SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended.................................................June 30, 1998
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 July 18, 1998 the Registrant had issued and outstanding 5,159,162
shares of its $.001 par value common stock.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1998 AND 1997 AND THE SIX MONTHS ENDED
JUNE 30, 1998 AND 1997 (unaudited)
Three Months Ended Six Months Ended
1998 1997 1998 1997
---- ---- ---- ----
OPERATING REVENUES:
Hotel operating revenues $14,156,930 $9,145,032 $25,753,648 $17,106,389
Management fees 297,516 249,805 474,216 407,756
Royalties 293,849 167,298 490,214 301,123
Other 39,657 103,012 77,157 171,605
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Total operating revenues 14,787,952 9,665,147 26,795,235 17,986,873
-------------- ----------- -------------- -------------
OPERATING COSTS AND EXPENSES
Direct 8,862,751 5,927,935 16,470,893 11,323,985
Corporate 859,236 648,264 1,556,038 1,226,724
Depreciation and amortization 1,392,170 984,254 2,791,428 1,911,708
-------------- ----------- -------------- -------------
Total operating costs and expenses 11,114,157 7,560,453 20,818,359 14,462,417
-------------- ----------- -------------- -------------
Income from operations 3,673,795 2,104,694 5,976,876 3,524,456
OTHER INCOME (EXPENSE):
Interest income 54,435 44,559 108,180 88,941
Interest expense (3,275,258) (2,050,242) (6,493,687) (4,044,079)
Gain on sale of property and equipment 74,523 -- 74,523 --
-------------- ----------- -------------- -------------
Total other expense (3,146,300) (2,005,683) (6,310,984) (3,955,138)
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Income (Loss) from operations, before
income taxes, minority interest and equity on
income taxes, minority interest and
equity in income of affiliates 527,495 99,011 (334,108) (430,682)
-------------- ----------- -------------- -------------
PROVISION (BENEFIT) FROM INCOME TAXES 219,640 28,629 (128,872) (192,335)
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Income (Loss) from operations, before
minority interest and equity in
income of affiliates 307,855 70,382 (205,236) (238,347)
MINORITY INTEREST (26,225) (27,225) (52,976) (52,965)
EQUITY IN INCOME OF AFFILIATES 70,265 15,012 64,904 7,818
-------------- ----------- -------------- -------------
NET INCOME (LOSS) $351,895 $ 58,169 $(193,308) $(283,494)
-------------- ----------- -------------- -------------
-------------- ----------- -------------- -------------
NET INCOME (LOSS) PER COMMON SHARE - BASIC $ 0.06 $ 0.01 $ (0.05) $ (0.07)
-------------- ----------- -------------- -------------
-------------- ----------- -------------- -------------
NET INCOME (LOSS) PER COMMON SHARE - DILUTED $ 0.06 $ 0.01 N/A N/A
-------------- ----------- -------------- -------------
-------------- ----------- -------------- -------------
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 1998
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,392,861
Cash - restricted 4,229,550
Accounts receivable - trade 917,655
Prepaid expenses and other 2,836,874
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TOTAL CURRENT ASSETS 9,376,940
INVESTMENTS IN PARTNERSHIP INTERESTS 1,738,908
LAND AND REAL ESTATE DEVELOPMENT 4,176,364
PROPERTY AND EQUIPMENT, NET 126,044,931
DEFERRED TAX ASSET 1,516,923
OTHER ASSETS 8,627,372
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TOTAL ASSETS $ 151,481,438
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LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Lines of credit $ 300,000
Current portion of long-term debt 2,950,853
Accounts payable - trade 1,240,064
Other accrued expenses 4,236,975
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TOTAL CURRENT LIABILITIES 8,727,892
LONG-TERM DEBT 128,559,291
DEFERRED REVENUE - LAND SALE 185,055
LIMITED PARTNERS' INTEREST IN
CONSOLIDATED PARTNERSHIP 1,099,287
SHAREHOLDERS' INVESTMENT:
Preferred stock 295
Common stock 5,170
Additional paid-in capital 17,864,454
Warrants outstanding 50,000
Accumulated deficit (4,968,755)
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12,951,164
Less: 10,000 shares of common stock in treasury,
