SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended. . . . . . . . . . . . . . . . . . . . . . . June 30, 1996
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.
One Airport Way, Suite 200, Rochester, New York 14624
- --------------------------------------------------------------------------------
(Address or principal executive offices) (Zip Code)
(716) 436-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------------- ------------
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 22, 1996 the Registrant had issued and outstanding 3,252,852
shares of its $.001 par value common stock.
The total number of pages in this report is 22.
The Index of Exhibits filed with the Reports is found at page 20.
Page 1 of 22
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1996 and 1995, AND THE THREE MONTHS ENDED
JUNE 30, 1996 AND 1995
(unaudited)
________________________________________________________________________________
Three Months Ended Six Months Ended
June 30 June 30
1996 1995 1996 1995
OPERATING REVENUES:
Hotel room rental $ 777,678 $ 1,140,191 $ 1,694,680 $ 2,595,178
Beach club income 669,269 687,089 1,414,094 1,409,777
Management fees -
Nonaffiliate 66,977 62,815 115,053 130,101
Affiliate 178,235 143,770 367,028 314,271
Royalties 158,581 108,729 266,122 186,681
Franchise placement income 25,000 25,000 100,000 25,000
Development fees 265,000 40,000 290,000 40,000
Consulting 50,000 -- 250,000 --
Sale of land -- -- -- 185,055
Miscellaneous 15,435 5,500 16,021 5,560
---------- ----------- ----------- -----------
Total operating revenues 2,206,175 2,213,094 4,512,998 4,891,623
---------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Direct 1,105,407 1,451,680 2,034,706 3,195,606
Corporate 483,077 414,882 959,715 882,500
Depreciation and Amortization 128,038 120,202 250,193 256,789
---------- ----------- ----------- -----------
Total operating costs and expenses 1,716,522 1,986,764 3,244,614 4,334,895
---------- ----------- ----------- -----------
Income from operations 489,653 226,330 1,268,384 556,728
---------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income - corporate 27,773 36,646 78,697 49,344
Interest income - minority interests 38,073 40,924 75,124 105,303
Interest expense - corporate (77,914) (87,197) (147,066) (141,239)
Interest expense - minority interests (135,564) (144,436) (271,801) (309,642)
Gain on repurchase of franchise rights -- 150,000 -- 150,000
---------- ----------- ----------- -----------
Total other income (expense) (147,632) (4,063) (265,046) (146,234)
Income from operations, before income taxes,
minority interest and equity on net income (losses) of affiliates 342,021 222,267 1,003,338 410,494
PROVISION (BENEFIT) FROM INCOME TAXES 106,316 43,099 187,997 (834,443)
---------- ----------- ----------- -----------
Income from operations, before minority interest,
and equity on net income (losses) of affiliates 235,705 179,168 815,341 1,244,937
MINORITY INTEREST (30,555) (58,536) (401,738) (301,684)
EQUITY INCOME/(LOSSES) OF AFFILIATES 49,084 1,825 45,138 (21,761)
---------- ----------- ----------- -----------
NET INCOME $ 254,234 $ 122,457 $ 458,741 $ 921,492
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
NET INCOME PER COMMON SHARE - PRIMARY $ 0.06 $ 0.03 $ 0.11 $ 0.25
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
NET INCOME PER COMMON SHARE - FULLY DILUTED $ 0.06 $ 0.04 $ 0.11 $ 0.23
---------- ----------- ----------- -----------
---------- ----------- ----------- -----------
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
Page 2 of 22
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996
(unaudited)
________________________________________________________________________________
ASSETS 1996
- ------ ----
CURRENT ASSETS:
Cash and cash equivalents $ 289,699
Accounts receivable - trade 349,601
Inventories 109,667
Prepaid expenses and other 630,075
Accounts and notes receivable -
Affiliates 338,800
Nonaffiliate 554,849
-----------
Total current assets 2,272,691
-----------
INVESTMENTS IN PARTNERSHIP INTERESTS 2,537,424
-----------
INVESTMENT IN LAND 780,822
-----------
REAL ESTATE DEVELOPMENT 2,763,276
-----------
PROPERTY AND EQUIPMENT, NET 6,414,468
-----------
DEFERRED TAX ASSET 492,385
-----------
OTHER ASSETS:
Mortgage and note receivable -
Affiliate 1,300,000
Deposit 470,485
Intangibles and other assets 276,862
-----------
Total other assets 2,047,348
-----------
Total assets $17,308,414
-----------
-----------
The accompanying notes to consolidated financial statements are an integral
part of these consolidated balance sheets.
