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.............................................September 30, 1996
Commission File Number...................................................0-17838
Hudson Hotels Corporation
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(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.
One Airport Way, Suite 200, Rochester, New York 14624
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(Address or principal executive offices) (Zip Code)
(716) 436-6000
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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
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 4, 1996 the Registrant had issued and outstanding 4,416,805
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.
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 and 1995, AND THE THREE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1995
(unaudited)
_____________________________________________________________________________________________________________________
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
OPERATING REVENUES:
Hotel operations $ 3,097,586 $ 1,703,742 $ 4,792,266 $ 4,298,920
Beach club income 518,102 511,461 1,932,196 1,921,238
Management fees -
Nonaffiliate 77,783 73,520 192,836 203,621
Affiliate 193,131 208,378 560,159 522,649
Royalties 184,654 144,360 450,776 331,041
Franchise placement income 0 55,500 100,000 80,500
Development fees 40,000 80,000 330,000 120,000
Consulting 50,000 -- 300,000 --
Sale of land -- -- -- 185,055
Miscellaneous 13,058 -- 29,079 5,560
------------ ----------- ------------ -----------
Total operating revenues 4,174,314 2,776,961 8,687,312 7,668,584
------------ ----------- ------------ -----------
OPERATING COSTS AND EXPENSES
Direct 2,765,859 1,879,704 4,800,565 5,075,310
Corporate 433,832 441,282 1,393,547 1,323,782
Depreciation and Amortization 225,197 120,202 475,390 376,991
------------ ----------- ------------ -----------
Total operating costs and expenses 3,424,888 2,441,188 6,669,502 6,776,083
------------ ----------- ------------ -----------
Income from operations 749,426 335,773 2,017,810 892,501
------------ ----------- ------------ -----------
OTHER INCOME (EXPENSE):
Interest income - corporate 50,923 9,511 129,620 58,855
Interest income - minority interests 33,980 36,350 109,104 141,653
Interest expense - corporate (162,516) (82,589) (309,582) (223,828)
Interest expense - hotel operations (303,855) -- (303,855) --
Interest expense - minority interests (26,566) (144,840) (298,367) (454,482)
Gain on repurchase of franchise rights -- -- -- 150,000
Gain on sale of franchise rights 358,725 -- 358,725 --
------------ ----------- ------------ -----------
Total other income (expense) (49,309) (181,568) (314,355) (327,802)
Income from operations, before income taxes,
minority interest and equity on net losses of
affiliates 700,117 154,205 1,703,455 564,699
PROVISION (BENEFIT) FROM INCOME TAXES 302,840 40,750 490,837 (793,693)
------------ ----------- ------------ -----------
Income from operations, before minority interest,
and equity on net losses of affiliates 397,277 113,455 1,212,618 1,358,392
MINORITY INTEREST 38,360 91,048 (363,378) (210,636)
EQUITY INCOME/(LOSSES) OF AFFILIATES 18,624 14,619 63,762 (7,142)
--- -------- ----------- ------------ ---- -------
NET INCOME $ 454,261 $ 219,122 $ 913,002 $ 1,140,614
------------ ----------- ------------ ------------
------------ ----------- ------------ ------------
NET INCOME PER COMMON SHARE - PRIMARY $0.10 $0.05 $0.21 $0.30
----- ----- ----- -----
----- ----- ----- -----
NET INCOME PER COMMON SHARE - FULLY DILUTED $0.09 $0.05 $0.19 $0.26
----- ----- ----- -----
----- ----- ----- -----
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996
(unaudited)
________________________________________________________________________________
ASSETS 1996
- ------ ----
CURRENT ASSETS:
Cash and cash equivalents $ 1,317,708
Accounts receivable - trade 724,111
Inventories 163,756
Prepaid expenses and other 601,662
Accounts and notes receivable -
Affiliates 200,850
Nonaffiliate 528,042
Other current assets 2,266,616
----------
Total current assets
5,802,745
----------
INVESTMENTS IN PARTNERSHIP INTERESTS 2,826,524
----------
NVESTMENT IN LAND 780,822
----------
REAL ESTATE DEVELOPMENT 3,453,570
-----------
