are trapped for application against required escrows for debt,
tax, insurance, and capital asset reserve. Cash in excess of the required
escrows is released to the Company on a periodic basis for working capital
needs.
There can be no assurances that in 2000 or 2001 the Company's restructuring
efforts will be successful, or that its lenders will agree to a course of action
consistent with the Company's requirements in restructuring the obligations.
Even if such agreement is reached it may require agreements of other creditors
and shareholders of the Company, none of which is assured. Furthermore, there
can be no assurance that restructuring of the Company's debt can be successfully
accomplished on terms acceptable to the Company. Under current circumstances,
the Company's ultimate ability to remain viable depends upon the successful
restructuring of its debt obligations. If the Company is unsuccessful in these
efforts, it may be unable to make its future obligations associated with its
principal payments, as well as other obligations, making it necessary to
undertake such other actions including seeking court protection as may be
appropriate to preserve asset value.
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.
R. R. Donnelly & Sons, a financial printer, sued the Company and Hudson Hotels
Trust in New York Supreme Court, Monroe County, by complaint filed October 14,
1999, for services rendered in preparation and printing of the registration
statement and prospectus for the aborted initial public offering of Hudson
Hotels Trust. Donnelly had claimed damages of $279,682.34, plus 18% interest,
from May 10, 1999. The Company answered the Complaint on November 22, 1999. On
July 13, 2000, the judge in this case granted summary judgment against the
Company. The Company is currently assessing its rights and will likely appeal
the ruling.
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 - 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)
Date: ___________ /s/ E. Anthony Wilson
-------------------------------------
E. Anthony Wilson
President and Chief Operating Officer
Date: ___________ /s/ Ralph L. Peek
-------------------------------------
Ralph L. Peek, Vice President
and Chief Accounting Officer