Page 3 of 22
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1996
(unaudited)
_______________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' INVESTMENT 1996
- ---------------------------------------- ----
CURRENT LIABILITIES:
Lines of credit $ 1,785,000
Accounts payable - trade 313,139
Accrued payroll and related taxes 24,214
Accrued interest 44,686
Other accrued expenses 268,853
Current portion of long-term debt 98,219
Deferred revenue - Beach Club 398,359
Deferred consulting 50,000
Deferred franchise revenue - current 39,000
Customer deposits 22,663
-----------
Total current liabilities 3,044,133
-----------
LONG-TERM DEBT 8,502,780
-----------
DEFERRED REVENUE - LAND SALE 185,055
-----------
LIMITED PARTNERS' INTEREST IN CONSOLIDATED PARTNERSHIPS 1,255,811
-----------
SHAREHOLDERS' INVESTMENT:
Preferred stock 295
Common stock 3,301
Additional paid-in capital 7,196,256
Warrants outstanding 50,000
Accumulated deficit (2,806,362)
-----------
4,443,490
Less 49,142 shares of common stock in treasury, at cost (122,855)
-----------
Total shareholders' investment 4,320,635
-----------
Total liabilities and shareholders' investment $17,308,414
-----------
-----------
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
Page 4 of 22
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE PERIOD ENDED JUNE 30, 1996
(unaudited)
- --------------------------------------------------------------------------------
Additional Additional
Series A Paid-In Paid-In
Preferred Capital Common Capital
Stock Preferred Stock Common
--------- --------- ------ ------
BALANCE, December 31, 1995 $ 295 $1,560,705 $3,280 $5,610,844
Net Income -- -- -- --
Exercise of stock options -- -- 21 11,646
Other -- -- -- 13,061
Cash dividends paid on
preferred stock -- -- -- --
- ----------------------------------------------------------------------------------------------
BALANCE, June 30, 1996 $295 $1,560,705 $3,301 $5,635,551
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Warrants Accumulated Treasury
Outstanding Deficit Stock Total
----------- ----------- --------- ----------
BALANCE, December 31, 1995 $60,000 $(3,201,443) $(122,855) $3,910,826
Net Income -- 458,741 -- 458,741
Exercise of stock options (10,000) -- -- 1,667
Other -- -- -- 13,061
Cash dividends paid on
preferred stock -- (63,660) -- (63,660)
- ----------------------------------------------------------------------------------------------
BALANCE, June 30, 1996 $50,000 $(2,806,362) $(122,855) $4,320,635
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
Stock balances at December 31, 1995:
Common stock: 3,231,425 shares; Preferred stock: 294,723 shares
Stock balances at June 30, 1996:
Common stock: 3,251,852 shares; Preferred stock: 294,723 shares
The accompanying notes to financial statements are an integral part of these
consolidated statements.
Page 5 of 22
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 and 1995
(unaudited)
____________________________________________________________________________________________________________________________________
1996 1995
---------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 458,741 $ 921,492
Adjustments to reconcile net income to net cash
from operating activities:
Deferred tax provision (benefit) 150,830 (840,560)
Depreciation and amortization 250,193 256,789
Gain on sale of land -- (185,055)
Gain on repurchase of franchise rights -- (150,000)
Minority interest in loss (earnings) 402,094 301,684
Non-cash consulting 13,061 8,233
Equity in net losses of affiliate (45,138) 21,761
Provision for (benefit from) bad debts -- 81,140
Capital distributions from unconsolidated
partnership interests 54,091 2,059
Cash proceeds on land sale -- 573,105
(Increase) decrease in assets
Accounts receivable - trade (43,659) 84,770
Inventories (33,022) (29,675)
Prepaid expenses (482,894) 63,204
Increase (decrease) in liabilities
Accounts payable 118,340 87,334
Accrued payroll and related taxes (16,846) 18,338
Accrued interest (1,814) (21,685)
Other accrued expenses (36,052) 89,844
Deferred revenue - Beach Club (523,617) (628,934)
Deferred consulting (250,000) --
Customer deposits (62,183) 61,404
Cash paid to repurchase franchise rights -- (200,000)
Deferred franchise revenue (65,000) (1,000)
---------- ----------
Net cash provided by operating activities (112,875) 514,248
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land/real estate development (1,205,704) (926,487)
Deposit on leased operations (200,000) --
Capital contribution to unconsolidated partnership
interests -- (487,500)
Collection on affiliate accounts and notes receivable 77,451 449,639
Increase in non-affiliate accounts and notes receivable (458,201) (969,766)
Purchase of equipment (57,244) (231,648)
Cash received for options exercised -- 33,200
Change in other assets 11,774 (80,824)
---------- ----------
Net cash used in investing activities (1,831,924) (2,213,386)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to limited partners (144,275) (1,119,130)
Proceeds of borrowings -- 1,500,000
Payments of debt (110,662) (334,812)
Borrowings on line of credit, net 1,785,000 1,250,000
Exercise of options/sale of treasury stock 1,667 --
Dividends paid (63,660) (63,660)
---------- ----------
Net cash used in financing activities 1,468,070 1,232,398
NET INCREASE IN CASH AND CASH EQUIVALENTS (476,729) (466,740)
CASH AND CASH EQUIVALENTS - beginning of period 766,428 592,581
---------- ----------
CASH AND CASH EQUIVALENTS - end of period 289,699 125,841
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest 420,681 404,865
---------- ----------
---------- ----------
Income taxes $178,269 $ 47,317
---------- ----------
---------- ----------
The accompanying notes to financial statements are an integral part of these
consolidated statements.