PROPERTY AND EQUIPMENT, NET 21,885,663
-----------
DEFERRED TAX ASSET 455,171
-----------
OTHER ASSETS:
Mortgage and note receivable -
Affiliate 1,300,000
Deposit 544,447
Intangibles and other assets 3,243,224
----------
Total other assets 5,087,671
----------
Total assets $40,292,166
-----------
-----------
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 1996
(unaudited)
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LIABILITIES AND SHAREHOLDERS' INVESTMENT 1996
- ---------------------------------------- ----
CURRENT LIABILITIES:
Line of credit $ 1,190,000
Accounts payable - trade 555,956
Accrued payroll and related taxes 47,480
Accrued interest 188,569
Other accrued expenses 641,790
Current portion of long-term debt 1,815,585
Notes payable - related party 30,000
Deferred revenue - Beach Club 98,117
Deferred consulting 0
Deferred franchise revenue - current 63,000
Customer deposits 314,283
------------
Total current liabilities 4,944,780
------------
LONG-TERM DEBT 22,662,939
-----------
DEFERRED REVENUE - LAND SALE 185,055
-----------
LIMITED PARTNERS' INTEREST IN CONTROLLED PARTNERSHIPS 1,297,937
-----------
SHAREHOLDERS' INVESTMENT:
Preferred stock 295
Common stock 4,416
Additional paid-in capital 13,530,675
Warrants outstanding 50,000
Accumulated deficit (2,383,931)
------------
Total shareholders' investment 11,201,455
------------
Total liabilities and shareholders' investment $40,292,166
------------
------------
The accompanying notes to consolidated financial statements are an integral part
of these consolidated balance sheets.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE PERIOD ENDED SEPTEMBER 30, 1996
(unaudited)
__________________________________________________________________________________________________________________________________
Additional Additional
Series A Paid-In Paid-In
Preferred Capital Common Capital Warrants Accumulated Treasury
Stock Preferred Stock Common Outstanding Deficit Stock Total
--------- --------- --------- -------- ------------ ----------- ---------- -------
BALANCE, December 31, 1995 $ 295 $1,560,705 $3,280 $5,610,844 $60,000 $(3,201,443) $(122,855) $3,910,826
Net Income -- -- -- -- -- 913,002 -- 913,002
Exercise of stock options -- -- 23 15,644 (10,000) -- -- 5,667
Conversion of debentures -- -- 600 2,999,400 3,000,000
Purchase of treasury stock -- -- (3,953,042) (3,953,042)
Issuance of common stock and use of
treasury stock for purchase of five
hotels 513 3,324,491 4,075,897 7,400,901
Other -- -- -- 19,591 -- -- -- 19,591
Cash dividends paid on
preferred stock -- -- -- -- -- (95,490) -- (95,490)
__________________________________________________________________________________________________________________________________
BALANCE, September 30, 1996 $295 $1,560,705 $4,416 $11,969,970 $50,000 (2,383,931) $0 $11,201,455
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Stock balances at December 31, 1995:
Common stock: 3,231,425 shares; Preferred stock: 294,723 shares
Stock balances at September 30, 1996:
Common stock: 4,415,805 shares; Preferred stock: 294,723 shares
The accompanying notes to financial statements are an integral part of these
consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 and 1995
(unaudited)
______________________________________________________________________________________________________________
1996 1995
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 913,002 $1,140,614
Adjustments to reconcile net income to net cash from operating activities:
Deferred tax provision (benefit) 150,830 (800,619)
Depreciation and amortization 475,390 376,991
Gain on sale of land -- (185,055)
Gain on repurchase of franchise rights -- (150,000)
Minority interest in loss (earnings) 363,378 210,636
Non-cash consulting 19,591 14,764
Equity in net losses (income) of affiliate (63,762) 7,142
Provision for (benefit from) bad debts -- 81,140
Capital distributions from unconsolidated partnership interests 57,185 20,156
Cash proceeds on land sale -- 573,105
(Increase) decrease in assets
Accounts receivable - trade (332,102) 154,528
Inventories (59,310) (22,508)
Prepaid expenses (6,410) 40,832
Increase (decrease) in liabilities
Accounts payable 163,615 165,960
Accrued payroll and related taxes 12,907 18,783
Accrued interest (42,854) (21,951)
Other accrued expenses 54,848 146,905
Deferred revenue - Beach Club (823,859) (916,134)
