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.................................................March 31, 1998
Commission File Number...................................................0-17838
Hudson Hotels Corporation
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
New York 16-1312167
- --------------------------------------------------------------------------------
State or other jurisdiction of I.R.S. Employer
in corporation or organization Identification No.
One Airport Way, Suite 200, Rochester, New York 14624
- --------------------------------------------------------------------------------
(Address or principal executive offices) (Zip Code)
(716) 436-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- ---------
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of April 15, 1998 the Registrant had issued and outstanding
5,157,162 shares of its $.001 par value common stock.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATION
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(unaudited)
- --------------------------------------------------------------------------------
1998 1997
---- ----
OPERATING REVENUES:
Hotel operations ............................................. $ 11,596,718 $ 7,961,357
Management fees .............................................. 176,700 157,951
Royalties .................................................... 196,365 133,825
Other ........................................................ 37,500 68,593
------------ ------------
Total operating revenues .............................. 12,007,283 8,321,726
OPERATING COSTS AND EXPENSES
Direct ....................................................... 7,608,142 5,396,050
Corporate .................................................... 696,802 578,460
------------ ------------
Total operating costs and expenses
before depreciation and amortization ............... 8,304,944 5,974,510
------------ ------------
Income from operations before
depreciation and amortization ...................... 3,702,339 2,347,216
DEPRECIATION AND AMORTIZATION ...................................... 1,399,258 927,454
------------ ------------
Income from operations .................................... 2,303,081 1,419,762
------------ ------------
OTHER INCOME (EXPENSE):
Interest income .............................................. 53,745 44,382
Interest expense ............................................. (3,218,429) (1,993,837)
------------ ------------
Total other expense ....................................... (3,164,684) (1,949,455)
Loss from continuing operations, before income taxes,
minority interest and equity on net losses of affiliates (861,603) (529,693)
BENEFIT FROM INCOME TAXES .......................................... (348,512) (220,964)
------------ ------------
Loss from continuing operations, before minority interest
and equity on net losses of affiliates ................. (513,091) (308,729)
MINORITY INTEREST .................................................. (26,751) (25,740)
EQUITY IN OPERATIONS OF AFFILIATES ................................. (5,361) (7,194)
------------ ------------
NET LOSS ........................................................... $ (545,203) $ (341,663)
------------ ------------
------------ ------------
NET LOSS PER COMMON SHARE - BASIC .................................. $ (.11) $ (.08)
------------ ------------
------------ ------------
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998
(unaudited)
- --------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 343,681
Cash - restricted .............................. 3,845,409
Accounts receivable - trade ................... 926,837
Prepaid expenses and other ..................... 1,702,116
-------------
TOTAL CURRENT ASSETS ................................ 6,818,043
INVESTMENTS IN PARTNERSHIP INTERESTS ................ 1,725,767
LAND AND REAL ESTATE DEVELOPMENT .................... 4,162,931
PROPERTY AND EQUIPMENT, NET ......................... 128,725,883
DEFERRED TAX ASSET .................................. 1,736,475
OTHER ASSETS ........................................ 8,634,463
-------------
TOTAL ASSETS ................................... $ 151,803,562
-------------
-------------
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Lines of credit ................................ $ 1,300,000
Current portion of long-term debt .............. 3,162,778
Accounts payable - trade ....................... 1,014,728
Other accrued expenses ......................... 3,911,543
-------------
TOTAL CURRENT LIABILITIES ........................... 9,389,049
LONG-TERM DEBT ...................................... 128,559,291
DEFERRED REVENUE - LAND SALE ........................ 185,055
LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP ............................ 1,099,017
SHAREHOLDERS' INVESTMENT:
Preferred stock ................................ 295
Common stock ................................... 5,168
Additional paid-in capital ..................... 17,845,758
Warrants outstanding ........................... 50,000
Accumulated deficit ............................ (5,288,820)
-------------
12,612,401
Less: 10,000 shares of common stock in treasury,
