SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1999
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.
300 Bausch & Lomb Place, Rochester, New York 14604
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(Address or principal executive offices) (Zip Code)
(716) 454-3400
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 25, 1999 the Registrant had issued and outstanding
6,464,161 shares of its $.001 par value common stock.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND THE NINE MONTHS ENDED
SEPTEMBER 30, 1999 AND 1998
(unaudited)
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Three Months Ended Nine Months Ended
1999 1998 1999 1998
------------ ------------ ------------ ------------
OPERATING REVENUES:
Hotel operating revenues $ 12,839,061 $ 16,087,093 $ 37,086,514 $ 41,840,741
Management fees 603,890 177,881 1,404,976 652,097
Royalties 568,297 372,429 1,296,483 862,643
Other -- 40,360 -- 117,517
------------ ------------ ------------ ------------
Total operating revenues 14,011,248 16,677,763 39,787,973 43,472,998
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES
Direct 7,864,089 10,452,240 22,437,026 26,923,133
Corporate 1,212,766 1,059,236 3,460,433 2,615,274
Non-recurring costs 695,037 -- 695,037 --
Depreciation and amortization 1,515,915 1,602,007 4,489,954 4,393,435
------------ ------------ ------------ ------------
Total operating costs and expenses 11,287,807 13,113,483 31,082,450 33,931,842
------------ ------------ ------------ ------------
Income from operations 2,723,441 3,564,280 8,705,523 9,541,156
OTHER INCOME (EXPENSE):
Interest income 78,958 58,810 201,041 166,990
Interest expense (3,101,169) (3,696,176) (9,454,683) (10,189,863)
Gain on sale of property and equipment -- -- -- 74,523
Settlement of Litigation -- (475,000) -- (475,000)
Non-Recurring Costs -- (4,838,872) -- (4,838,872)
------------ ------------ ------------ ------------
Total other expense (3,022,211) (8,951,238) (9,253,642) (15,262,222)
------------ ------------ ------------ ------------
Loss from operations, before income taxes,
minority interest and equity on income taxes,
minority interest, equity in income of
affiliates and extraordinary item (298,770) (5,386,958) (548,119) (5,721,066)
PROVISION FOR (BENEFIT FROM) INCOME TAXES 4,920 (2,053,150) 8,223 (2,182,022)
------------ ------------ ------------ ------------
Loss from operations, before
minority interest and equity in
income of affiliates (303,690) (3,333,808) (556,342) (3,539,044)
MINORITY INTEREST (23,902) 13,823 (68,426) (39,153)
EQUITY IN INCOME OF AFFILIATES 79,458 100,387 119,918 165,291
------------ ------------ ------------ ------------
LOSS BEFORE EXTRAORDINARY GAIN $ (248,134) $ (3,219,598) $ (504,850) $ (3,412,906)
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF
DEBT, NET OF $0 INCOME TAXES 4,089,465 -- 4,089,465 --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 3,841,331 $ (3,219,598) $ 3,584,615 $ (3,412,906)
============ ============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE - BASIC &
DILUTED
Loss before extraordinary gain $ (0.04) $ (0.61) $ (0.10) $ (0.67)
Extraordinary gain $ 0.63 -- $ 0.66 --
------------ ------------ ------------ ------------
Net income (loss) $ 0.59 $ (0.61) $ 0.56 $ (0.67)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 and DECEMBER 31, 1998
(unaudited)
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ASSETS
1999 1998
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CURRENT ASSETS:
Cash and cash equivalents $ 1,335,347 $ 1,751,580
Cash - restricted 5,444,165 3,013,617
Accounts receivable - trade 1,365,050 931,212
Prepaid expenses and other 885,771 1,356,730
------------- -------------
TOTAL CURRENT ASSETS 9,030,333 7,053,139
INVESTMENTS IN PARTNERSHIP INTERESTS 1,816,507 1,781,218
LAND AND REAL ESTATE DEVELOPMENT 780,822 2,430,880
PROPERTY AND EQUIPMENT, NET 122,515,763 124,434,369
OTHER ASSETS 6,518,944 6,976,612
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TOTAL ASSETS $ 140,662,369 $ 142,676,218
============= =============
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Lines of credit $ 400,000 $ 400,000
Current portion of long-term debt 3,026,814 6,017,698
Accounts payable - trade 734,980 1,112,851
Other accrued expenses 6,036,148 6,026,744
------------- -------------
TOTAL CURRENT LIABILITIES 10,197,942 13,557,293
LONG-TERM DEBT 123,844,231 128,039,543
DEFERRED REVENUE - LAND SALE 185,055 185,055
LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP 1,061,082 1,060,581
SHAREHOLDERS' INVESTMENT:
Preferred stock 295 295
Common stock 6,475 5,743
Additional paid-in capital 21,923,716 19,873,260
Accumulated deficit (16,515,176) (20,004,301)
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5,415,310 (125,003)
Less: 10,000 shares of common stock in treasury,
at cost at June 30, 1999 (41,251) (41,251)
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TOTAL SHAREHOLDERS' INVESTMENT 5,374,059 (166,254)
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TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 140,662,369 $ 142,676,218
============= =============
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999
(unaudited)
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SERIES A ADDITIONAL ADDITIONAL
PREFERRED PAID-IN CAPITAL COMMON PAID-IN CAPITAL ACCUMULATED TREASURY
STOCK PREFERRED STOCK COMMON DEFICIT STOCK TOTAL
----- --------- ----- ------ ------- ----- -----
BALANCE, DECEMBER 31, 1998 $295 $1,560,705 $5,743 $18,312,555 $(20,004,301) $(41,251) $ (166,254)
Net income -- -- -- -- 3,584,615 -- 3,584,615
Issuance of stock -- -- 667 1,999,333 -- -- 2,000,000
Issuance of stock as
compensation -- -- 65 51,123 -- -- 51,188
Cash dividends paid on
preferred stock -- -- -- -- (95,490) -- (95,490)
---- ---------- ------ ----------- ------------ -------- -----------
BALANCE, SEPTEMBER 30, 1999 $295 $1,560,705 $6,475 $20,363,011 $(16,515,176) $(41,251) $ 5,374,059
==== ========== ====== =========== ============ ======== ===========
Stock balances at December 31, 1998:
Common stock: 5,732,495 shares; Preferred stock: 294,723 shares
Stock balances at September 30, 1999:
Common stock: 6,464,161 shares; Preferred stock: 294,723 shares
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1999 and 1998
(unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
----------- ------------
Net Income/(Loss) $ 3,584,615 $ (3,412,906)
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred tax provision -- (2,054,014)
Depreciation and amortization 4,489,954 4,393,435
Gain on sale of property and equipment -- (74,523)
Minority interest in operations 68,426 39,153
Non-cash litigation settlement -- 375,000
Non-cash consulting and employee compensation 51,188 110,602
Equity in operations (119,198) (165,291)
Extraordinary gain on debt extinguishment (4,089,465) --
Capital distributions from unconsolidated
partnership interests 103,235 194,114
(Increase) decrease in assets -
Accounts receivable - trade (433,838) (7,560)
Prepaid expenses and other 470,959 (421,343)
Increase (decrease) in liabilities -
Accounts payable (377,871) (230,599)
Other accrued expenses 9,404 4,306,064
----------- ------------
Net cash provided by operating activities 3,757,409 3,052,132
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land/real estate development -- (41,139)
Increase in restricted cash (2,430,548) (2,641,333)
Cash collected on sale of property and equipment 1,650,058 2,038,910
Change in affiliates accounts and notes receivable -- (38,672)
Purchase of equipment (2,120,945) (28,272,365)
Deposits and other assets (11,374) (294,212)
Change in non-affiliate accounts receivable -- 235,291
----------- ------------
Net cash used in investing activities (2,912,809) (28,425,096)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings -- 27,300,000
Repayment of mortgages (1,096,731) (699,318)
Distributions to limited partners (68,612) (80,352)
Proceeds from stock options exercised -- 15,000
Dividends paid (95,490) (95,490)
Repayments on line of credit, net -- (412,537)
Proceeds from sale of common stock -- 1,000,000
----------- ------------
Net cash used in financing activities (1,260,833) 27,027,303
----------- ------------
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS (416,233) 1,654,339
CASH AND CASH EQUIVALENTS - beginning of period 1,751,580 670,736
----------- ------------
CASH AND CASH EQUIVALENTS - end of period $ 1,335,347 $ 2,325,075
=========== ============
OTHER INFORMATION:
Cash paid during the period for:
Interest $ 9,305,363 $ 10,035,108
Income taxes $ 59,656 $ 36,505
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated interim financial statements
reflect, in the opinion of management, all adjustments, which are of a normal
and recurring nature, necessary for a fair presentation of the financial
condition and results of operations and cash flows for the periods presented.