Page 6 of 22
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 1996
(unaudited)
1. BASIS OF PRESENTATION
In the opinion of Management, the interim financial statements included
herewith reflect all adjustments which are necessary for a fair statement
of the results for the interim periods presented. All significant
intercompany transactions and accounts have been eliminated in
consolidation.
The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the full year.
The accounting policies followed by the Company are set forth in Note 2 to
the Company's financial statements in the December 31, 1995 10-KSB.
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, 1995 10-KSB.
2. THE COMPANY
As a result of shareholder approval, on May 13, 1996, the Company amended
its Certificate of Incorporation to change the Company's name to Hudson
Hotels Corporation.
3. LITIGATION
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 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. 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) and it is anticipated those suits will go to trial during
1997.
On February 11, 1993, a complaint was filed in the Western District of New
York, United States District Court, by John Miranda, Susan Miranda and
Christopher Miranda, seeking damages and costs against Quality Inn
International, Choice Hotels International, and naming Hudson as a
co-defendant. The requested relief in this case, John Miranda and Susan
Miranda and Christopher Miranda vs. Quality Inns
Page 7 of 22
International Inc., Choice Hotels International Inc., Ridge Road Hotel
Properties, Ridge Road Hotel Properties d/b/a Comfort Inn, a/k/a Comfort
Inn West, Hudson Hotels Corp., and Jennifer L. Ansley, as Executrix of the
Estate of Loren G. Ansley, was based on allegations that John Miranda,
while staying at the Comfort Inn, stepped on a needle, and claims
negligence and lack of due care on the part of the defendants. This case
is being diligently defended by the insurance carrier of Ridge Road Hotel
Properties and Hudson. The Company believes that it has adequate insurance
for any potential loss. 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 significant effect on the
Company's financial statements.
On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's former
investment bankers, filed a complaint in New York State Supreme Court
against the Company alleging breach of contract and damages of $906,250
relating to the Company's rescission of a warrant granted to them in
connection with the investment advisory agreement. In February 1994, the
Board of Directors of the Company determined that Ladenburg had been
otherwise adequately compensated for such services as were actually
performed, and voted to rescind the warrant. The Company has answered the
complaint, denying the relevant allegations and asserting several
affirmative defenses. Discovery in the case has commenced and is
continuing. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result
has been made in the financial statements.
Page 8 of 22
4. SUMMARIZED FINANCIAL INFORMATION - INVESTMENTS IN PARTNERSHIP INTERESTS
The following is a summary of condensed financial information for the
partnerships which the Company exercises control for the six month period ended
June 30, 1996, and a combined summary of condensed financial information for the
partnerships which the Company does not control for the six month period ended
June 30, 1996.
DELRAY BEACH WATERTOWN TOTAL
HOTEL PROPERTIES HOTEL CONSOLIDATED UNCONSOLIDATED
LIMITED PROPERTIES PARTNERSHIPS PARTNERSHIPS
------------------ ---------- ------------ ------------
Property and equipment
net of accumulated
depreciation $6,304,307 $ -- $6,304,307 $43,779,130
Current assets 710,442 11,042 721,484 1,520,458
Notes and mortgage
receivable - noncurrent -- 1,300,000 1,300,000 1,500,000
Other assets 175,278 -- 175,278 1,020,548
---------- --------- --------- -----------
TOTAL ASSETS 7,190,027 1,311,042 8,501,069 47,820,136
---------- --------- --------- -----------
Mortgage and notes
payable - current 50,455 -- 50,455 2,536,522
Other current liabilities 764,024 -- 764,024 1,559,834
Mortgage/Notes payable - non
current 6,303,144 -- 6,303,144 35,630,667
---------- --------- --------- -----------
TOTAL LIABILITIES 7,117,623 -- 7,117,623 39,727,023
---------- --------- --------- -----------
NET ASSETS 72,404 1,311,042 1,383,446 8,093,103
---------- --------- --------- -----------
---------- --------- --------- -----------
Net Revenues 2,675,127 -- 2,675,127 7,816,432
Operating Expenses 1,908,089 2,330 1,908,089 4,416,214
---------- --------- --------- -----------
Income (Loss) from Operations 767,038 (2,330) 764,708 3,400,218
Other Income (Expense), net (321,602) 65,000 $256,602 (3,386,731)
---------- --------- --------- -----------
NET INCOME $ 445,436 $62,670 $ 508,106 $ 13,487
---------- --------- --------- -----------
---------- --------- --------- -----------
Page 9 of 22
5. LONG TERM DEBT
Future minimum repayments under long-term debt are as follows:
Remainder 1996 $ 98,219
1997 117,189
1998 131,219
1999 138,943
2000 and thereafter 8,115,429
The Company has guaranteed repayment of the Delray Beach Hotel Properties
Limited mortgage payable. The limited partners of Delray Beach Hotel
Properties Limited have guaranteed, in the aggregate, repayment of 50% of
the mortgage. The mortgage also requires Delray Beach Hotel Properties
Limited to meet certain financial covenants, which were met at June 30,
1996.