at cost at March 31, 1998 .................. (41,251)
-------------
TOTAL SHAREHOLDERS' INVESTMENT ...................... 12,571,150
-------------
TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT . $ 151,803,562
-------------
-------------
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 PERIOD ENDED MARCH 31, 1998
(unaudited)
- --------------------------------------------------------------------------------
SERIES A ADDITIONAL ADDITIONAL
PREFERRED PAID-IN CAPITAL COMMON PAID-IN CAPITAL WARRANTS ACCUMULATED TREASURY
STOCK PREFERRED STOCK COMMON OUTSTANDING DEFICIT STOCK TOTAL
----- --------- ----- ------ ----------- ------- ----- -----
BALANCE, DECEMBER 31, 1997 ... $ 295 $ 1,560,705 $ 5,166 $ 16,275,868 $ 50,000 $ (4,711,787) $ (41,251) $ 13,138,996
Net Loss ................ -- -- -- -- -- (545,203) -- (545,203)
Other ................... -- -- -- 1,687 -- -- -- 1,687
Exercise of stock options -- -- 2 7,498 -- -- -- 7,500
Cash dividends paid on
preferred stock ...... -- -- -- -- -- (31,830) -- (31,830)
------ ------------ -------- ------------ --------- ------------ --------- ------------
BALANCE, MARCH 31, 1998 ...... $ 295 $ 1,560,705 $ 5,168 $ 16,285,053 $ 50,000 $ (5,288,820) $ (41,251) $ 12,571,150
------ ------------ -------- ------------ --------- ------------ --------- ------------
------ ------------ -------- ------------ --------- ------------ --------- ------------
Stock balances at December 31, 1997:
Common stock: 5,155,162 shares; Preferred stock: 294,723 shares
Stock balances at March 31, 1998:
Common stock: 5,157,162 shares; Preferred stock: 294,723 shares
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIOD ENDED MARCH 31, 1998 and 1997
(unaudited)
- --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
---- ----
Net Loss ............................................................. $ (545,203) $ (341,663)
Adjustments to reconcile net income to net
cash from operating activities:
Deferred tax provision ........................................... (348,549) (220,965)
Depreciation and amortization .................................... 1,399,258 927,454
Gain on sale of land ............................................. -- (28,812)
Minority interest in operations .................................. 26,751 25,740
Non-cash consulting .............................................. 1,687 1,688
Equity in operations ............................................. 5,361 7,194
Capital distributions from unconsolidated
partnership interests ......................................... 50,220 3,094
(Increase) decrease in assets -
Accounts receivable - trade ................................... (28,959) (238,712)
Prepaid expenses and other ....................................... (470,521) 243,196
Increase (decrease) in liabilities -
Accounts payable .............................................. (379,732) 521,795
Other accrued expenses ........................................... (316,255) (16,462)
----------- -----------
Net cash provided by operating activities ..................... $ 26,568 $ 883,547
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land/real estate development ...................... $ (15,780) $ (58,049)
Increase in restricted cash ...................................... (381,481) (174,220)
Cash collected on sale of land ................................... -- 399,659
Change in affiliates accounts and notes receivable ............... (110,007) 136,464
Purchase of equipment ............................................ (276,228) (292,256)
Change in other assets ........................................... 4,600 46,361
Deposits ......................................................... (96,900) (97,832)
Change in non-affiliate accounts receivable ...................... 256,479 (317,434)
----------- -----------
Net cash used in investing activities ......................... $ (619,317) $ (357,307)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgages ........................................... (270,439) (168,454)
Distributions to limited partners ................................ (27,000) (26,000)
Proceeds from stock options exercised ............................ 7,500 --
Dividends paid ................................................... (31,830) (31,830)
Borrowings on line of credit, net ................................ 587,463 --
----------- -----------
Net cash provided by/(used in)financing activities............. 265,694 (226,284)
----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................................... (327,055) 299,956
CASH AND CASH EQUIVALENTS - beginning of period ...................... 670,736 1,057,368
----------- -----------
CASH AND CASH EQUIVALENTS - end of period ............................ $ 343,681 $ 1,357,324
----------- -----------
----------- -----------
OTHER INFORMATION:
Cash paid during the period for:
Interest ...................................................... $ 3,158,634 $ 1,996,078
Income taxes .................................................. $ 14,372 $ 7,390
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 1998
(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, 1997 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, 1997 10-KSB.