The preparation of financial statements in accordance with generally accepted
accounting principals ("GAAP") requires management to make estimates and
assumptions. Such estimates and assumptions affect the reported amounts of
assets and liabilities, as well as the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates. The results of operations for the interim periods are not
necessarily indicative of the results for the entire year.
The accounting policies followed by the Company are set forth in Note 2 to the
Company's financial statements in the December 31, 1998 10-K.
Other footnote disclosures normally included in the financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements and notes
included in the Company's December 31, 1998 10-K.
2. THE COMPANY
Hudson Hotels Corporation (the "Company") was organized as Microtel Franchise
and Development Corporation to develop and franchise a national chain of economy
limited service lodging facilities ("Microtels"), using the service mark
"MICROTEL". The Company was incorporated in New York State on June 5, 1987.
The principal activity of the Company is as owner/manager of hotels. The Company
also manages hotels with financial interest (through various partnerships) and
manages hotels through third party management contracts. The owned and managed
hotels are located in thirteen (13) states, and are operated under various
franchise agreements. The Company operates in the industry segment of hotel
operations and management.
On October 5, 1995, the Company entered into an agreement with US Franchise
Systems, Inc. ("USFS") pursuant to which USFS purchased worldwide franchising
and administration for the Microtel hotel chain (the "USFS Agreement").
Following this transaction, the Company ceased its franchising activities.
Although the agreement was entitled Joint Venture Agreement, the transaction was
structured as an outright sale of the Company's franchising rights.
The Company, in return, received $4.0 million over a three (3) year period,
allocated as follows: $3,037,640 for the purchase of the franchising assets;
$700,000 for consulting services over three (3) years; and $262,360 in interest
related to deferred payments. Expenses of $121,759 were netted against the
purchase price. Of the total consideration, $2.0 million was paid at closing,
$1.0 million was paid at the first anniversary and $500,000 at the second
anniversary, and an additional $500,000 was paid at the third anniversary. In
addition to the lump sum payments, the Company is entitled to receive royalty
payments from properties franchised by USFS at the rate of 1% of gross room
revenues from hotels 1-100; .75% of gross room revenues from hotels 101-250 and
.5% of gross room revenues for all hotels in excess of 250.
Under this Agreement, the Company has the right to franchise and construct an
additional twenty-two (22) Microtel Inn properties and ten (10) "suites"
properties and to thus receive all royalties on a total of fifty (50) Microtels
(twenty-eight (28) existing hotels and twenty-two (22) new hotels to be
undertaken by the Company) and ten (10) suites.
As a result of the sale of its franchising system pursuant to the USFS
Agreement, the Company has focused its efforts on developing, building and
managing various hotel products, including Microtel Inns, which has been the
Company's strength since it acquired Hudson Hotels Corporation in 1992. During
1996, 1997 and 1998, the Company embarked upon a significant expansion and
development program, which included several acquisitions and the development of
six (6) Microtel Inns through a joint venture partnership.
3. LIQUIDITY
In December of 1998, and the first quarter of 1999, the Company sold certain
assets and took other actions as described in Item 1 "Recent Developments" in
the December 31, 1998 10-K to generate cash or avoid cash payments which would
allow sufficient liquidity to maintain current operations during its seasonally
slow operating season (the fourth and first quarters). The Company's mezzanine
loan agreement required Hudson to use the proceeds of asset sales to pay down
the mezzanine debt; however, Hudson instead used these proceeds for working
capital. This violation of the mezzanine loan agreement gave the lender the
right to demand immediate repayment of the mezzanine loan. In April 1999, the
Company entered into an agreement with this lender, which waives these
violations of the mezzanine loan agreement if the Company fulfills certain
conditions. One of these conditions is that the Company is not to make any
principal payments to subordinated creditors of this lender, including Equity
Inns, LP ("Equity Inns"), its $3.0 million convertible subordinated debenture or
for the obligations of Hudson Hotels Trust. Such requirement caused the Company
to default in its obligations to Equity Inns as of May 1, 1999; however, under
the subordination agreement with Equity Inns, that firm is currently prevented
from taking legal action to enforce the payment of its debt. In May 1999 Equity
Inns notified the Company that it has declared this debt in default and has
accelerated the debt and is seeking default interest. Also, after default,
Equity Inns can obtain 2,000,000 shares of Hudson Hotels common stock, which is
collateral for this debt.
Additionally, upon default (which has already occurred), the holder of a $2.0
million debt in Hudson Hotels Trust can convert his debt into a total of 666,666
shares of Hudson common stock. Another Hudson Hotels Trust debt holder has
already converted $2.0 million of Hudson Hotels Trust debt into 666,666 shares
of Hudson common stock. Additionally, the Company at December 31, 1998 had
certain portions of its mezzanine debt that would begin to amortize in the
fourth quarter of 1999. As a result of the recent agreement with the holder of
the mezzanine debt, the amortization of this debt now begins in the second
quarter of 2000, which amortization the Company will not, at current operating
levels, be able to service. Therefore, the Company's viability is dependent upon
the restructuring of its debt obligations and strengthening its equity base, and
ultimately, a return of profitability.
The Company is currently in discussions with its lenders about its debt
obligations and activities to restructure its debt. On July 23, 1999, the
Company replaced its outstanding $7.5 million convertible subordinated debenture
to Oppenheimer Convertible Securities Fund with a new convertible subordinated
debenture bearing the following terms: principal balance of $3.0 million;
interest rate at 18.75%; maturity date of April 15, 2000 and a conversion price
of $1.80 per share. There is negative working capital of $1,167,609 at September
30, 1999 with a significant amount of this negative working capital generated by
significant principal debt payments. These principal payments described herein
are expected to continue. Furthermore, the Company is severely restricted in
accessing the cash flows generated from revenues as they are trapped for
application against required escrows for debt, tax, insurance, capital asset
reserve, and beginning in the second quarter of 2000, principal amortization of
the Company's mezzanine debt.
There can be no assurances that the Company's restructuring efforts will be
successful, or that the Company's lenders will agree to a course of action
consistent with the Company's requirements in restructuring the obligations.
Even if such agreement is reached it may require approval of additional debt
holders, or possibly agreements of other creditors and shareholders of the
Company, none of which is assured. Furthermore, there can be no assurance that
restructuring of the Company's debt can be successfully accomplished on terms
acceptable to the Company. Under current circumstances, the Company's ultimate
ability to remain viable depends upon the successful restructuring of its debt
obligations. If the Company is unsuccessful in these efforts, it may be unable
to make its future obligations associated with its principal payments, as well
as other obligations, making it necessary to undertake such other actions
including seeking court protection as may be appropriate to preserve asset
value.
4. SUMMARIZED FINANCIAL INFORMATION - INVESTMENTS IN PARTNERSHIP INTERESTS
The following is a summary of condensed statement of operation for the
unconsolidated partnerships that the Company does not control for the nine month
period ended September 30, 1999 and 1998 and balance sheets for September 30,
1999 and December 31, 1998.