at cost at June 30, 1998 (41,251)
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TOTAL SHAREHOLDERS' INVESTMENT 12,909,913
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TOTAL LIABILITIES AND SHAREHOLDERS' INVESTMENT $ 151,481,438
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The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' INVESTMENT
FOR THE SIX MONTH PERIOD ENDED JUNE 30, 1998
(unaudited)
SERIES A ADDITIONAL ADDITIONAL
PREFERRED PAID-IN CAPITAL COMMON PAID-IN CAPITAL
STOCK PREFERRED STOCK COMMON
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 $ 295 $ 1,560,705 $ 5,166 $ 16,275,868
Net Loss -- -- -- --
Other -- -- -- 12,885
Exercise of stock options -- -- 4 14,996
Cash dividends paid on preferred stock -- -- -- --
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1998 $ 295 $ 1,560,705 $ 5,170 $ 16,303,749
------------ ------------ ------------ ------------
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WARRANTS ACCUMULATED TREASURY
OUTSTANDING DEFICIT STOCK TOTAL
------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1997 $ 50,000 $ (4,711,787) $ (41,251) $ 13,138,996
Net Loss -- (193,308) -- (193,308)
Other -- -- -- 12,885
Exercise of stock options -- -- -- 15,000
Cash dividends paid on preferred stock -- (63,660) -- (63,660)
------------ ------------ ------------ ------------
BALANCE, JUNE 30, 1998 $ 50,000 $ (4,968,755) $ (41,251) $ 12,909,913
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Stock balances at December 31, 1997:
Common stock: 5,155,162 shares; Preferred stock: 294,723 shares
Stock balances at June 30, 1998:
Common stock: 5,159,162 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 SIX MONTH PERIOD ENDED JUNE 30, 1998 and 1997
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES: 1998 1997
---- ----
Net Loss $ (193,308) $(283,494)
Adjustments to reconcile net income to net
cash provided by operating activities:
Deferred tax provision (128,997) (192,336)
Depreciation and amortization 2,791,428 1,911,708
Gain on sale of property and equipment (74,523) (28,812)
Minority interest in operations 52,976 52,965
Non-cash consulting 12,885 35,603
Equity in operations (64,904) (7,818)
Capital distributions from unconsolidated
partnership interests 96,026 45,251
(Increase) decrease in assets -
Accounts receivable - trade (19,777) (415,138)
Prepaid expenses and other (395,311) 19,579
Increase (decrease) in liabilities -
Accounts payable (154,396) 426,827
Other accrued expenses 641,687 61,940
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Net cash provided by operating activities 2,563,786 1,626,276
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CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of land/real estate development (29,216) (60,570)
Increase in restricted cash (765,622) (1,122,449)
Cash collected on sale of property and equipment 2,051,831 399,659
Change in affiliates accounts and notes receivable (1,553,011) 113,174
Purchase of equipment (842,773) (707,157)
Deposits and other assets (195,326) (204,942)
Change in non-affiliate accounts receivable 489,517 (57,417)
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Net cash used in investing activities (844,600) (1,639,702)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of mortgages (482,364) (289,405)
Distributions to limited partners (53,500) (53,500)
Purchase of treasury stock -- (41,251)
Proceeds from stock options exercised 15,000 431,188
Dividends paid (63,660) (63,660)
Borrowings (Repayments) on line of credit, net (412,537) 200,000
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Net cash provided by/(used in)financing activities (997,061) 183,372
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NET INCREASE IN CASH AND CASH
EQUIVALENTS 722,125 169,946
CASH AND CASH EQUIVALENTS - beginning of period 670,736 1,057,368
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CASH AND CASH EQUIVALENTS - end of period $1,392,861 $1,227,314
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OTHER INFORMATION:
Cash paid during the period for:
Interest $6,365,325 $4,010,654
Income taxes $ 14,372 $ 11,890
The accompanying notes are an integral part of these consolidated statements.