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", which offers downsized rooms with higher quality furnishings at
rates below those available at competing national lodging chains. The Company
was incorporated in New York State on June 5, 1987.
On October 5, 1995, the Company completed an exclusive Joint Venture Agreement
with US Franchise Systems, Inc. ("USFS") in which USFS purchased worldwide
franchising and administration for the Microtel hotel chain.
As part of the Joint Venture Agreement, 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 was paid at the first anniversary and $500,000 was
paid at the second anniversary and $500,000 is due on the third anniversary. In
addition to the lump sum payments, 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. 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 receive all royalties on the fifty (50) Microtels (28
existing and 22 new ones to be undertaken by the Company) and ten (10) suites.
As a result of the Joint Venture 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 and 1997, the Company embarked upon a
significant expansion and development program, which includes several
acquisitions and development of five (5) Microtel Inns through a joint venture
partnership.
The Company operates in the industry segment of hotel development and
management.
3. SUMMARIZED FINANCIAL INFORMATION - INVESTMENTS IN PARTNERSHIP INTERESTS
The following is a summary of condensed financial information for the
unconsolidated partnerships which the Company does not control for the three
month period ended March 31, 1998 and 1997.
1998 1997
---- ----
Property and equipment, net of accumulated depreciation $ 31,475,400 $ 28,102,555
Current assets ........................................ 2,690,808 2,630,772
Other assets .......................................... 1,031,096 1,052,245
------------ ------------
TOTAL ASSETS ....................................... 35,197,304 31,785,572
------------ ------------
Mortgage and notes payable - current .................. 1,945,948 1,990,073
Other current liabilities ............................. 851,092 785,833
Mortgage/Notes payable - noncurrent ................... 25,218,161 22,509,663
------------ ------------
TOTAL LIABILITIES .................................. 28,015,201 25,285,569
------------ ------------
NET ASSETS ............................................ $ 7,182,103 $ 6,500,003
------------ ------------
------------ ------------
COMPANY'S SHARE .................................... $ 1,790,959 $ 1,879,786
------------ ------------
------------ ------------
Net revenues .......................................... $ 3,002,060 $ 2,674,087
Operating expenses .................................... 1,895,735 1,624,363
------------ ------------
Income (Loss) from operations ......................... 1,106,325 1,049,724
Other income (expense), net ........................... (1,149,689) (1,129,244)
------------ ------------
NET (LOSS) ............................................ $ 43,364) $ (79,520)
------------ ------------
------------ ------------
COMPANY'S SHARE .................................... $ (5,361) $ (7,194)
------------ ------------
------------ ------------
4. Long Term Debt
Future minimum repayments under long-term debt are as follows:
Remainder 1998 ...... $ 3,162,778
1999 ................ 2,985,083
2000 ................ 6,096,952
2001 ................ 6,213,286
2002 ................ 13,825,812
2003 and thereafter.. 99,438,158
5. Commitments and Contingencies
The Company has various operating lease arrangements for automobiles
and office space. Total rent expense under operating leases amounted to
$44,753 and $42,881 for the periods ending March 31, 1998 and 1997,
respectively. Future minimum lease payments under operating leases are
approximately: 1998 remainder - $108,364; 1999 - $21,209; and 2000 -
$13,056.
The Company is required to remit monthly royalty fees from 2% to 4% of
gross room revenue, plus additional monies for marketing assessments
and reservation fees to its franchisors based on franchise agreements
which extend from ten to sixteen years. Some of these agreements
specify restrictions on transferability of franchise and liquidated
damages upon termination of franchise agreement due to the franchisee's
default. Total fees were approximately $282,000 and $156,000 for the
three months ended March 31, 1998 and 1997, respectively.