1999 1998
------------ ------------
Property and equipment, net of
Accumulated depreciation $ 56,778,470 $ 57,248,847
Current assets 4,497,860 3,495,286
Other assets 1,488,048 1,088,155
------------ ------------
TOTAL ASSETS 62,764,378 61,832,288
------------ ------------
Mortgage and notes payable - current 161,665 550,524
Other current liabilities 2,735,562 2,429,449
Mortgage and notes payable - noncurrent 43,717,136 43,614,917
------------ ------------
TOTAL LIABILITIES 46,614,363 46,594,890
------------ ------------
NET ASSETS $ 16,150,015 $ 15,237,398
============ ============
COMPANY'S SHARE $ 1,816,507 $ 1,781,218
============ ============
Net revenues $ 18,386,215 $ 10,471,128
Operating expenses 11,922,533 3,760,551
------------ ------------
Income from operations 6,463,682 6,710,577
Other expenses, net (4,294,705) (5,676,878)
------------ ------------
NET INCOME $ 2,168,977 $ 1,033,699
============ ============
COMPANY'S SHARE $ 119,918 $ 165,291
============ ============
5. LINE OF CREDIT
The Company has a line of credit note with a commercial bank, with an interest
rate of prime plus 1 1/2%, for a total of $400,000. The amount borrowed is
collateralized by undeveloped land in Tonawanda, New York.
6. LONG TERM DEBT
Future minimum repayments under long-term debt are as follows:
Remainder of 1999 $ 3,026,814
2000 9,147,670
2001 9,517,974
2002 6,325,594
2003 and thereafter 98,852,993
7. COMMITMENTS AND CONTINGENCIES
The Company has various operating lease arrangements for automobiles and office
space. Total rent expense under operating leases amounted to $362,451 and
$198,948 for the periods ending September 30, 1999 and 1998, respectively.
Future minimum lease payments under operating leases are approximately: 1999
remainder - $123,438; 2000 - $470,160; 2001 - $446,043; 2002 - $420,000; and
thereafter - $420,000.
The Company is required to remit monthly royalty fees from 2% to 4% of gross
room revenue, plus additional monies for marketing assessments and reservation
fees to its franchisors based on franchise agreements which extend from ten to
sixteen years. Some of these agreements specify restrictions on transferability
of the franchise and liquidated damages upon termination of franchise agreement
due to the franchisee's default. Total fees were approximately $2,061,000 and
$2,278,000 for the nine months ended September 30, 1999 and 1998, respectively.
In 1996, the Company acquired a hotel and assumed a ground lease for the land on
which the hotel stands in Statesville, NC. The initial term of this lease
commenced in February 1984 and expires April 30, 2005. The Company renewed the
lease at its option, for three additional ten year periods ending April 30,
2035. The annual rental during the final ten years of the initial term and each
extension is the greater of $22,000 plus one-half percent of gross room rentals
from the Statesville hotel during the 1991 lease year of the lease term or four
percent of gross room rentals from the Statesville hotel during each lease year.
The Company has a right of first refusal to buy the land subject to the ground
lease from the lessor during the lease term subject to the first refusal rights
of Roses Department Stores, Inc., or its successors. Rent expense on the ground
lease was $16,500 for the nine month period ended September 30, 1999 and 1998.
The future minimum ground lease rental payments, assuming no gross room rentals
during the initial lease term and no increases in the consumer price index, are
as follows for the years ended December 31:
Remainder 1999 $ 5,500
2000 22,000
2001 22,000
2002 22,000
2003 22,000
Thereafter 704,000
----------
$ 797,500
==========
8. INCOME TAXES
Income taxes are provided in accordance with Statement of Financial Accounting
Standard No. 109, "Accounting for Income Taxes", which requires an asset and
liability approach to financial accounting and reporting for income taxes. The
Statement requires that deferred income taxes be provided to reflect the impact
of "temporary differences" between the amount of assets and liabilities for
financial reporting purposes and such amounts as measured by current tax laws
and regulations. A valuation allowance is established to reduce deferred tax
assets to the amount expected to be realized.
The deferred tax consequences of temporary differences in reporting items for
financial statement and income tax purposes are recognized, if appropriate.
Realization of the future tax benefits related to the deferred tax assets is
dependent on many factors, including the Company's ability to generate taxable
income within the net operating loss carryforward period and its history of
taxable earnings. Management has considered these factors in reaching its
conclusions regarding the full valuation allowance for financial reporting
purposes.
At September 30, 1999, the Company has net operating loss carryforwards for
income tax purposes of approximately $9,100,000 that may be used to offset
future taxable income. These loss carryforwards will begin to expire in 2003.
9. SHAREHOLDERS INVESTMENT
In 1998, the Company announced its plans to "paper clip" with Hudson Hotels
Trust ("Hudson Trust"), a newly formed entity that planned an initial public
offering ("IPO"), led by a group of seven (7) underwriters to raise funds to
acquire a group of twenty-nine (29) hotel properties, which would then be leased
to the Company. Prior to the IPO, Hudson Trust borrowed a total of $4.0 million
from two third party sources (in the form of two $2.0 million notes). As part of
the loan agreement, the Company pledged 1,333,332 shares of its stock as
security for the repayment of the loans from the third parties. These funds were
used to put deposits on the hotels to be acquired by Hudson Trust and for other
expenses related to the IPO. Due to difficult capital market conditions, Hudson
Trust was not able to complete its IPO. In March 1999 one of the holders of
these notes agreed to convert one of the $2.0 million notes into 666,666 shares
of Hudson common stock. Hudson Trust did not repay the remaining loan when it
came due April 30, 1999.
10. SUPPLEMENTAL INFORMATION FOR NON-CASH FINANCING ACTIVITIES
In March 1999, a $2.0 million note from Hudson Trust was converted to 666,666
shares of Hudson Hotels Corp. Common Stock. See Note 9 for further details.
In July 1999, the Company replaced its outstanding $7.5 million Convertible
Subordinated Debenture with a new $3.0 million Convertible Subordinated
Debenture. See Note 11 for further details.
11. EXTRAORDINARY GAIN ON EXTINGUISHMENT
On July 23, 1999 the Company replaced its outstanding $7.5 million Convertible
Subordinated Debenture to Oppenheimer Convertible Securities Fund with a new
Convertible Subordinated Debenture bearing the following terms: principal
balance of $3.0 million; interest rate of 18.75%; maturity date of April 15,
2000; and a conversion price of $1.80 per share.
As a result, the Company reported an extraordinary gain from debt restructuring
net of expenses of approximately $4 million or $0.63 per common share - basic
and $0.49 per common share - diluted.
12. NON-RECURRING COSTS
During the third quarter of 1999 the Company had charges of $695,037 as a result
of non-recurring costs. This amount is comprised of the following: a $351,643
charge associated with severance pay and $343,394 associated with the work
performed in exploring strategic alternatives.
13. SETTLEMENT OF LITIGATION
On September 30, 1998 the Company reached a settlement in a longstanding
litigation with plaintiffs, Ladenburg, Thalmann Co., who alleged a breach of
contract by the Company. In exchange for termination of the lawsuit and mutual
release, the Company paid to the plaintiff a total of $100,000 in cash and
200,000 shares of common stock valued at $375,000.
14. NON-RECURRING COSTS
During the third quarter of 1998, the Company recognized charges of $4.8
million. These charges include: (i) a deposit and direct costs related to the
terminated acquisition of twenty-six Fairfield Inns by Marriott that were under
contract to Hudson Hotel Trust, and (ii) costs incurred by the Company as Hudson
Hotels Trust was unable to raise funds through an initial public offering. These
costs and deposits were written off due to current economic conditions, which
have prevented the completion of Hudson Hotels Trust's initial public offering.
15. BUSINESS SEGMENTS
As described in Note 2, the Company operates in two segments: (1) hotel
owner/operator; and (2) hotel management services and other. Revenues,
identifiable assets and capital expenditures of each segment are those that are
directly identified with those operations.
The Company evaluates the performance of its segments based primarily on
earnings before interest, taxes and depreciation and amortization ("EBITDA")
generated by the operations of its Owned Hotels. Interest expense is primarily
related to debt incurred by the Company through its corporate obligations and
collateralized mortgage obligations on its hotel properties. The Company's taxes
are included in the consolidated Federal income tax return of the Company and
are allocated based upon the relative contribution to the Company's consolidated
taxable income/losses and changes in temporary differences.