HUDSON HOTELS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 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 entered into an agreement with US Franchise
Systems, Inc. ("USFS") pursuant to which USFS purchased worldwide franchising
and administration for the Microtel hotel chain. 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, will receive $4 million over a three year period,
allocated as follows: $3,037,640 for the purchase of the franchising assets;
$700,000 for consulting services over three 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 million was paid at closing,
$1 million was paid at the first anniversary and $500,000 at the second
anniversary, and an additional $500,000 is due 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% from hotels 101-250, and .5% for all hotels
in excess of 250.
As a result of the USFS Agreement, the Company has focused its efforts on
developing, building and managing various hotel products, including Microtel
Inns. The Company has had this focus since it acquired Hudson Hotels
Corporation in 1992. Also, 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 six month
period ended June 30, 1998 and 1997.
1998 1997
---- ----
Property and equipment, net of accumulated depreciation $31,083,621 $28,077,627
Current assets 2,692,606 2,647,457
Other assets 1,037,848 1,041,410
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TOTAL ASSETS 34,814,075 31,766,494
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Mortgage and notes payable - current 1,945,948 1,852,871
Other current liabilities 905,644 850,911
Mortgage/Notes payable - noncurrent 24,913,163 22,509,663
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TOTAL LIABILITIES 27,764,755 25,213,445
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NET ASSETS $ 7,049,320 $ 6,553,049
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COMPANY'S SHARE $ 1,738,908 $ 1,879,786
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Net revenues $ 6,657,619 $ 5,213,048
Operating expenses 4,042,236 3,179,373
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Income from operations 2,615,383 2,033,675
Other expense, net (2,167,118) (1,991,030)
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NET INCOME $ 448,265 $ 42,645
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COMPANY'S SHARE $ 64,904 $ 7,818
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4. LINE OF CREDIT
The Company has a line of credit with a commercial bank, with an interest rate
of prime plus 1 1/2% for a total of $400,000. Amounts borrowed are
collateralized by land in Tonawanda, New York. Borrowings under this line of
credit were $300,000 at June 30, 1998.
5. Long Term Debt
Future minimum repayments under long-term debt are as follows:
Remainder 1998 $ 2,950,853
1999 2,985,083
2000 6,096,952
2001 6,213,286
2002 13,825,812
2003 and thereafter 99,438,158
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TOTAL $131,510,144
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6. Commitments and Contingencies
The Company has various operating lease arrangements for automobiles
and office space. Total rent expense under operating leases amounted to
$89,506 and $79,002 for the periods ending June 30, 1998 and 1997,
respectively. Future minimum lease payments under operating leases are
approximately: 1998 remainder - $270,243; 1999 - $417,209; and 2000 -
$409,056.
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 $638,000 and $326,000 for the
six months ended June 30, 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. 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 - $342,750;
1999 - $914,000; 2000 - $914,000; 2001 - $914,000; 2002 - $914,000;
thereafter $1,675,667.
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 $11,000 for the
six month period ended June 30, 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 $11,000
1999 22,000
2000 22,000
2001 22,000
2002 22,000
Thereafter 726,000
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$825,000
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7. 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 liabilities represent the difference in more than one
depreciation method.
At June 30, 1998, Company has net operating loss carryforwards for
income tax purposes of approximately $4,721,000 may be used to offset
future taxable income. These loss carryforwards will begin to expire in
2003.