The Company provided 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. Also, during 1996, the Company earned a
$250,000 fee for managing the reconstruction project. Base rent is
equal to one-twelfth of 2% of the outstanding principal balance under
the credit facilities per month, plus amounts payable by the Landlord
under the credit facilities monthly. The Company is also obligated to
pay/or have due additional monthly rent/or abatement on
positive/negative earnings based on 15% of the leased operation's
adjusted net revenues, as defined in the lease agreement.
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: remainder of 1998 - $514,125;
1999 - $914,000; 2000 - $914,000; 2001 - $914,000; thereafter
$2,589,667.
The Company assumed a ground lease for the land on which a hotel was
acquired by the Company in 1996 in Statesville, North Carolina. 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 $5,500 for the
three month period ended March 31, 1997 and 1996.
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 of 1998 ... $16,500
1999 ................ 22,000
2000 ................ 22,000
2001 ................ 22,000
2002 ................ 22,000
Thereafter .......... 726,000
--------
$830,500
--------
--------
6. 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 March 31, 1998, Company has net operating loss carryforwards for
income tax purposes of approximately $4,745,000 may be used to offset
future taxable income. These loss carryforwards will begin to expire in
2003.
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 this entire Form 10-KSB 1997 Annual Report. Particular attention should be
directed to the Consolidated Financial Statements found at Item 7 and
Management's Discussion and Analysis of Financial Condition and Results of
Operations found at Item 6.
As a result of the acquisitions of (i) five (5) partnerships in which the
Company had a minority interest, (ii) twelve (12) hotels from SB Motel Corp. and
(iii) nine (9) Hampton Inns during the past two years, a significant portion of
the current results are not directly comparable to prior year results,
specifically hotel operations and direct costs, expenses and interest expense.
RESULTS OF OPERATIONS
Three months ended March 31, 1998, compared to the three months ended March 31,
1997:
Total operating revenues increased $3,685,557, or 44% to $12,007,283 for 1998,
reflecting changes in revenue categories, as discussed below.
HOTEL OPERATIONS were $11,596,718 for the three months ended March 31, 1998, an
increase of $3,635,361, or 46%, from the three months ended March 31, 1997.
Hotel operations consisted of the following:
Three Months Ended
March 31, 1998 March 31, 1997
-------------- --------------
Hotel room revenue ...... $10,005,204 $6,550,856
Beach club revenue ...... 377,409 350,513
Food and beverage revenue 749,728 745,155
Other ................... 464,377 314,833
------------ ------------
Total .............. $11,596,718 $7,961,357
------------ ------------
------------ ------------
Hotel room revenues for the three month period ended March 31, 1998 increased
$3,454,348 from the three month period ended March 31, 1997. The increase is
primarily the result of acquiring nine (9) hotels on October 31, 1997, thus the
revenue for the acquisition was not included for the full three months ended
March 31, 1997. Occupancy and average daily room rates for the Company owned
hotels were 60.2% and $58.14, respectively, for the three months ended March 31,
1998, and 57.6% and $55.69, respectively, for the three months ended March 31,
1997.
The Beach Club revenue, which totaled $377,409 for the three month period ended
March 31, 1998 and relates to the operation of the beach club at the Seagate
Hotel and Beach Club, increased $26,896, or 8%, from the comparable period in
1997. The increase is specifically attributable to increase in initiation fees
being charged to new members.
Food and beverage revenue was $749,728 for the three month period ended March
31, 1998, and remained consistent, compared to $745,155 for the three month
period ended March 31, 1997.
ROYALTIES for the three month period ended March 31, 1998 have increased $62,540
over the three month period ended March 31, 1997, an increase of 47%. The
increase is attributable to sixty-two (62) franchised Microtel Inns in
operation, as opposed to twenty-six (26) during the same three month period in
1997. The Company receives all royalties on twenty-eight (28) of the sixty-two
(62) franchised Microtel Inns and on the remaining thirty-four (34) franchises
established by US Franchise Systems, Inc., the Company receives royalty payments
from USFS of 1% of gross room revenues. After USFS has separately franchised 100
hotels, the royalty rate drops to .75% from hotels 101-250; and .5% for htoels
251 and beyond.