The following table presents revenues and other financial information by
business segment for the nine months ended September 30, 1999 and 1998 (in
thousands):
1999 Hotel Operations Management & Other Elimination (A) Consolidated
---- ---------------- ------------------ --------------- ------------
Revenues $ 37,087 $ 4,543 $ (1,842) $ 39,788
EBITDA $ 12,841 $ 355 -- $ 13,196
Depreciation and amortization $ 4,252 $ 238 -- $ 4,490
Interest expense $ 8,658 $ 797 -- $ 9,455
Capital expenditures $ 1,987 $ 134 -- $ 2,121
Total assets $ 125,917 $ 59,441 $ (44,696) $ 140,662
1998 Hotel Operations Management & Other Elimination (A) Consolidated
---- ---------------- ------------------ --------------- ------------
Revenues $ 41,841 $ 3,671 $ (2,039) $ 43,473
EBITDA $ 12,986 $ 948 -- $ 13,934
Depreciation and amortization $ 4,237 $ 156 -- $ 4,393
Interest expense $ 9,210 $ 980 -- $ 10,190
Capital expenditures $ 1,442 $ 222 -- $ 1,664
Total assets $ 157,836 $ 73,476 $ (50,978) $ 180,334
(A) Eliminations represent inter-company management fees and inter-company
receivables/payables and investments in subsidiaries
The following presents the segments' performance measure to the Company's
consolidated loss from operations before taxes, minority interest, equity in
income of affiliates and extraordinary gain:
1999 1998
-------- --------
EBITDA
Hotel operations $ 12,841 $ 12,986
Management and other 355 948
Interest (9,455) (10,190)
Depreciation and amortization (4,490) (4,393)
Other 201 (5,072)
-------- --------
Loss before income taxes, minority interest, equity
in income of affiliates and extraordinary gain $ (548) $ (5,721)
======== ========
The following table presents revenues and other financial information by
business segment for the three months ended September 30, 1999 and 1998 (in
thousands):
1999 Hotel Operations Management & Other Elimination (A) Consolidated
---- ---------------- ------------------ --------------- ------------
Revenues $ 12,840 $ 1,812 $ (641) $ 14,011
EBITDA $ 4,408 $ (169) -- $ 4,239
Depreciation and amortization $ 1,443 $ 73 -- $ 1,516
Interest expense $ 2,903 $ 198 -- $ 3,101
Capital expenditures $ 900 $ 46 -- $ 946
Total assets $ 125,917 $ 59,441 $ (44,696) $ 140,662
1998 Hotel Operations Management & Other Elimination (A) Consolidated
---- ---------------- ------------------ --------------- ------------
Revenues $ 16,087 $ 1,421 $ (830) $ 16,678
EBITDA $ 4,912 $ 255 -- $ 5,167
Depreciation and amortization $ 1,549 $ 53 -- $ 1,602
Interest expense $ 3,470 $ 226 -- $ 3,696
Capital expenditures $ 667 $ 154 -- $ 821
Total assets $ 157,836 $ 73,476 $ (50,978) $ 180,334
(A) Eliminations represent inter-company management fees and inter-company
receivables/payables and investments in subsidiaries
The following presents the segments' performance measure to the Company's
consolidated income from operations before taxes, minority interest, equity in
income of affiliates and extraordinary gain:
1999 1998
------- -------
EBITDA
Hotel operations $ 4,408 $ 4,912
Management and other (169) 255
Interest (3,101) (3,696)
Depreciation and amortization (1,516) (1,602)
Other 79 (5,256)
------- -------
Loss before income taxes, minority interest, equity
in income of affiliates, and extraordinary gain $ (299) $(5,387)
======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis should be read in conjunction
with the entire Form 10-Q and Form 10-K 1998 Annual Report. Particular attention
should be directed to the Consolidated Financial Statements found at Item 8 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations found at Item 7.
As a result of the sale of (i) the Cricket Inn Virginia Beach in May 1998, (ii)
the Company's leasehold interest in the Canandaigua Inn on the Lake in December
1998, and (iii) the loss of its 42% interest in HH Bridge, LP, which was
consolidated in the 1998 financial statements as a result of the equity method
of accounting, a significant portion of the current results are not directly
comparable to prior year results, specifically hotel operations and direct
costs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1998:
Total operating revenues decreased $2,666,515, or 16% to $14,011,248 for the
three months ended September 30, 1999, from $16,677,763 for the three months
ended September 30, 1998, reflecting changes in revenue categories, as discussed
below.
HOTEL OPERATING REVENUES were $12,839,061 for the three months ended September
30, 1999, a decrease of $3,248,032, or 20%, from $16,087,093 for the three
months ended September 30, 1998. Hotel operations consisted of the following:
THREE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Hotel room revenue $11,475,463 $13,666,122
Beach club revenue 342,263 296,089
Food and beverage revenue 515,027 1,595,377
Other 506,308 529,505
----------- -----------
Total $12,839,061 $16,087,093
=========== ===========
Hotel room revenues were $11,475,463 for the three month period ended September
30, 1999 a decrease of $2,190,659, or 16%, from $13,666,122 for the three month
period ended September 30, 1998. The net decrease is the result of (i) the sale
of the Company's leasehold interest in the Canandaigua Inn on the Lake in
December 1998 which had $1,054,389 in room revenue in the third quarter of 1998
and (ii) the loss of its 42% interest in HH Bridge, LP which had $1,187,875 in
room revenue in the third quarter. The third quarter ended 1999 and 1998 room
revenues for same store hotels remained flat. This is attributable to Hurricane
Floyd, which adversely affected occupancy in our hotels during the month of
September. The Company currently manages the Canandaigua Inn on the Lake and the
HH Bridge, LP hotels pursuant to a Management Agreement. The results of these
five (5) hotels were included in hotel room revenues in 1998 but are not
included in 1999. Occupancy, average daily room rates and RevPar for the Company
owned hotels were 71.7%, $60.44 and $43.31, respectively, for the three months
ended September 30, 1999 and 76.9%, $59.98 and $46.13, respectively, for the
three months ended September 30, 1998.
The Beach Club revenue, which totaled $342,263 for the three month period ended
September 30, 1999 and relates to the operation of the beach club at the Seagate
Hotel and Beach Club, increased $46,174, or 16%, from $296,089 for the three
months ended September 30, 1998. The slight increase is specifically
attributable to increases in initiation fees being charged to new members.
Food and beverage revenue was $515,027 for the three months ended September 30,
1999 compared to $1,595,377 for the three months ended September 30, 1998, a
decrease of $1,080,350 or 68%. The net decrease is primarily a result of the
sale of the Company's leasehold interest in the Canandaigua Inn on the Lake in
December 1998, which had food and beverage operations and the loss of the
Company's 42% interest in HH Bridge, LP which has food and beverage operations
at one of its hotels.
Other hotel revenue decreased $23,197 or 4% to $506,308 for the three months
ended September 30, 1999 from $529,505 for the three months ended September 30,
1998. The decrease is primarily the result of the sale of the Company's
leasehold interest in the Canandaigua Inn on the Lake in December 1998 and the
loss of the Company's 42% interest in HH Bridge, LP whose results are not
included in 1999 but were included in 1998.
ROYALTIES for the three month period ended September 30, 1999 have increased
$195,868, or 53% to $568,297 from $372,429 for the three month period ended
September 30, 1998. The increase is attributable to one hundred fifty-nine (159)
franchised Microtel Inns in operation, as opposed to one hundred (100) in
operation at September 30, 1998. The Company receives all royalties on
twenty-eight (28) of the one hundred fifty-nine (159) franchised Microtel Inns
and on the remaining one hundred thirty-one (131) franchises established by US
Franchise Systems, Inc., the Company receives royalty payments from USFS based
on the following schedule: 1% of gross room revenues for hotels 0-100; .75% of
gross room revenues for hotels 101-250; and .5% of gross room revenues for
hotels 251 and beyond.