Deferred consulting (300,000) --
Customer deposits 238,875 (10,471)
Cash paid to repurchase franchise rights -- (200,000)
Deferred franchise revenue (41,000) (50,000)
----------- -------------
Net cash provided by operating activities 780,324 594,818
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land/real estate development (1,895,998) (915,865)
Deposit on leased operations (200,000) --
Capital contribution to unconsolidated partnership interests -- (757,000)
Collection on affiliate accounts and notes receivable 137,481 913,588
Increase in non-affiliate accounts and notes receivable (422,756) (745,953)
Purchase of equipment (211,405) (300,152)
Cash received for options exercised 4,000 222,850
Cash acquired relating to purchase of Hudson Properties 413,791 --
Change in other assets (2,223,070) (124,045)
------------ ------------
Net cash used in investing activities (4,397,957) (1,706,577)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to limited partners (140,544) (1,154,130)
Proceeds of borrowings 7,500,000 1,500,000
Payments of debt (252,013) (386,338)
Borrowings on line of credit, net 1,110,000 895,000
Treasury stock purchased (3,953,042) --
Dividends paid (95,490) (95,490)
----------- -----------
Net cash used in financing activities 4,168,911 759,042
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS 551,278 (352,717)
CASH AND CASH EQUIVALENTS - beginning of period 766,428 592,581
---------- ----------
CASH AND CASH EQUIVALENTS - end of period 1,317,706 239,864
---------- ----------
---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest 910,824 622,550
---------- ----------
---------- ----------
Income taxes $ 208,269 $ 61,567
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---------- ----------
The accompanying notes to financial statements are an integral part of these
consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 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
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.
4. SUMMARIZED FINANCIAL INFORMATION - INVESTMENTS IN PARTNERSHIP INTERESTS
The following is a summary of condensed financial information for the
partnership (Watertown Hotel Properties II) which the Company exercises
control for the nine month period ended September 30, 1996, and a combined
summary of condensed financial information for the partnerships which the
Company does not control for the nine month period ended September 30,
1996. On July 31, 1996, the Company acquired the remaining interest of
Delray Beach Hotel Properties Limited, whose financial statements are
presented below prior to the acquisition date for the seven month period
ended July 31, 1996.
DELRAY BEACH WATERTOWN
HOTEL PROPERTIES HOTEL UNCONSOLIDATED
LIMITED PROPERTIES PARTNERSHIPS
----------------- ---------- ------------
Property and equipment
net of accumulated
depreciation $6,276,336 $ -- $32,499,787
Current assets 495,705 11,038 1,042,944
Notes and mortgage
receivable - noncurrent -- 1,300,000 1,500,000
Other assets 174,776 -- 872,166
---------- ------------ -- --------
TOTAL ASSETS 6,946,817 1,311,038 35,914,897
---------- ------------ -----------
Mortgage and notes
payable - current 183,917 -- 1,980,414
Other current liabilities 623,758 -- 1,654,488
Mortgage/Notes payable - non
current 6,162,256 -- 24,316,406
---------- ------------ -----------
TOTAL LIABILITIES 6,969,931 -- 27,951,308
---------- ------------ -----------
NET ASSETS (23,114) 1,311,038 7,963,589
---------- ------------ -----------
---------- ------------ -----------
Net Revenues 2,957,488 -- 7,845,506
Operating Expenses 1,729,892 2,334 5,193,359
---------- ------------ -----------
Income (Loss) from Operations 1,227,596 (2,334) 2,652,148
Other Income (Expense), net (877,678) 97,500 (2,344,700)
---------- ------------ ------------
NET INCOME $ 349,918 $ 95,166 $ 307,448
---------- ------------ ------------
---------- ------------ ------------
5. LONG TERM DEBT
Future minimum repayments under long-term debt are as follows:
Remainder 1996 $1,815,585
1997 449,314
1998 513,490
1999 1,948,681
2000 and thereafter 19,751,454
On July 3, 1996, the Oppenheimer Bond Fund for Growth converted its two
$1,500,000 convertible subordinated debentures into 600,000 shares of the
Company's common stock. Accordingly, the Company transferred $3,000,000 to
shareholders' investment.