6. LINES OF CREDIT
On December 13, 1995, the Company signed a $500,000 working capital demand
line of credit agreement with a commercial bank, which bears interest at
prime plus 3/4%. Amounts borrowed are collateralized by substantially all
of the Company's assets. At June 30, 1996, $500,000 was borrowed under the
terms of this line.
On December 13, 1995, the Company signed a commitment letter for a
$2,000,000 loan limit with a commercial bank for the intended purpose of
purchasing land for the development of hotel properties. The loan limit
bears interest at prime plus 1% and a fee of 1/4% on each advance. Each
advance is due nine months from the date of the draw. Amounts borrowed are
collateralized by substantially all of the Company's assets. At June 30,
1996, $1,285,000 was borrowed under the terms of this loan limit.
7. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease arrangements for automobiles and
office space. Total rent expense under operating leases amounted to
$75,215 and $85,090 for the periods ending June 30, 1996 and 1995,
respectively. Future minimum lease payments under operating leases are
approximately: 1996 remainder - $72,243; 1997 - $96,256; 1998 - $2,328.
In November 1994, the Company provided a $250,000 cash deposit to secure a
ten year operating lease and management contract of a full-service hotel
located in Canandaigua, New York, from L, R, R & M, L.L.C. In June 1996,
the Company provided an additional $200,000 cash deposit which extends the
lease term an additional eighteen months and provides additional security
on the renovations performed from November 1995 through May 1996. One of
the minority owners of L, R, R & M, L.L.C. is a greater than 5% Microtel
shareholder who is not involved in the management or operation of the
Company. The deposit shall be returned to the Company in the event the
Landlord sells the premises based on 25% of the net proceeds of such sale,
as defined in the lease agreement. Future minimum lease payments under
this operating lease are approximately: 1996 remainder $261,098; 1997 -
$595,000; 1998 - $595,000; 1999 - $595,000; thereafter $2,925,417.
As an equity partner in various hotel partnerships, the Company has
guaranteed portions of mortgages payable relating to the partnerships. The
guarantees range from 100% to 200% of the outstanding mortgages payable to
banks. Amounts guaranteed by the Company related to the partnerships'
mortgages payable were approximately $8.4 million at June 30, 1996. This
balance includes the Company's guarantee of Delray Beach Hotel Properties
Limited mortgage payable to a bank which has an outstanding balance of
$5,361,099 at June 30, 1996, along with limited partner guarantees.
Page 10 of 22
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.
Deferred tax assets include loss carryforwards and deferred revenue.
Deferred tax liability represents the gross up relating to the purchase of
Hudson.
At June 30, 1996, Company has net operating loss carryforwards for income
tax purposes of approximately $975,000 which may be used to offset future
taxable income. These loss carryforwards will begin to expire in 2003.
9. RECEIVABLES/PAYABLES WITH AFFILIATES
The Company has advanced affiliated entities the following as of June 30,
1996:
Microtel Partners 1995-I, L.P. $113,742
Airport Hotel Properties, L.P. 37,254
Gatlinburg Microtel, LP 15,000
S&W Restaurants, Inc. 64,500
Rochester Hospitality Partners, L.P. 54,445
Other 53,859
--------
$338,800
--------
--------
10. EXCLUSIVE DEVELOPMENT AGREEMENT
On June 30, 1995, the Company entered into an agreement with the former
partners of S&E Hospitality Partnership where as one of the former partners
of S&E sold all of their assigned prepaid franchises (14) for $200,000 back
to the Company. The 14 prepaid franchises had been recorded as deferred
revenue with a value of $350,000 on the Company's balance sheet prior to
the transaction. This transaction resulted in a $150,000 gain. The
remaining 5 prepaid franchises are still being held by the other former
partner of S&E. At March 31, 1996, all five (5) prepaid franchises were
used for the following Microtels opened: Colonie, New York; Greensboro,
North Carolina; Chattanooga, Tennessee; Raleigh, North Carolina and
Charlotte, North Carolina. The last two Microtels were opened during the
first quarter of 1996.
11. JOINT VENTURE AGREEMENT
On October 5, 1995, the Company signed an exclusive joint venture agreement
with US Franchise Systems, Inc. in which USFS assumed worldwide franchising
and administration for the Microtel hotel chain.
The Company in return will receive $4 million over a three year period in
exchange for the exclusive franchise rights of the Microtel name and
various consulting services; $2 million was paid at closing, another $1
million will be paid at the first anniversary and $500,000 each at the
second and third anniversary. In addition to the lump sum payment, the
Company will receive royalty payments from properties franchised by USFS.
Royalty payments will consist of 1% of gross room revenues from hotels
1-100; .75% from hotels 101-250; and .5% above 250 units. In addition, the
Company issued USFS 100,000 warrants exercisable at the Company's common
stock market price on October 5, 1995.
The Company has retained the right to franchise and construct an additional
twenty-three (23) Microtel properties and ten (10) "Suites" properties (if
offered by USFS), and to receive all royalties on the fifty (50) Microtels
(27 existing and 23 new ones to be undertaken by the Company) and ten (10)
Suites.