Pursuant to the USFS Agreement, the Company has retained the right to franchise,
construct and collect franchise placement fees on an additional twenty-two (22)
Microtel Inn properties (for a total of 50 properties) and ten (10) "suite"
properties and retain all royalties on these fifty (50) Microtel Inns
(twenty-eight (28) existing and twenty-two (22) new properties to be undertaken
by the Company) and ten (10) new suites properties. The Company will also
receive royalty payments in the future from US Franchise Systems, Inc., for
franchises they open based on the schedule discussed in the preceding paragraph.
MANAGEMENT FEES for the three month period ended September 30, 1999 increased
$426,009, or 239% to $603,890, compared to management fees of $177,881 for the
same three-month period ended September 30, 1998. The increase is primarily the
result of increased gross revenues at hotels managed by the Company as
management fees are generally based on a percentage of gross revenue and the
addition of seven (7) management contracts when compared to the period ended
September 30, 1998. The schedule of owned and managed hotels is summarized
below:
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Owned 25 28
Managed with financial interest 12 10
Other managed 13 5
--- ---
50 43
=== ===
Management fees of approximately $641,267 were generated by the twenty-five (25)
owned hotels for the three month period ended September 30, 1999, which were
eliminated for consolidation purposes.
OTHER REVENUE for the three month period ended September 30, 1999 decreased
$40,360, or 100% to $-0- from $40,360 for the three month period ended September
30, 1998. This is primarily a result of consulting fees accrued from USFS of
$37,500, which were non-recurring after September 1998.
The Company plans to continue its revenue growth by maintaining the following
strategies: (i) acquire additional hotel management contracts (ii) enhance
operating performance of its existing hotels owned or under management (iii)
develop and build additional hotels including Microtel Inns, if financing is
obtainable, and (iv) opportunistic acquisition of existing hotels. However,
given the Company's highly leveraged financial condition, it is at a
substantial disadvantage in acquiring or developing additional hotel
properties.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues,
less direct expenses; departmental expenses, undistributed expenses, property
occupancy costs and insurance costs) for the three months ended September 30,
1999 was 39%, compared to 35% for the three months ended September 30, 1998. The
increase in gross operating margin is a result of undertaking operational steps
to more effectively and efficiently manage the properties purchased in 1997 and
1996.
CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses increased
$153,530, or 15%, to $1,212,766 for the three months ended September 30, 1999
from $1,059,236 for the three months ended September 30, 1998. The increase is
primarily a result of the following: (1) a $165,000 increase in payroll and
related expenses as a result of the addition of
employees, and (2) a $71,000 increase in rent expense associated with leasing
new office space offset by reduction in various corporate expenses as a result
of cost containment.
NON-RECURRING COSTS during the third quarter of 1999, the Company recorded
$695,037 of costs associated with its review of strategic alternatives (see
Note 12).
DEPRECIATION AND AMORTIZATION for the three month period ended September 30,
1999 decreased $86,092, or 5% to $1,515,915 from $1,602,007 for the three month
period ended September 30, 1998. The decrease is a result of the loss of the
Company's 42% interest in HH Bridge, LP in which depreciation and amortization
was recorded for three (3) hotels, which was included in the 1998 results. This
decrease is offset by capital improvements in 1997 and 1998, which increased
depreciation expense. Capital improvements include converting the Cricket Inn
Charlotte, NC to a Red Roof Inn and wall replacement at the Seagate Hotel and
Beach Club.
OTHER INCOME (EXPENSE) for the three months ended September 30, 1999 improved by
$5,929,027, or 66%, to $3,022,211 from $8,951,238 for the three months ended
September 30, 1998. This improvement is primarily a result of recording one-time
charges in 1998 relating to litigation settlement totaling $475,000 (see Note
13), and non-recurring charges totaling $4,838,872 (see Note 14). In addition,
the improvement is a result of amortization of long-term debt resulting in
paying less interest expense on reduced principal balances and lower interest
rates in effect on variable rate debt in the period ended September 30, 1999. Of
the $3,101,169 in total interest expense 60% relates to the mortgages held on
the hotels acquired or consolidated by the Company in 1996 and 1997. The
remaining amount represents interest on the Company's outstanding convertible
debentures, mezzanine financing, notes payable relating to purchase of hotels,
notes payable of Hudson Hotels Trust, Tonawanda bond issue and line of credit.
INCOME TAXES - The provision for income tax of $4,920 includes minimum state
taxes. For the three month period ended September 30, 1999, the Company did not
record a deferred tax benefit as realization of the future tax benefits related
to the deferred taxes is dependent on many factors, including the Company's
ability to generate taxable income within the net operating loss carryforward
period. The benefit from income tax of $2,053,150 for the three month period
ended September 30, 1998 represents federal and state tax income tax benefit
from the recognition of deferred tax assets and liabilities on loss from
continuing operations before income taxes of $5,272,748.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT - In July 1999, the Company
replaced its outstanding $7.5 million convertible subordinated debenture with a
new $3.0 million convertible subordinated debenture. As a result, the Company
recognized an extraordinary gain of $4,089,465 or $0.63 per common share - basic
and diluted.
NET INCOME/(LOSS) - As a result of the above factors, the net income increased
$7,060,929 from the three month period ended September 30, 1998 to a net income
of $3,841,331 for the three month period ended September 30, 1999. The resulting
net income per common share - basic and diluted of $0.59 for the three month
period ended September 30, 1999, compared to a net loss per common share - basic
and diluted of ($0.61) for the three month period ended September 30, 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999, COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1998:
Total operating revenues decreased $3,685,025, or 8% to $39,787,973 for 1999
from $43,472,998 for the nine months ended September 30 1998, reflecting changes
in revenue categories, as discussed below.
HOTEL OPERATIONS were $37,086,514 for the nine months ended September 30, 1999,
a decrease of $4,754,227, or 11%, from $41,840,741 for the nine months ended
September 30, 1998. Hotel operations consisted of the following:
NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Hotel room revenue $ 32,684,724 $ 35,670,991
Beach club revenue 1,111,168 1,057,863
Food and beverage revenue 1,910,623 3,614,329
Other 1,379,999 1,497,558
------------ ------------
Total $ 37,086,514 $ 41,840,741
============ ============
Hotel room revenues were $32,684,724 for the nine month period ended September
30, 1999 a decrease of $2,986,267, or 8%, from $35,670,991 for the nine month
period ended September 30, 1998. The net decrease is the result of (i) the sale
of the Cricket Inn Virginia Beach in May 1998 which had $150,067 in room revenue
in the first nine months of 1998, (ii) the sale of the Company's leasehold
interest in the Canandaigua Inn on the Lake in December 1998 which had
$2,012,973 in room revenue in the first nine months of 1998, and (iii) the loss
of its 42% interest in HH Bridge, LP which had $1,187,875 in room revenue in the
third quarter. This decrease was offset in part by overall increases in room
revenue at the Company's other hotels. The Company currently manages the
Canandaigua Inn on the Lake and the HH Bridge, LP hotels pursuant to a
Management Agreement. The results of these five (5) hotels were included in
hotel room revenues in 1998 but are not included in 1999. Occupancy, average
daily room rates and RevPar for the Company owned hotels were 68.5%, $60.53 and
$41.49, respectively, for the nine months ended September 30, 1999 and 70.2%,
$58.92 and $41.38, respectively, for the nine months ended September 30, 1998.
The Beach Club revenue, which totaled $1,111,168 for the nine month period ended
September 30, 1999 and relates to the operation of the beach club at the Seagate
Hotel and Beach Club, increased $53,305, or 5%, from $1,057,863 for the nine
months ended September 30, 1998. The small increase is specifically attributable
to increase in initiation fees being charged to new members.