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 fro common shares subject to the
terms above. This debenture is subordinate and junior in right of payment
to the senior indebtedness of the Company.
As part of the acquisition described in Note 12, the Company has assumed
payments on the current mortgages and has agreed to indemnify each
exchanging partner for his or her continuing liability upon guarantees of
the outstanding mortgages on each property. The following describes each
mortgage assumed as part of the acquisition.
DELRAY BEACH HOTEL PROPERTIES LIMITED - This mortgage requires monthly
payments of $52,111, including interest at 10%, through December 1996, at
which time the rate will adjust to the highest prime rate of U.S. money
center banks, plus 1%. The payment will also adjust so that the remaining
principal balance will amortize over nineteen years. The mortgage is due
in full December 2005. The mortgage is collateralized by substantially all
assets of the entity and is guaranteed by Hudson Hotels Corporation. The
limited partners have also proportionately guaranteed repayment of fixed
sums of the mortgage balance not to exceed 78% of their proportionate share
of the original mortgage balance, in which case Hudson Hotels indemnified
the limited partners as a condition of the acquisition. The mortgage
balance at September 30, 1996 is $5,341,629.
In addition, the entity issued a $1,000,000 note due in full on March 1,
2000 to Hudson Hotels Corporation. The note bears interest at 12%, with
interest payable monthly. Minimum monthly principal payments of $7,500 are
required beginning May 1, 1996. Additional principal payments can be made
at any time, without penalty. The note is collateralized by the beach club
accounts receivables and beach club dues with a second priority to that of
the first mortgage. This note is eliminated during consolidation of the
Company's financial statements. The balance of the note at September 30,
1996 is $962,500.
BROOKWOOD HOTEL PROPERTIES - First mortgage payable to Key Bank of New
York, requiring monthly payments of $53,076, including interest at 10%. A
balloon payment of $4,950,953 is due January 1998. The mortgage is
collateralized by substantially all assets of the entity and guaranteed by
the partners based on their ownership percentages, in which case, Hudson
Hotels Corporation indemnified the partners as a condition of the
acquisition. The mortgage balance at September 30, 1996 totaled
$5,115,525.
Subordinated mortgage payable to Brookwood Funding Associates, L.P.
requiring monthly payments of interest only at 10% per annum.
Additionally, supplemental interest shall be payable annually March 1st at
the rate of 2% per annum, conditional upon sufficient net operating income
as defined in the mortgage note. Beginning March 1, 1998, monthly
installments of principal and interest in the amount of $14,475 are
required. A balloon payment of $1,461,819 is due August 1999. The
mortgage is collateralized by substantially all assets of the entity. The
subordinated mortgage balance totaled $1,500,000 at September 30, 1996.
JAMESTOWN HOTEL PROPERTIES, L.P. - The mortgage requires monthly payments
of $15,820 plus interest at the LIBOR rate plus 3.25%. (8.75% at July 31,
1996) through November 1996, at which time a balloon payment of $1,649,400
is due. The mortgage is collateralized by substantially all assets of the
entity and is guaranteed by the partners based on their ownership
percentages, in which case, Hudson Hotels Corporation indemnified the
limited partners as a condition of the acquisition. The mortgage balance
totaled $1,662,070 at September 30, 1996.
RIDGE ROAD HOTEL PROPERTIES, L.P. - Mortgage payable to a bank requiring
monthly payments of $23,593, including interest at the prime rate plus
1.75% through January 1999, at which time a balloon payment of $1,776,593
is due. The mortgage is collateralized by substantially all assets of the
entity, substantially all assets of Airport Hotel Properties, L.P. (a
related partnership) and guaranteed by the partners based on their
ownership percentages, in which case, Hudson Hotels Corporation indemnified
the limited partners as a condition of the acquisition. The mortgage
balance totaled $1,995,928 at September 30, 1996.