Page 11 of 22
12. SUBSEQUENT EVENTS
CONVERSION OF DEBENTURES
On July 3, 1996, the Oppenheimer Bond Fund for Growth converted $3,000,000
convertible subordinated debentures into 600,000 shares of the Company's
common stock. Accordingly, the Company transferred $3,000,000 to
shareholders' investment.
REPURCHASE OF COMMON STOCK
On July 8, 1996, the Company repurchased 600,000 shares of common stock for
$6.50 per share. This stock will be held in treasury and used for future
acquisitions by the Company.
ISSUANCE OF SUBORDINATED CONVERTIBLE DEBENTURES
On July 10, 1996, the Company sold a $7.5 million convertible subordinated
debenture to the Oppenheimer Bond Fund for Growth. The conversion price of
the 7.5% convertible subordinated debenture due July 1, 2001 is $7.50 per
common share. This price will reset on December 31, 1998, based on 125% of
the average volume weighted price over the last thirty days, or such number
of days having 150,000 shares of trading volume. A maximum and minimum
conversion price for common shares are set at $7.50 and $4.50,
respectively. At the holder's option, at any time on or before maturity,
the debenture or any part may be converted for common shares subject to the
terms above. This debenture is subordinate and junior in right of payment
to the senior indebtedness of the Company.
Page 12 of 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
Selected Financial Data (item 6); Management's Discussion and Analysis of
Financial Condition and Results of Operations (item 7); and Accountant's Report,
Financial Statements and Notes to Financial Statements (item 8) of the Company's
December 31, 1995 Transition Report on Form 10-KSB.
Franchise placement income for the six month period ended June 30, 1996,
reflects the opening of four franchises (Raleigh, North Carolina; Lake Norman,
North Carolina; Charlotte - University Place, North Carolina and Charlotte -
Airport, North Carolina), of which one opened during the second quarter ended
June 30, 1996. Royalties for the six month period ended June 30, 1996 increased
$79,441 over the six month period ended June 30, 1995, an increase of 43%. The
increase is attributable to twenty six franchised Microtel Inns in operation, as
compared to twenty in operation during the same six month period in 1995.
As a result of the Company's joint venture with US Franchise Systems, Inc. (see
Note 11), the Company has retained the right to franchise, construct and collect
franchise placement fees on an additional twenty-three (23) Microtel properties
and ten (10) "suite" properties and retain all royalties on the fifty (50)
Microtels (27 existing and 23 new ones to be undertaken by the Company) and ten
(10) suites. The Company will also receive royalty payments in the future from
US Franchise Systems, Inc., for franchises they open, along with consulting
payments over the next three years.
Overall, management fees for the six month period ended remained relatively flat
from the same period in 1995. This is a result of non-renewal of contracts and
their replacement with new contracts, which are in the start-up mode. The
Company has added three additional management contracts during the six month
period ended June 30, 1996, for a total of nineteen (19) managed properties.
Development fees increased $250,000 from the same period in 1995. The increase
is attributable to four Microtel Inns and one full-service hotel under various
stages of development for which fees were charged, compared with two Microtel
Inn projects under development for the six months ended June 30, 1995. The fees
relating to the Microtel Inns represent a reimbursement of costs incurred.
A significant decrease in hotel operating revenue $900,498 or 35%, is a result
of the shutdown of the Company leased hotel ("Inn on the Lake") in November 1995
which is undergoing major renovations. The Inn on the Lake re-opened on May 20,
1996. For the six months ended June 30, 1996, 76% of the hotel and all of the
beach club revenue relates to the operation of Delray Beach Hotel Properties
Limited, of which the Company is a controlling partner. In total, hotel
operating revenue and beach club income for the six month period ended June 30,
1996 increased approximately $26,000 from the same period in 1995. This is
primarily a result of consistent occupancies with higher room rates and a slight
increase in rates for beach club dues.
Consulting fees for the six months ended June 30, 1996 represent fees received
as part of our joint venture with US Franchise Systems, Inc., in which the
Company will be receiving fees for various consulting services over the next
three years.
During the six month period ended June 30, 1995, the gain on sale of land
relates to the sale of 2.87 acres of land the Company owned in Tonawanda, New
York, to a partnership in which the Company has an interest. The Company only
recognized its pro rata share of income on the sale based on the non-related
ownership of the partnership. The remaining deferred revenue will be recognized
as the Company's partnership interest is diluted or at such time the project is
developed and operating. There was no sale of land during the same period in
1996. With the signing of the Joint Venture Agreement with US Franchise
Systems, Inc. (see Note 11), the Company is focusing its efforts on developing,
building and managing Microtels, which has been the Company's strength since
purchasing Hudson Hotels in 1992. The Company will focus on an aggressive
development schedule through joint venture of Microtel properties, funded, in
part, with the proceeds from the joint venture with US Franchise Systems, Inc.