Food and beverage revenue was $1,910,623 for the nine months ended September 30,
1999 compared to $3,614,329 for the nine months ended September 30, 1998, a
decrease of $1,703,706 or 47%. The net decrease is primarily a result of the
sale of the Company's leasehold interest in the Canandaigua Inn on the Lake in
December 1998, which had $1,843,018 of food and beverage revenue and the loss of
its 42% interest in HH Bridge, LP which had $145,055 of food and beverage
revenue. This was offset by increased food and beverage volume at the Seagate
Hotel and Beach Club and assuming the food and beverage operations of the
Brookwood Inn in Pittsford, NY on May 1, 1998 which was leased in prior years to
a third party.
Other hotel revenue decreased $117,559 or 8% to $1,379,999 for the nine months
ended September 30, 1999 from $1,497,558 for the nine months ended September 30,
1998. The decrease is primarily the result of (i) the sale of the Cricket Inn
Virginia Beach in May 1998, (ii) the sale of the Company's leasehold interest in
the Canandaigua Inn on the Lake in December 1998, and (iii) the loss of its 42%
interest in HH Bridge, LP whose results are not included in 1999 but were
included in 1998.
ROYALTIES for the nine month period ended September 30, 1999 have increased
$433,840, or 50% to $1,296,483 from $862,643 for the nine month period ended
September 30, 1998. The increase is attributable to one hundred fifty-nine (159)
franchised Microtel Inns in operation at September 30, 1999, as opposed to one
hundred (100) franchised Microtel Inns in operation at September 30, 1998. The
Company receives all royalties on twenty-eight (28) of the one hundred
fifty-nine (159) franchised Microtel Inns and on the remaining one hundred
thirty-one (131) franchises established by US Franchise Systems, Inc., the
Company receives royalty payments from USFS based on the following schedule: 1%
of gross room revenues for hotels 0-100; .75% of gross room revenues for hotels
101-250; and .5% of gross room revenues for hotels 251 and beyond.
Pursuant to the USFS Agreement, the Company has retained the right to franchise,
construct and collect franchise placement fees on an additional twenty-two (22)
Microtel Inn properties (for a total of 50 properties) and ten (10) "suite"
properties and retain all royalties on these fifty (50) Microtel Inns
(twenty-eight (28) existing and twenty-two (22) new properties to be undertaken
by the Company) and ten (10) new suites properties. The Company will also
receive royalty payments in the future from US Franchise Systems, Inc., for
franchises they open based on the schedule discussed in the preceding paragraph.
MANAGEMENT FEES for the nine month period ended September 30, 1999 increased
$752,879, or 115% to $1,404,976, compared to management fees of $652,097 for the
same nine month period ended September 30, 1998. The increase is primarily the
result of increased gross revenues at hotels managed by the Company as
management fees are generally based on a percentage of gross revenue and the
addition of seven (7) management contracts when compared to the period ended
September 30, 1999. The schedule of owned and managed hotels is summarized
below:
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
Owned 25 28
Managed with financial interest 12 10
Other managed 13 5
--- ---
50 43
=== ===
Management fees of approximately $1,842,207 were generated by the twenty-five
(25) owned hotels for the nine month period ended September 30, 1999, which were
eliminated for consolidation purposes.
OTHER REVENUE for the nine month period ended June 30, 1999 decreased $117,517,
or 100% to $-0- from $117,517 for the nine month period ended September 30,
1998. This is primarily a result of consulting fees accrued from USFS of
$110,000, which were non-recurring after September 1998.
The Company plans to continue its revenue growth by maintaining the following
strategies: (i) acquire additional hotel management contracts (ii) enhance
operating performance of its existing hotels owned or under management (iii)
develop and build additional hotels including Microtel Inns, if financing is
obtainable, and (iv) opportunistic acquisition of existing hotels. However,
given the Company's highly leveraged financial condition, it is at a
substantial disadvantage in acquiring or developing additional hotel
properties.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues,
less direct expenses; departmental expenses, undistributed expenses, property
occupancy costs and insurance costs) for the nine months ended September 30,
1999 was 40%, compared to 36% for the nine months ended September 30, 1998. The
increase in gross operating margin is a result of undertaking operational steps
to more effectively and efficiently manage the properties purchased in 1997 and
1996.
CORPORATE EXPENSE represents general and administrative costs and expenses
associated with the corporate office. Corporate costs and expenses increased
$845,159, or 32%, to $3,460,433 for the nine months ended September 30, 1999
from $2,615,274 for the nine months ended September 30, 1998. The increase is
primarily a result of the following: (1) a $617,000 increase in payroll and
related expenses as a result of the addition of employees, and (2) a $156,000
increase in rent expense associated with leasing new office space.
NON-RECURRING COSTS during the third quarter of 1999, the Company recorded
$695,037 of costs associated with its review of strategic alternatives
(see Note 12).
DEPRECIATION AND AMORTIZATION for the nine month period ended September 30, 1999
increased $96,519, or 2% to $4,489,954 from $4,393,435 for the nine month period
ended September 30, 1998. The increase is a result of capital improvements in
1997 and 1998, which increased depreciation expense. Capital improvements
include converting a Cricket Inn Charlotte, NC to a Red Roof Inn and wall
replacement at the Seagate Hotel and Beach Club.
OTHER INCOME (EXPENSE) for the nine months ended September 30, 1999 improved by
$6,008,580, or 39%, to $9,253,642 from $15,262,222 for the nine months ended
September 30, 1998. This improvement is primarily a result of recording one-time
charges in 1998 relating to litigation settlement totaling $475,000 (see Note
13) and non-recurring charges totaling $4,838,872 (see Note 14). In addition,
the improvement is a result of amortization of long-term debt resulting in
paying less interest expense on reduced principal balances and lower interest
rates in effect on variable rate debt in the period ended September 30, 1999. Of
the $9,454,683 in total interest expense 60% relates to the mortgages held on
the hotels acquired or consolidated by the Company in 1996 and 1997. The
remaining amount represents interest on the Company's outstanding convertible
debentures, mezzanine financing, notes payable relating to purchase of hotels,
notes payable of Hudson Hotels Trust, Tonawanda bond issue and line of credit.
INCOME TAXES - The provision for income tax of $8,223 includes minimum state
taxes. For the nine month period ended September 30, 1999, the Company did not
record a deferred tax benefit as realization of the future tax
benefits related to the deferred taxes is dependent on many factors, including
the Company's ability to generate taxable income within the net operating loss
carryforward period. The benefit for income tax of $2,182,027 for the nine month
period ended September 30, 1998 represents federal and state tax income tax
benefit from the recognition of deferred tax assets and liabilities on loss from
continuing operations before income taxes of $5,594,928.
EXTRAORDINARY GAIN ON EXTINGUISHMENT OF DEBT - In July 1999 the Company replaced
its outstanding $7.5 million convertible subordinated debenture with a new $3.0
million convertible subordinated debenture. As a result, the Company recognized
an extraordinary gain of $4,089,465 or $0.66 per common share - basic and
diluted.
NET INCOME/(LOSS) - As a result of the above factors, the net income increased
$6,997,521 from the nine month period ended September 30, 1998 to net income of
$3,584,615 for the nine month period ended September 30, 1999. The resulting net
income per common share - basic and diluted of $0.56 for the nine month period
ended September 30, 1999, compared to a net loss per common share - basic and
diluted of ($0.67) for the nine month period ended September 30, 1998.
CAPITAL RESOURCES AND LIQUIDITY
At September 30, 1999, the Company had a $400,000 working capital demand note
with a commercial bank, which bears interest at a rate of prime plus 1 1/2%.
Amounts borrowed are collateralized by unencumbered land. At September 30, 1999,
$400,000 was borrowed under the terms of this line.
At September 30, 1999, the Company had $1,335,347 of cash and cash equivalents
compared with $1,751,580 at December 31, 1998.
The Company is required to maintain certain levels of escrowed cash in order to
comply with the terms of its debt agreements. All cash is trapped for
application against required escrows for debt, taxes, insurance and capital
asset reserves. A substantial portion of the escrowed cash funds is released
several times monthly for application against current liabilities. The balance
held in escrow on September 30, 1999 was $5,444,165 and $3,013,617 on December
31, 1998. The increase is a result of real estate tax escrows being
accumulated and the timing of weekly cash sweeps.