Note payable to a former partner, requiring monthly payments of $3,549,
including interest at 8%, through January 1999. The note balance totaled
$90,377 at September 30, 1996.
MUAR LAKES ASSOCIATES, L.P. - The mortgage requires monthly payments of
$12,434, including principal and interest at the small bank prime rate
plus 1 1/2% through August 2008, at which time the remaining balance is
due. The mortgage is collateralized by substantially all assets of the
entity and is guaranteed by the partners based on their ownership
percentages, in which case, Hudson Hotels Corporation indemnified the
partners as a condition of the acquisition. The mortgage balance totaled
$1,047,813 at September 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 September 30, 1996, no funds were 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 September
30, 1996, $1,110,000 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
$112,823 and $127,635 for the periods ending September 30, 1996 and 1995,
respectively. Future minimum lease payments under operating leases are
approximately: 1996 remainder - $36,122; 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 $130,549; 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 $3.1 million at September 30, 1996.
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 September 30, 1996, Company has net operating loss carryforwards for
income tax purposes of approximately $475,000 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 September
30, 1996:
Microtel Partners 1995-I, L.P. $88,850
Gatlinburg Microtel, LP 7,500
S&W Restaurants, Inc. 64,500
Rochester Hospitality Partners, L.P. 40,000
---------
$ 200,850
---------
---------
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 received a $500,000
payment on September 30, 1996, and will receive another $500,000 payment
on December 1, 1996. The Company offset interest accrued on the balance
due and deferred expenses relating to the joint venture in determining the
net gain of $358,725, which is presented in the Statement of Income.
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.
12. ACQUISITION
On August 28, 1996, the Company completed the acquisition of the remaining
partnership interests in five hotel partnerships in which the Company was
the owner of varying general and limited partnership equity interests for
1,170,103 shares of the Company's common stock. The acquisition has been
accounted for under the purchase method and, accordingly, the operating
results of the five hotel partnerships acquired have been included in the
consolidated operating results since the effective date of the acquisition,
July 31, 1996. One of the partnerships acquired, Delray Beach Hotel
Properties Limited, was included in the consolidated operating results of
the Company prior to the acquisition, as the Company, in its capacity as
sole general partner and by the terms of the partnership agreements,
controlled the partnership of Delray Beach Hotel Properties Limited.
The Company shares to be exchanged therefor were valued at the average
closing price for the five trading days prior to the effective date of the
exchange, i.e., July 31, 1996. The share value was determined by that
method to be $6.325. A total of 1,170,103 shares was exchanged for the
partnership interests acquired. The Company utilized 657,292 treasury
shares and 512,811 newly issued shares to satisfy its obligations. The
Company has agreed to register the shares so exchanged for sale pursuant to
the Securities Act of 1933. In addition to the shares thus exchanged, the
Company has agreed to indemnify each exchanging partner for his or her
continuing liability upon guarantees of the outstanding mortgages on each
property.
The following partnerships and properties were acquired:
DELRAY BEACH HOTEL PROPERTIES LIMITED - This limited partnership operates a
70 room luxury suite hotel and private beach club and restaurant under the
name Seagate Hotel and Beach Club. The partnership purchased the Seagate
in 1990 and has made significant improvements to the property since its
purchase. The property is located in Delray Beach, Florida. This all
suite ocean-front property (housed in one two-story and one three-story
structure) is located on an approximately 2.5 acre site at 400 South
Ocean Boulevard, along Florida's Gold Coast, midway between West Palm
Beach and Fort Lauderdale. Directly across the street is the beach club,
a one-story structure located on approximately 22,000 square feet of real
estate, including 400 feet of private beach front. The property also
consists of a one-story administration building which services the hotel
and club. Hotel amenities include 1,000 square feet of meeting
facilities, freshwater and salt water swimming pools, a gazebo and
outdoor deck. All 70 suites are also equipped with a kitchenette. Beach
club amenities include a lounge, kitchen and dining room/restaurant, as
well as a bathhouse containing locker rooms, cabanas and a small service
area. The Company, through general and limited partnership interests, had
a 26.16% ownership interest in the partnership prior to the exchange.