Page 13 of 22
Expenses - Direct expenses and costs represent the operation of the Company's
leased hotel and its controlled affiliate (Delray Beach Hotel Properties
Limited), which are consolidated in the Company's financial statement. For the
six month period ended June 30, 1996, direct expenses decreased $1,160,900, or
36%, from the same period in 1995. The decrease is a result of the shutdown and
renovation of the Company leased hotel ("Inn on the Lake") in November 1995 for
a major renovation. The Inn on the Lake re-opened on May 20, 1996. Direct
expenses and costs for Delray Beach Hotel Properties Limited remained relatively
flat for the same period in 1995. Corporate costs and expenses increased
$77,215, or 9%, for the six month period ended June 30, 1996, compared to the
same period in 1995. The increase is attributable to hiring three additional
employees and timing of professional fees incurred by the Company. $172,356, or
69%, of depreciation and amortization for the six month period ended June 30,
1996 represents depreciation of building and furniture and fixtures of Delray
Beach Hotel Properties Limited, while the majority of the remaining depreciation
and amortization represents amortization associated with the adjustment to fair
value of real estate investments. This amortization will continue at a current
quarterly level of approximately $30,000 for the next seven years and decreasing
through fifteen years. This accounting item does not impact the Company's cash
flow.
Interest Income (Expense) - Interest income - corporate - represents interest
earned by the corporate entity. Approximately $71,880 or 91%, represents
interest earned on the balance of payments due from USFS (see Note 11).
Interest income - minority interests represents interest earned by the Company's
controlled affiliates (Delray Beach Hotel Properties Limited and Watertown Hotel
Properties II, L.P.). $65,000, or 87%, is generated by interest on the mortgage
receivable from Watertown Hotel Properties II, L.P. Interest expense -
corporate represents interest paid by the corporate entity on its outstanding
convertible debentures, notes payable relating to purchase of partnership
interests, Tonawanda bond issue and line of credit. Interest Expense - Minority
Interests represents interest on the financing of Delray Beach Hotel Properties
Limited.
Other income of $150,000 for the six month period ended June 30, 1995,
represents the reacquisition of 14 prepaid franchises for $200,000 from a former
partner of S&E Hospitality. The 14 prepaid franchises had been recorded as
deferred revenue with a value of $350,000 on the Company's balance sheet prior
to the transaction.
Minority interest represents the elimination of the minority partners interest
in operations of Delray Beach Hotel Properties Limited and Watertown Hotel
Properties II, L.P. Equity in income/losses of affiliates represents the net
income/losses incurred from the Company's equity investment in various hotels.
The increase in equity income of affiliates is a result of properties added
during the preceding eighteen to twenty four month period which have attained
market penetration.
Income Taxes - The provision for income taxes of $187,997 for the six month
period ended June 30, 1996, represents federal and state tax expense on income
before tax of $646,738. The income tax benefit of $834,443 for the six months
ended June 30, 1995 represents the future benefit from tax loss carryforwards
recognized as a result of current year earnings and the expected profitability
in future fiscal periods. The net benefit for the six months ended June 30,
1995, was offset by certain minimal state tax liabilities.
As a result of the above factors, net income of $254,234 and $458,741 was
reported for the three and six month periods ended June 30, 1996, compared to
net income of $122,457 and $921,492, respectively, for the corresponding periods
in 1995. The net income per share for the three and six month periods ended
June 30, 1996 was $.06 and $.11, compared to net income per share of $.03 and
$.25 for the corresponding periods in 1995. Shares used in computing net income
per share for the six month period increased from $3,490,515 for June 30, 1995,
to $3,762,151 for June 30, 1996. The predominant factors for this increase are
(i) stock issued for consulting services (ii) stock options exercised and (iii)
additional options and warrants included in the calculation due to an increase
in the Company's stock price. Consolidation of revenues and expenses of Delray
Beach Hotel Properties Limited and Watertown Hotel Properties II provides no
additional net income or loss to the Company, than from reporting the investment
under the equity method of accounting.
Page 14 of 22
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company had working capital deficit of $771,442 as
compared to a working capital deficit of $394,178 at December 31, 1995. Cash
and cash equivalents totaled $289,699. The decrease in working capital from
December 31, 1995 is primarily attributable to draws on the Company's line of
credit to purchase land for Microtel Inn development.
Investment in real estate partnership interests represents the Company's
interest in various partnerships. Investment in real estate partnership
interests decreased $46,445 from December 31, 1995. The predominant factors for
the decrease are income/losses recorded from the various partnerships and cash
distributions received from the partnerships which are accounted for under the
equity method and amortization of step-up in equity investment of hotels.
Investment in land represents land purchased for the purpose of future
development or sale. Real estate development represents parcels of land owned
by the Company which are currently under development or consideration as hotel
sites. During the quarter ended June 30, 1996, the Company purchased two
parcels of land (Tucson, Arizona and Arlington, Texas) using its line of credit.
As of June 30, 1996, five parcels are under development.
The majority of property and equipment reflected on the balance sheet relates to
real and personal property of Delray Beach Hotel Properties, Limited. The
Company maintains an ongoing capital improvement policy at the property, which
is funded through the hotel and beach club operations.
Deferred tax assets represent the future benefit from tax loss carryforwards
realized as a result of current year earnings and the expected profitability in
future fiscal periods, along with an alternative minimum tax credit and deferred
revenue relating to consulting, initial franchise placement fees and land sale.