Net cash flows provided by operating activities was $3,757,409 for the nine
months ended September 30, 1999 compared to cash flows provided by operating
activities of $3,052,132 for the nine months ended September 30, 1998. The net
increase in 1999 is primarily the result cash payments made in 1998 for
litigation settlement and non-recurring costs.
Net cash flows used in investing activities was $2,912,809 for the nine months
ended September 30, 1999 compared to net cash flows used in investing activities
of $28,425,096 for the nine months ended September 30, 1998. Net cash flow used
in investing activities for the nine months ended September 30, 1999 reflects
cash received for the sale of land, changes in restricted cash, collection of
deposits and other assets less the purchase of equipment and the amounts placed
into escrow as required by the loan agreements. Net cash used in investing
activities for the nine months ended September 30, 1998, reflects amounts placed
into escrow as required by the loan agreements, capital improvements to the
twenty-five (25) hotels acquired in 1996 and 1997, acquisition of three (3)
hotels for $26.6 million and cash received from: (i) the sale of property and
equipment, and (ii) non-affiliates offset by the deposits submitted for the
acquisition of three (3) hotels.
Net cash flows used in financing activities was $1,260,833 for the nine months
ended September 30, 1999 compared to net cash flows provided by financing
activities of $27,027,303 for the nine months ended September 30, 1998. Net cash
flows used in financing activities for the nine months ended September 30, 1999
reflects the repayment of mortgages, preferred stock dividends and distributions
to limited partners. Net cash flows used in financing activities for the nine
months ended September 30, 1998 reflects cash proceeds from the exercise of
options, proceeds from our line of credit, sale of stock of $1,000,000 and
proceeds from borrowings of $27.3 million primarily utilized for the acquisition
of the three (3) hotel properties in HH Bridge, LP. This was offset by financing
costs, repayment of mortgages and preferred dividends.
EBITDA decreased by $739,114, or 5%, to $13,195,477 for the nine months ended
September 30, 1999, compared to $13,934,591 for the nine months ended
September 30, 1998. The decrease is primarily the result of the non-recurring
charge (see Note 12). EBITDA is defined as total operating revenues less
direct, corporate and indirect operating costs. The Company believes this
definition of EBITDA provides a meaningful measure of its ability to service
debt. The slight decrease is a result of losing operating results from the
Canandaigua Inn on the Lake and three hotels in HH Bridge, LP. This was
offset by the Company undertaking operational steps to more effectively and
efficiently manage the properties purchased in 1996 and 1997.
LIQUIDITY in December of 1998, and the first quarter of 1999, the Company sold
certain assets and took other actions as described in Item 1 "Recent
Developments" in the December 31, 1998 10-K to generate cash or avoid cash
payments which would allow sufficient liquidity to maintain current operations
during its seasonally slow operating season (the fourth and first quarters). The
Company's mezzanine loan agreement required Hudson to use the proceeds of asset
sales to pay down the debt; however, Hudson instead used these proceeds for
working capital. This violation of the mezzanine loan agreement gave the lender
the right to demand immediate repayment of the mezzanine loan. In April 1999,
the Company entered into an agreement with this lender, which waives these
violations of the mezzanine loan agreement if the Company fulfills certain
conditions. One of these conditions is that the Company is not to make any
principal payments to subordinated creditors of this lender, including Equity
Inns, LP ("Equity Inns"), for its 10% subordinated note or on the $3.0 million
convertible subordinated debenture or for the obligations of Hudson Hotels
Trust. Such requirements caused the Company to default in its obligations to
Equity Inns as of May 1, 1999. However, under the subordination agreement with
Equity Inns, that firm is currently prevented from taking legal action to
enforce the payment of its debt. In May 1999 Equity Inns notified Hudson that it
has declared this debt in default and has accelerated the debt and is seeking
default interest. Also, after default, Equity Inns can obtain 2,000,000 shares
of Hudson Hotels common stock, which is collateral for this debt.
Additionally, upon default (which has already occurred), the holder of a $2.0
million debt in Hudson Hotels Trust can convert his debt into a total of 666,666
shares of Hudson common stock. Another Hudson Hotels Trust debt holder has
already converted $2.0 million of Hudson Hotels Trust debt into 666,666 shares
of Hudson common stock. Additionally, the Company at December 31, 1998 had
certain portions of its mezzanine debt that would begin to amortize in the
fourth quarter of 1999. As a result of this recent agreement with the holder of
the mezzanine debt, the amortization of this debt now begins in the second
quarter of 2000, which amortization the Company will not, at current operating
levels, be able to service. Therefore, the Company's viability is dependent upon
the restructuring of its debt obligations and strengthening its equity base, and
ultimately, a return of profitability.
The Company is currently in discussions with its lenders about its debt
obligations and activities to restructure its debt. On July 23, 1999 the Company
replaced its outstanding $7.5 million convertible subordinated debenture to
Oppenheimer Convertible Securities Fund with a new convertible subordinated
debenture bearing the following terms: principal balance of $3.0 million;
interest rate at 18.75%; maturity date of April 15, 2000 and a conversion price
of $1.80 per share. There is negative working capital of $1,167,609 at September
30, 1999 with a significant amount of this negative working capital generated by
significant principal debt payments. These principal payments described herein
are expected to continue. Furthermore, the Company is severely restricted in
accessing the cash flows generated from revenues as they are trapped for
application against required escrows for debt, tax, insurance, capital asset
reserve, and now beginning in the second quarter of 2000, principal amortization
of the Company's mezzanine debt.
There can be no assurances that the Company's restructuring efforts will be
successful, or that the Company's lenders will agree to a course of action
consistent with the Company's requirements in restructuring the obligations.
Even if such agreement is reached it may require approval of additional debt
holders, or possibly agreements of other creditors and shareholders of the
Company, none of which is assured. Furthermore, there can be no assurance that
restructuring of the Company's debt can be successfully accomplished on terms
acceptable to the Company. Under current circumstances, the Company's ultimate
ability to remain viable depends upon the successful restructuring of its debt
obligations. If the Company is unsuccessful in these efforts, it may be unable
to make its future obligations associated with its principal payments, as well
as other obligations, making it necessary to undertake such other actions
including seeking court protection as may be appropriate to preserve asset
value.
Year 2000 Compliance
Many computer systems were designed using only two digits to designate years.
These systems may not be able to
distinguish the year 2000 from the year 1900. Like other organizations, the
Company could be adversely affected if the computer systems used by it or its
service providers do not properly address this problem prior to January 1, 2000.
Currently, the Company does not anticipate that the transition to the year 2000
will have any material impact on its performance. The Company's plan to respond
to the Year 2000 problem consists of three phases that address the state of
readiness, Year 2000 costs, risks and contingency plans.
Phase I includes a plan to respond to the Year 2000 problem, which includes the
following areas (the "Focus Areas"): (i) telephone and call accounting systems;
(ii) credit card readers; (iii) sprinkler systems and fire suppression system;
(iv) security systems; (v) card entry systems; (vi) elevator systems; (vii)
computer systems and vendor contracts (hardware); (viii) fax machines and
laundry equipment; (ix) HVAC (heating and air conditioning systems) and utility
companies; (x) food, beverage, equipment, supplies and other ordering systems;
and (xi) computer software systems, including franchisor and non-franchisor
reservation systems. The Company has created a task force and procedures to
survey, test and report results for management's review. The Company believes
that the estimated cost to remediate its Year 2000 problems is approximately
$1,000,000 and has currently spent approximately $650,000.
Phase II involves initiating a survey and checklist to each hotel manager for
completion and return to management. The survey was developed by the Company
after a review of franchisor and other Year 2000 compliance information to
include (i) the current vendor list with a column for a listing of current
product usage and (ii) a vendor address log and telephone number listing. Each
hotel checklist included the front desk, business center, housekeeping/back
office, beverage and guestrooms. Phase II also involves the testing of the
Company's computer systems. The Company is conducting tests on the systems
identified in Phase I and has yet to encounter any Year 2000 compliance issue
which cannot be corrected before January 1, 2000.