BROOKWOOD HOTEL PROPERTIES - This general partnership operates a
full-service 108 room hotel operating under the name Brookwood Inn in
Pittsford, New York. This five-story hotel is located on an approximately
six acre site along Route 96 in Pittsford, New York, just off Interstate
490. The complex offers whirlpool and executive suites, as well as a
full-service restaurant, heated indoor pool, whirlpool and fitness center.
The hotel also has meeting and conference facilities available to
accommodate 5 to 75 people. The property was developed and opened by a
Hudson partnership in May 1987 and has been managed by Hudson Hotels
Corporation since that time. The Company's ownership percentage totaled
27.75% prior to the exchange.
RIDGE ROAD HOTEL PROPERTIES, L.P. - This limited partnership operates a
Comfort Inn, which is located in Greece, New York. This five-story 83 room
limited-service hotel is located on 1.9 acres of land along Route 104 West,
off Interstate 390 North, just outside the city of Rochester and 5 minutes
from the airport. Amenities include jacuzzi suites and a breakfast room.
This property was developed by Hudson Hotels Corporation and opened in
1986. Hudson Hotels Corporation has managed the property since that time.
The Company's ownership percentage prior to the exchange totaled 8.69%.
JAMESTOWN HOTEL PROPERTIES, L.P. - This limited partnership operates a
Comfort Inn which is located in Jamestown, New York. This two-story 101
room hotel is located on a five acre site adjacent to Interstate 17 in
Jamestown, New York. The hotel is only one mile from both Chautauqua
County airport and the city of Jamestown. This limited-service facility
provides specialty jacuzzi rooms and a cocktail lounge. The property was
developed by Hudson Hotels Corporation and opened in February 1986. Hudson
Hotels Corporation has managed the property since that time. The Company's
ownership percentage totaled 7.75% prior to the exchange.
MUAR LAKES ASSOCIATES, L.P. - This limited partnership operates an Econo
Lodge, which is located in Canandaigua, New York. This two-story 65 room
limited-service hotel is located on 2.8 acres of land along Routes 5 & 20
near the Bristol Mountain ski resort and the Finger Lakes resort area in
Western New York State. The Company's ownership percentage totals 5.00%
prior to the exchange.
As stated above, the Company owned varying percentage interests in each of
the partnerships acquired; for each partnership except Brookwood, a
subsidiary of the Company was the sole general partner of the limited
partnership prior to the exchange. In addition, the Company managed each
of the properties owned by partnerships. The Company owns 100% of
the ownership interest in each property and will continue to operate and
manage each property as a hotel.
The following summary, prepared on a pro forma basis, combines the
consolidated results of operations as if the five hotel partnerships had
been acquired as of the beginning of the periods presented, after including
the impact of certain adjustments, such as: depreciation and amortization
of fixed assets and intangibles and the related income tax effects.
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 1996 DECEMBER 31, 1995
(UNAUDITED) (UNAUDITED)
Operating revenues $11,560,280 $15,528,664
Net income 1,135,635 2,603,569
Net income per share - primary $0.22 $0.51
net income per share - fully diluted $0.20 $0.48
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisition had been in effect for the entire periods
presented. In addition, they are not intended to be a projection of future
results and do not reflect any synergies that might be achieved from
combined operations.
13. POTENTIAL ACQUISITION
The Company has entered into a definite agreement to acquire twelve
limited-service hotel properties containing 1,533 guest rooms, for
$61,000,000 from SB Motel Corp., a subsidiary of Salomon Brothers Holding
Company, Inc., the parent company of Salomon Brothers, Inc. The purchase
price includes a $55,000,000 cash payment, with the balance comprised of
$3,000,000 in Hudson Hotels Corporation common stock, and a $3,000,000
short-term note, if the transaction is consummated as contemplated. The
acquisition is subject to, among other things, the satisfactory completion
by Hudson Hotels Corporation of accounting, legal and business/operational
review of SB Motel Corp. and is expected to close before year end.