As a result of the Company's joint venture with US Franchise Systems, Inc., 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 (20)
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, along with
consulting payments over the next year.
MANAGEMENT FEES for the three month period ended March 31, 1998, remained
consistent compared to the same three-month period ended December 31, 1996. The
schedule of owned and managed hotels is summarized below:
March 31, 1998 March 31, 1997
-------------- --------------
Owned ......................... 26 17
Managed with financial interest 10 10
Other managed ................. 5 5
---- ---
41 32
---- ---
---- ---
Management fees of approximately $577,000 were generated by the twenty-six (26)
owned hotels for the three month period ended March 31, 1998, which were
eliminated for consolidation purposes.
OTHER revenue for the three month period ended March 31, 1998 decreased $31,093,
or 45%, compared to the same three month period ended March 31, 1997. This is
primarily a result of the gain on the sale of real estate totaling $28,812,
which occurred in February 1997.
The Company plans to continue its rapid revenue growth by maintaining the
following strategies: (i) enhance operating performance of its existing hotels
owned or under management (ii) develop and build Microtel Inns on sites acquired
and (iii) opportunistic acquisition of existing hotels.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues,
less direct expenses; departmental expenses, undistributed expenses, property
occupancy costs and insurance costs) for the three months ended March 31, 1998
was 34%, compared to 32% for the three months ended March 31, 1997. 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 represents general and administrative costs and expenses associated
with the corporate office. Corporate costs and expenses increased $118,342, or
20%, to $696,802 for the three month period ended March 31, 1998. The increase
is primarily a result of the following: (1) increases in professional fees
incurred for the three month period ended March 31, 1998, compared to the three
month period ended March 31, 1997 and (2) payroll expense increased as a result
of the addition of employees.
DEPRECIATION AND AMORTIZATION for the three month period ended March 31, 1998
increased $471,804, or 51%, over the three month period ended March 31, 1997.
The increase is a result of the acquisition of nine (9) hotels on October 31,
1997, thus recording additional depreciation and amortization during the three
months ended March 31, 1998.
OTHER EXPENSE for the three month period ended March 31, 1998 increased
$1,215,229 from the three month period ended March 31, 1997. The increase is
primarily the result of incurring additional debt for the acquisition of nine
(9) hotels on October 31, 1997. Of the $3,218,429 in total interest expense, for
the three months ended March 31, 1998, 59% relates to the mortgage held on the
hotels acquired in 1996 and 1997. The remaining represents interest on the
Company's outstanding convertible debentures, mezzanine financing, notes payable
relating to purchase of hotels, Tonawanda bond issue and line of credit.
EQUITY IN OPERATIONS OF AFFILIATES represents the net loss incurred from the
Company's equity investment in various hotels. The loss for the three month
period ended March 31, 1998 decreased $1,833, or 25%, from the comparable three
month period March 31, 1997, as a result of various hotel properties in a
partnership still undergoing a start-up period of lower revenues for the three
months ended March 31, 1997.
INCOME TAXES - The income tax benefit for the three months ended March 31, 1998
and 1997 represents federal and state income tax benefit generated by a loss
before tax of $893,715 and $562,627, respectively. The provision includes tax
expense/benefit from the valuation of deferred tax assets and liabilities.
NET LOSS - As a result of the above factors, net loss increased $203,540 from
the three month period ended March 31, 1997 to a net loss of $545,203 for the
three month period ended March 31, 1998. The net loss per common share - basic
of $0.11, compared with a net loss per common share - basic of $0.08 for the
three month period ended March 31, 1997.
CAPITAL RESOURCES AND LIQUIDITY
At March 31, 1998, the Company had a $1,400,000 working capital demand line note
with two commercial banks which bears interest at rates between prime plus 1/2%
and 1 1/2%. Amounts borrowed are collateralized by a hotel property and
unencumbered land. At March 31, 1998, $1,300,000 was borrowed under the terms of
these lines.