The Company is currently proceeding with Phase III of its assessment of the Year
2000 problem. Phase III of the Company's assessment of the Year 2000 problem
includes the results of testing, action plans, reporting of results and
contingency plans to remediate any Year 2000 problems. The risks and contingency
plans include a "reasonably likely worst case Year 2000 scenario." The Company
believes that the consequences of a worst case scenario rest almost exclusively
with outside vendors. The contingency plan, which the Company is currently
initiating, is to replace non-compliant vendors with new compliant vendors. A
thorough review of all vendors will continue to be an ongoing Year 2000 strategy
for the Company. However, the Company's contingency plan has back-up support to
address each of the focus areas.
The franchisors of many of the hotels have provided compliance guides to assist
in the Company's response to the Year 2000 problem. Promus Hotel Corporation,
Holiday Hospitality/Bass Hotels & Resorts, Marriott International, Inc., and
Choice Hotels International, Inc. have completed third party vendor checks,
reviewed computer systems and provided for reference a preferred compliant
vendor list. A checklist for Year 2000 issues, a work plan and a sample vendor
letter was provided to help the Company complete its assessment of the Year 2000
problem.
The Company is in the process of mailing a questionnaire to third party vendors
to assess third party risks. The results of this risk assessment were completed
April 30, 1999. In addition, the Company has sought assurances from the Lessee
and other service providers that they are taking all necessary steps to ensure
that their computer systems will accurately reflect the year 2000, and the
Company will continue to monitor the situation. There can be no assurance that
the systems of such third parties will be Year 2000 compliant or that any third
party's failure to have Year 2000 compliant systems would not have a material
adverse effect on the Company's systems and operations.
Special Note Regarding Forward-Looking Statements
-------------------------------------------------
Certain matters discussed in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and Capital Resources and
Liquidity are "forward-looking statements" intended to qualify for the safe
harbors from liability established by the Private Securities Litigation Reform
Act of 1996. These forward-looking statements can generally be identified as
such because the context of the statement will include words such as the company
"believes", "anticipates", "expects", or words of similar meaning. Similarly,
statements that describe the Company's future plans, objectives or goals are
also forward-looking statements. Such forward-looking statements are subject to
certain risks, assumptions and uncertainties which are described in close
proximity to such statements and which could cause actual results to differ
materially from those currently anticipated. Shareholders, potential investors
and other readers are urged to consider these risks, assumptions and
uncertainties carefully in evaluating the forward-looking statements are
cautioned not to place undue reliance on such forward-looking statements. The
forward-looking statements made herein are only made as of the date of this Form
10-Q and the Company undertakes no obligation to publicly update such
forward-looking statements to reflect subsequent events or circumstances.
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
On October 26, 1990, a complaint was filed in Palm Beach County Circuit Court,
Florida, by Seagate Beach Quarters, Inc., a Florida corporation (Bearing Case
#90-12358-AB), seeking an unspecified amount of damages plus interest and costs,
against Rochester Community Savings Bank, ("RCSB"), a New York based bank, Shore
Holdings, Inc. ("SHORE"), a subsidiary of RCSB and naming Hudson as a
co-defendant. On December 6, 1990, Delray Beach Hotel Properties Limited, a
Florida limited partnership controlled by Hudson Hotels, purchased the Seagate
Hotel and Beach Club from RCSB's subsidiary, SHORE. The purchase contract
included an indemnification of Hudson Hotels against any action resulting from
previously negotiated contracts between RCSB's subsidiaries and third parties;
however, this indemnity specifically excludes indemnity for punitive damages
which may be assessed again the Company. Case #90-12358-AB contained allegations
that RCSB's subsidiary, SHORE, defaulted in its obligations under a Contract for
Purchase and Sale, dated August 16, 1990, and failed to go forward with the
transaction due to alleged tortuous 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 tortuous 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 in February
2000.
On December 4, 1998 and February 5, 1999 the Company was served with claims
before the State of South Carolina Human Affairs Division arising out of an
incident that occurred at the Greenville, SC Hampton Inn on November 7, 1997. A
security guard employed by Security Masters, Inc. (the contract provider of
security services at the Hampton Inn) allegedly confronted a group of black
students with a starter pistol, and directed racially biased comments to the
student during that confrontation. Subsequently, on June 18, 1999, the
plaintiffs, Nathaniel Davis III, Jennifer Curry, Shiona Drummer, Renoalda Bray
and Corey-Khalil Horden commenced a civil suit against the Company and
SecurityMasters, Inc. in the United States District Court, District of South
Carolina, Greenville Division, alleging violations of Titles II and III of the
Civil Rights Act of 1964 and seeking unspecified actual and compensatory
damages, attorneys fees and costs, and punitive damages. The Company has
appeared in this action, and plaintiffs have sought leave to amend their
complaint. The Company's insurance company has assumed the defense of this
action, but has reserved as to coverage.
On April 13, 1999, the Company and its subsidiary, Canandaigua Hotel Corp., were
each served with a summons and complaint by Cheryl K. Lee, as administratrix of
the Estate of Eugene R. Guthrie, deceased, alleging negligence relating to the
design and maintenance of the handicapped access ramp at the Inn on the lake,
which negligence allegedly caused injuries resulting in the death of the
decedent. L,R,M&M, LLC, the owner of the Inn on the Lake, is also a defendant.
The action has been commenced in New York Supreme Court, Monroe County, and
demands damages in the amount of $2,000,000 plus costs and disbursements. This
action has been turned over to the Company's insurance company for defense; the
Company believes that it has adequate insurance to cover any potential loss.
On June 2, 1999 the Company, and its subsidiary Hudson Hotels Properties
Corporation, as well as Hudson Hotels Trust; E. Anthony Wilson, the Company's
Chairman and President; and a significant shareholder were each served with a
summons and complaint by B. Thomas Golisano, the holder of a $2,000,000 note
from Hudson Hotels Trust which is secured by 666,666 shares of common stock of
the Company. The action has been commenced in New York Supreme Court and demands
damages of $2,000,000 plus costs and disbursements. The complaint alleges that
such note is in default and that the Company assumed the obligation of Hudson
Hotels Trust to pay such note. In addition, the complaint alleges that Mr.
Wilson and the significant shareholder of the Company conspired to cause
the Company to breach certain negative covenants that the Company entered into
in connection with the pledge of the 666,666 shares of the Company's common
stock. Hudson Hotels Trust has admitted the default on the $2,000,000 note while
the Company and the other defendants have denied liability except for the pledge
of the 666,666 shares of the Company's common stock. The parties argued
plaintiff's motion for summary judgement on August 13, 1999; the judge reserved
his decision on the motion and the parties are awaiting that decision.
Advocates for the Disabled, Inc. have sued Pamela Skinner, the manager of the
Seagate Hotel and Beach Club, in the United States District Court, Southern
District of Florida, seeking injunctive and declaratory relief relating to
alleged violations of the Americans with Disabilities Act at the Seagate
Hotel. The Company has engaged counsel to defend its employee, Ms. Skinner,
and has engaged an independent architect to evaluate the alleged deficiencies.
After taking into consideration legal counsel's evaluation of all such actions,
management is of the opinion that the outcome of each such proceeding or claim
which is pending, or known to be threatened (as described above), will not have
a material adverse effect on the Company's financial statements.
ITEM 2. CHANGE IN SECURITIES - None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - None
ITEM 5. OTHER INFORMATION - None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
Exhibit No. Description
- ----------- -----------
11 Statement re: computation of per share earnings
27 Financial Data Schedule
B. Form 8-K: The following report was filed on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUDSON HOTELS CORPORATION
--------------------------------------------
(Registrant)
Date: 11/1/99 /s/ E. Anthony Wilson
--------------------------------------------
E. Anthony Wilson, Chairman of the Board and
Chief Executive Officer
Date: 11/1/99 /s/ Taras M. Kolcio
--------------------------------------------
Taras M. Kolcio, Vice President, Controller
and Principal Accounting Officer