The SB Motel Corp Portfolio. includes eight Fairfield Inns by
Marriott-Registered Trademark- and four Cricket Inns-Registered
Trademark-located in the states of Georgia (1), North Carolina (7), South
Carolina (2) and Virginia (2). The hotel properties, which range in size
from 96 to 150 guest rooms, are predominantly at highly visible
interstate locations and have undergone approximately $14,000,000 in
renovations in the last two years.
14. CASH FLOW STATEMENT SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTION
In connection with the acquisition discussed in Note 12, liabilities were
assumed as follows:
Fair value of assets acquired $26,510,316
Less: stock issued 7,400,901
------------
Liabilities assumed $ 19,109,415
------------
------------
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 nine month period ended September 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 none were opened during the third quarter
ended September 30, 1996. Royalties for the nine month period ended September
30, 1996 increased $119,735 over the nine month period ended September 30, 1995,
an increase of 36%. The increase is attributable to twenty six franchised
Microtel Inns in operation, as compared to twenty two in operation during the
same nine 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 nine 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 nine month
period ended September 30, 1996, for a total of nineteen (19) managed
properties. In addition, on July 31, 1996, the Company acquired the remaining
partnership interests in five hotel partnerships in which the Company was an
owner of varying equity interests (see Note 12). As a result of the
acquisition, the management fees earned from these entities are eliminated
during consolidation from the date of acquisition.
Development fees increased $210,000 from the same period in 1995. The increase
is attributable to five 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 nine months ended September 30, 1995.
The fees relating to the Microtel Inns represent a reimbursement of costs
incurred.
An increase in hotel operating revenue of $493,346, or 11%, is a result of the
re-opening (at higher room rates) of the Company leased hotel ("Inn on the
Lake") which underwent major renovations during the past three quarters. Also,
hotel revenues include two months operations from the five hotels acquired on
July 31, 1996 (see Note 12). The hotel revenues from Delray Beach Hotel
Properties Limited (one of the five acquired properties) were already included
in 1995 and 1996 figures, as it was consolidated as a result of the equity
method of accounting.
Beach club income for the nine months ended September 30, 1996, increased
$10,958 from the same period in 1995. This is primarily a result of consistent
food and beverage volumes with a slight increase in rates for beach club dues.
Consulting fees for the nine months ended September 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 nine month period ended September 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.
Expenses - Direct expenses and costs represent the operation of the Company's
leased hotel and the five hotels acquired (see Note 12), which are consolidated
in the Company's financial statement. For the nine month period ended September
30, 1996, direct expenses decreased $274,745, or 5%, from the same period in
1995. The overall 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
include the operations of the five hotels acquired by the Company (see Note 12).
Delray Beach Hotel Properties Limited's (one of the hotels acquired) direct
expenses have already been included in the Company's financial statements since
1992, as a result of the equity method of accounting in which its results are
included in the Company's Consolidated Financial Statements. Corporate costs and
expenses increased $69,765, or 5%, for the nine month period ended September 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. $361,685, or 76%, of depreciation and amortization for the nine
month period ended September 30, 1996 represents depreciation and amortization
of the five hotels acquired by the Company (see Note 12), 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 $95,840, or 74%, 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 (Watertown Hotel Properties II, L.P.). $97,500, or 89%,
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, prior to the acquisition of
the remaining interest on July 31, 1996 (see Note 12). Interest Expense - Hotel
Operations - includes interest from the mortgages assumed due to the acquisition
of the five hotel entities on July 31, 1996 (see Note 12).
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.
The gain on the sale of worldwide franchise rights is a result of receiving a
$500,000 payment from US Franchise Systems, Inc., in September 1996, as a result
of our joint venture agreement. A portion of the payment was used to offset
interest accrued on the balance due and deferred expenses relating to the joint
venture.
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. Only seven months of operations for Delray Beach Hotel
Properties Limited has been included within the elimination of its minority
interest as a result of the acquisition of the remaining interest of the entity
on July 31, 1996 (see Note 12). 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
operating hotel properties added during the preceding eighteen to twenty four
month period which have attained market penetration.