At March 31, 1998, the Company had $343,681 of cash and cash equivalents
compared with $670,736 at December 31, 1996. 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 are released several times monthly for application against
current liabilities. The balances held in escrow on March 31, 1998 and December
31, 1997 were $3,845,409 and $3,463,928, respectively.
Net cash flows provided by operating activities were $26,568 for the three month
period ended March 31, 1998, a decrese of $857,089 from $883,547, the comparable
period in 1997. The net decrease is primarily the result of the acquisition of
nine (9) Hampton Inns on October 31, 1997, which reduced earnings as the hotels
were purchased during their seasonal slow months. In addition, the Company
reduced its accounts payable from December 31, 1997, by approximately $380,000.
Net cash flows used in investing activities was $619,317 for the three month
period ended March 31, 1998, an increase of $262,010 from $357,307, the
comparable period for 1997. Net cash used by investing activities for the three
months ended March 31, 1998, reflects primarily amounts placed into escrow as
required by the loan agreements ($381,481), capital improvements to twenty-six
(26) hotels ($276,220) and deposits submitted for the acquisition of three (3)
hotels ($96,900).
Net cash flows provided by financing activities was $265,694 for the three
month period ended March 31, 1998. Net cash provided by financing activities
consists of net borrowing on the line of credit totaling $587,463 and
proceeds from the exercise of options totaling $7,500 for the three month
period ended March 31, 1998. This was offset by repayment of mortgages
($270,439) and preferred dividends ($31,830).
EBITDA increased by $1,355,123, or 58%, to $3,702,339 for the three month
period ended March 31, 1998, compared to $2,347,216 for the comparable period
in 1997. EBITDA is defined as earnings before interest expense, income taxes,
depreciation, amortization, minority interest and equity of affiliates. The
Company believes this definition of EBITDA provides a meaningful measure of
its ability to service debt. The increase is a result of the acquisition of
nine (9) hotel properties acquired on October 31, 1997 and improved operating
performance of the existing hotel properties held by the Company prior to the
October 31, 1997 acquisition.
Funds on hand, internally generated future cash flows and funds available on
the Company's secured demand notes are expected to be sufficient to meet
capital requirements, as well as operating expenses and debt service
requirements through at least the next twelve months. The Company continues
to evaluate the necessity of other financing alternatives.
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-QSB 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 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 in early 1999.
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 defended by the insurance
carrier of Ridge Road Hotel Properties and Hudson. The Company believes that it
has adequate insurance for any potential loss.
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 rescinded the warrant. The Company
has answered the complaint, denying the relevant allegations and asserting
several affirmative defenses. Cross-motions for summary judgment were argued in
October, 1997; the judge has recently denied both motions, and Ladenburg has
appealed. It is anticipated that the suit will now proceed to trial. 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.
US Franchise Systems, Inc. ("USFS") has informed Hudson Hotels Corporation that
USFS will claim indemnity under the Joint Venture Agreement for any liability to
USFS arising out of the following suit: Plaintiff Larry Owens, a guest in the
process of registering at the Birmingham Microtel Inn, claims damages arising
out of a gun shot wound to the buttocks, which occurred during a robbery of the
hotel. The claim is based upon plaintiff's assertion that the hotel owner had a
duty to warn potential guests that a robbery was in progress. Hudson does not
own or manage this hotel. USFS was named in the lawsuit as franchisor of
Microtel Inns. Hudson's liability under this claim is being defended by the
hotel's insurance company.
On January 16, 1998, the Company was served with a complaint alleging
discrimination based upon the gender of the plaintiff and sexual harassment. The
plaintiff is a former employee of S&W Restaurant, Inc., the company which
operates the restaurant in the Brookwood Inn in Pittsford, New York. In April
1998, the Company settled with the plaintiff and the outcome did not have a
material adverse effect on the Company's financial statements.
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 1. Legal Proceedings
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. 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: 4/15/98 /s/ Bruce A. Sahs
----------------------------------------
Bruce A. Sahs, Executive Vice President
and Chief Operating Officer
Date: 4/15/98 /s/ Taras M. Kolcio
----------------------------------------
Taras M. Kolcio, Chief Financial Officer