Deferred tax liability relates to the acquisition of Hudson and the tax effect
related temporary differences associated with financial reporting and tax basis
of the purchased assets.
Other assets consist of (i) a mortgage note receivable held by Watertown Hotel
Properties II, L.P. in the amount of $1,300,000, collateralized by land and the
Microtel Inn hotel located in Watertown, New York; (ii) a $450,000 cash deposit
to secure a ten year operating lease and management contract of a full-service
hotel located in Canandaigua, New York, from L, R, R & M, L.L.C. One of the
minority owners of L, R, R & M, L.L.C. is a greater than 5% Microtel shareholder
who is not involved in the management or operation of the Company. Also, in
January 1995, the Company received a note from Delray Beach Hotel Properties
Limited, for $1,000,000 due May 1, 2000. Under the terms of the note, payments
are interest only and are calculated at 12% per annum. Minimum monthly
principal payments of $7,500 began on May 1, 1996. Additional principal
payments can be made at any time, without penalty. The note does not appear on
the face of the balance sheet, as it is eliminated during consolidation. The
increase in intangible and other assets is primarily the result of mortgage
acquisition costs relating to the refinance of the Delray Beach Hotel Properties
Limited mortgage in 1995.
Long-term debt is substantially comprised of a $5,361,099 mortgage on the real
property of Delray Beach Hotel Properties Limited, which was refinanced in
November 1995. The remaining long-term debt relates to the Company issuing two
$1,500,000 convertible subordinated debentures, a note issued by the Company for
the purchase of various partnership interests and a bond with the Town of
Tonawanda relating to improvements to land in that township.
Shareholders' equity increased to $4,320,635 as of June 30, 1996 from $3,910,826
as of December 31, 1995. The factors which affected the level of shareholders'
equity are represented by an increase of $1,667 for options/warrants exercised,
including related tax benefits, a decrease of $63,660 resulting from preferred
dividend payment, other of $13,061 and an increase of $458,741 for net income
for the six months ended June 30, 1996.
The Company has, in total, $2,500,000 in two lines of credit, which are
available for short term requirements which may arise. The Company believes it
has sufficient resources from its present cash position to meet its current
obligations and believes that its cash position and revenues from operations are
sufficient to meet its cash requirements for the next twelve months. The
Company has not been negatively impacted by inflation during any of the periods
presented.
Page 15 of 22
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 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. 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) and it is
anticipated those suits will go to trial during 1997.
On February 11, 1993, a complaint was filed in the Western District of New York,
United States District Court, by John Miranda, Susan Miranda and Christopher
Miranda, seeking damages and costs against Quality Inn International, Choice
Hotels International, and naming Hudson as a co-defendant. The requested relief
in this case, John Miranda and Susan Miranda and Christopher Miranda vs. Quality
Inns International Inc., Choice Hotels International Inc., Ridge Road Hotel
Properties, Ridge Road Hotel Properties d/b/a Comfort Inn, a/k/a Comfort Inn
West, Hudson Hotels Corp., and Jennifer L. Ansley, as Executrix of the Estate of
Loren G. Ansley, was based on allegations that John Miranda, while staying at
the Comfort Inn, stepped on a needle, and claims negligence and lack of due care
on the part of the defendants. This case is being diligently defended by the
insurance carrier of Ridge Road Hotel Properties and Hudson. The Company
believes that it has adequate insurance for any potential loss.
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 significant effect on the Company's financial statements.
On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's former
investment bankers, filed a complaint in New York State Supreme Court against
the Company alleging breach of contract and damages of $906,250 relating to the
Company's rescission of a warrant granted to them in connection with the
investment advisory agreement. In February 1994, the Board of Directors of the
Company determined that Ladenburg had been otherwise adequately compensated for
such services as were actually performed, and voted to rescind the warrant. The
Company has answered the complaint, denying the relevant allegations and
asserting several affirmative defenses. Discovery in the case has commenced and
is continuing. The ultimate outcome of the litigation cannot presently be
determined. Accordingly, no provision for any liability that may result has
been made in the financial statements.
Page 16 of 22
On January 29, 1996, William Lerner filed a complaint in the Court of Common
Please of Washington County, Pennsylvania, against the Company, alleging breach
of contract and damages of $253,125 relating to the Company's rescission of a
warrant granted to this individual in connection with establishing a
relationship with Ladenburg, Thalmann & Co., Inc. In February 1994, the Board
of Directors of the Company rescinded the warrant to William Lerner as a result
of terminating the Company's relationship with Ladenburg, Thalmann & Co., Inc.
On March 26, 1996, William Lerner dismissed the complain filed against the
Company. As part of the dismissal, the Company allowed him to exercise his
warrants on a cashless basis and issued 19,594 shares of Microtel common stock
as a result of this transaction.
ITEM 2. CHANGE IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the annual meeting of the stockholders of the Company held on May 13, 1996,
the stockholders of the Company approved the following:
The shareholders approved the appointment of the Board of Directors consisting
of five Directors. Each Director shall hold office until the next annual
meeting of shareholders and until the successor of the Director is duly elected
and qualifies.