Income Taxes - The provision for income taxes of $490,837 for the nine month
period ended September 30, 1996, represents federal and state tax expense on
income before tax of $1,403,839. The income tax benefit of $793,693 for the
nine months ended September 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 nine months
ended September 30, 1995, was offset by certain minimal state tax liabilities.
As a result of the above factors, net income of $454,261 and $913,002 was
reported for the three and nine month periods ended September 30, 1996,
compared to net income of $219,122 and $1,140,614 respectively, for the
corresponding periods in 1995. The net income per share for the three and
nine month periods ended September 30, 1996 was $.10 and $.21, compared to
net income per share of $.05 and $.30 for the corresponding periods in 1995.
Shares used in computing net income per share for the nine month period
increased from 3,770,701 for September 30, 1995, to 4,443,772 for September
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 and (iv) issuance of stock and use of treasury stock to purchase
five hotels. Consolidation of revenues and expenses of Delray Beach Hotel
Properties Limited (for the seven months ended July 31, 1996) 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.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of $857,965, as
compared to a working capital deficit of $394,178 at December 31, 1995. Cash
and cash equivalents totaled $1,317,708. The increase in working capital
from December 31, 1995 is primarily attributable to the acquisition of five
hotel entities (see Note 12). In July 1996, the Company received $7,500,000
as a result of issuing a convertible subordinated debenture. The Company
used the funds to (i) repurchase 600,000 shares of the Company's common stock
(ii) paydown its line of credit (iii) purchase land in Plano, Texas, to be
developed and (iv) a deposit for the acquisition of SB Motel Corp.
Investment in real estate partnership interests represents the Company's
interest in various partnerships. Investment in real estate partnership
interests increased $242,655 from December 31, 1995. The predominant factors
for the net increase are income/losses recorded from the various partnerships
and cash distributions received from the partnerships which are accounted for
under the equity method, amortization of step-up in equity investment of hotels,
elimination of the negative and positive equity balances in five hotel equity
investments as a result of the Company's acquisition of the remaining
partnership interests in those five partnerships (see Note 12).
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 nine months ended September 30, 1996, the Company purchased
three parcels of land (Tucson, Arizona; Arlington, Texas, and Plano, Texas) )
using its line of credit and proceeds from a debenture. As of September
30, 1996, six parcels are under development.
The majority of property and equipment reflected on the balance sheet relates to
real and personal property of the five hotel partnerships acquired on July 31,
1996. The Company maintains an ongoing capital improvement policy at all
hotel properties, which is funded through hotel 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 consist primarily of acquisition costs
relating to the refinance of the Delray Beach Hotel Properties Limited mortgage
in 1995.
Long-term debt is substantially comprised of $14,970,803 mortgages on the real
property for the five hotel entities acquired on July 31, 1996. The remaining
long-term debt relates to the Company issuing a $7,500,000 convertible
subordinated debenture and a bond with the Town of Tonawanda relating to
improvements to land in that township.
Shareholders' equity increased to $11,201,455 as of September 30, 1996 from
$3,910,826 as of December 31, 1995. The factors which affected the level of
shareholders' equity are represented by (i) an increase of $7,400,901 for the
issuance of common stock and use of treasury stock for the purchase of five
hotels (see Note 12) (ii) decrease of $3,953,042 for the purchase of treasury
stock (iii) an increase of $5,667 for options/warrants exercised, including
related tax benefits, a decrease of $95,490 resulting from preferred dividend
payment (v) other of $19,594 and (vi) an increase of $913,002 for net income for
the nine months ended September 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.
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.
On January 29, 1996, William Lerner filed a complaint in the Court of Common
Pleas 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. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
EXHIBIT NO. DESCRIPTION
4.9 Convertible subordinated debenture due July 1, 2001 with
the Oppenheimer Bond Fund for Growth
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
August 2, 1996 Acquisition of Assets
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: 11/6/96 /s/ BRUCE A. SAHS
---------------------------------
Bruce A. Sahs, Executive Vice
President and Chief Operating
Officer
Date: 11/6/96 /s/ TARAS M. KOLCIO
---------------------------------
Taras M. Kolcio, Chief Financial
Officer