Appointment of Bonadio & Company as the Company's independent public accountants
for the year ending December 31, 1996.
Authorize the issuance of options for an additional 300,000 shares pursuant to
the Company's 1993 Non-Statutory Stock Option Plan.
Amend the Certificate of Incorporation of the Company to change the Company's
name to Hudson Hotels Corporation.
The table below sets forth the number of votes case for, against or withheld for
each nominee to the Company's Board of Directors, as well as votes cast for
other proposals discussed above at the May 13, 1996 shareholders meeting:
ELECTION OF DIRECTORS
NOMINEE FOR AGAINST ABSTAINED
------- --- ------- ---------
E. Anthony Wilson 3,064,416 9,529 --
Michael Cahill 3,064,416 9,529 --
Bruce A. Sahs 3,064,416 9,529 --
Ralph L. Peek 3,064,416 9,529 --
Robert Fagenson 3,064,416 9,529 --
As to the proposal to appointing Bonadio & Company as the Company's independent
public accountants for the year ending December 31, 1996:
3,049,916 shares have voted FOR
14,129 shares have voted AGAINST and
9,900 shares have ABSTAINED
As to the proposal to authorize the issuance of options for an additional
300,000 shares pursuant to the Company's 1993 Non-Statutory Stock Option Plan:
2,202,209 shares have voted FOR
56,464 shares have voted AGAINST and
17,265 shares have ABSTAINED
Page 17 of 22
As to the proposal to amend the Certificate of Incorporation of the Company to
change the Company's name to Hudson Hotels Corporation:
3,043,133 shares have voted FOR
17,210 shares have voted AGAINST and
13,252 shares have ABSTAINED
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit No. Description
- ----------- -----------
3.5 Amendment to Certificate of Incorporation changing the
Company's name to Hudson Hotels Corporation
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:
DATE OF REPORT ITEM
-------------- ----
January 19, 1996 Change in Company's fiscal year
end to December 31, 1995
Page 18 of 22
Exhibit 11
COMPUTATION OF EARNINGS PER COMMON SHARE
(unaudited)
THREE MONTHS SIX MONTHS
------------ ----------
6/30/96 6/30/95 6/30/96 6/30/95
------- ------- ------- -------
PRIMARY
- ----------------------------------------
Net earnings applicable to common stock:
Net earnings $254,234 $122,457 $458,741 $921,942
Deduct preferred stock dividends paid (31,830) (31,830) (63,660) (63,660)
--------- --------- --------- ---------
Net earnings applicable to common stock $222,404 $ 90,627 $395,081 $858,282
--------- --------- --------- ---------
--------- --------- --------- ---------
Weighted average number of common shares and
common equivalents outstanding:
Weighted average common shares outstanding 3,251,852 3,119,254 3,242,465 3,117,669
Additional shares assuming conversion of options
and warrants 453,802 349,060 519,686 372,846
--------- --------- --------- ---------
Weighted average number of common shares and
common equivalents outstanding 3,705,654 3,468,314 3,762,151 3,490,515
--------- --------- --------- ---------
--------- --------- --------- ---------
PRIMARY EARNINGS PER SHARE $ 0.06 $ 0.03 $ 0.11 $ 0.25
--------- --------- --------- ---------
--------- --------- --------- ---------
FULLY DILUTED*
- ----------------------------------------
Net earnings applicable to common stock
on a fully diluted basis:
Net earnings applicable to common stock per above $222,404 $90,627 $395,081 $858,282
Add net interest expense related to convertible
debentures 19,500 42,000 39,000 46,200
Add dividends on convertible preferred stock 31,830 31,830 63,660 63,660
--------- --------- --------- ---------
Net earnings applicable to common stock on a fully
diluted basis $273,734 $164,457 $497,741 $968,142
--------- --------- --------- ---------
--------- --------- --------- ---------
Total shares for fully diluted:
Shares used in calculating primary earnings
per share 3,705,654 3,468,314 3,762,151 3,490,515
Additional shares to be issued under full
dilution using ending market price -- 90,182 -- 45,091
Addition shares to be issued under full
conversion of convertible debentures 600,000 600,000 600,000 300,000
Additional shares to be issued under full
conversion of preferred stock 294,723 294,723 294,723 294,723
--------- --------- --------- ---------
Total shares for fully diluted 4,600,377 4,453,219 4,656,874 4,130,329
---------
---------
FULLY DILUTED EARNINGS PER SHARE $ 0.06 $ 0.04 $ 0.11 $ 0.23
--------- --------- --------- ---------
--------- --------- --------- ---------
* This calculation is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083 although
not required by footnote 8 paragraph 40 of APB No. 15 because it results in anti-dilution.
Page 19 of 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON HOTELS CORPORATION
-------------------------
(Registrant)
Date: 7/22/96 /S/ Bruce A. Sahs
-----------------
Bruce A. Sahs, Executive Vice President
and Chief Operating Officer
Date: 7/22/96 /S/ Taras M. Kolcio
-------------------
Taras M. Kolcio, Controller
Page 20 of 22