8. Accounts/Notes with Affiliates
The Company has a $1,200,000 note agreement with Hudson Hotels Limited
Partnership, L.P. ("HHLP"), a subsidiary of Hudson Hotels Trust
("HHT"), a Maryland Real Estate Investment Trust. The Company and HHT
share the same executive management team. The note matures on April 30,
1999 and accrues interest at a rate of 12% per annum with interest
payments due monthly. At the option of HHLP, at the stated maturity,
the note may be converted into a term loan, bearing interest at 12%,
payable in 120 equal monthly payments of principal plus interest in the
amount of $17,217.
9. Stockholders Investment
On May 26, 1998, the Company issued 500,000 warrants at $4.00 a share,
which expire April 30, 2003, to an individual and a partnership as
consideration for amounts loaned to Hudson Hotels Limited Partnership,
L.P. ("HHLP"), a subsidiary of Hudson Hotels Trust, an affiliate of the
Company. The issuance of the option grants are expensed over the
expected period of the loan between HHLP and the an individual and a
partnership. In addition, the Company's wholly-owned subsidiary, Hudson
Hotels Properties Corp., has pledged 1,333,332 shares of common stock
of the Company as security for the payment of the loan by HHLP to the
individual and the partnership.
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 acquisition of nine (9) Hampton Inns on October 31, 1997, a
significant portion of the current results are not directly comparable to prior
year results, specifically hotel operating revenues and direct costs, expenses
and interest expense.
RESULTS OF OPERATIONS
Three months ended June 30, 1998, compared to the three months ended June 30,
1997:
Total operating revenues increased $5,122,805, or 53% to $14,787,952 for the six
months ended June 30, 1998, from $9,665,147 for the six months ended June 30,
1997, reflecting changes in revenue categories, as discussed below.
HOTEL OPERATING REVENUES were $14,156,930 for the three months ended June 30,
1998, an increase of $5,011,898, or 55%, from $9,145,032 for the three months
ended June 30, 1997. Hotel operations consisted of the following:
Three Months Ended
June 30, 1998 June 30, 1997
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Hotel room revenue $11,999,665 $7,538,650
Beach club revenue 384,365 316,059
Food and beverage revenue 1,269,224 906,830
Other 503,676 383,493
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Total $14,156,930 $9,145,032
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Hotel room revenues for the three month period ended June 30, 1998 increased
$4,461,015 or 59% to $11,999,665 from $7,538,650 for the three month period
ended June 30, 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 three months ended June 30, 1997. Occupancy and average
daily room rates for the Company owned hotels were 73.4% and $58.45,
respectively, for the three months ended June 30, 1998, and 70.0% and $55.14,
respectively, for the three months ended June 30, 1997.
The Beach Club revenue, which totaled $384,365 for the three month period
ended June 30, 1998 and relates to the operation of the beach club at the
Seagate Hotel and Beach Club, increased $68,306, or 22%, from the comparable
period in 1997. The increase is specifically attributable to an increase in
initiation fees being charged to new members.
Food and beverage revenue was $1,269,224 for the three month period ended
June 30, 1998, compared to $906,830 for the three month period ended June 30,
1997, an increase of $362,394, or 40%. The increase is a result of additional
food and beverage volume at the Canandaigua Inn on the Lake.
ROYALTIES for the three month period ended June 30, 1998 increased $126,551
to $293,849 from $167,298 for the three month period ended June 30, 1997, an
increase of 76%. The increase is attributable to ninety-eight (98) franchised
Microtel Inns in operation at June 30, 1998, as opposed to thirty (30) in
operation at June 30, 1997. The Company receives all royalties on
twenty-eight (28) of the ninety-eight (98) franchised Microtel Inns and on
the remaining seventy (70) 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% for hotels 101-250; and .5% for hotels 251 and beyond.
As a result of the Company's joint venture agreement ("USFS Agreement") with
US Franchise Systems, Inc., the Company has retained the right to 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 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 June 30, 1998, remained
consistent compared to the same three-month period ended June 30, 1997. The
schedule of owned and managed hotels is summarized below:
June 30, 1998 June 30, 1997
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Owned 25 17
Managed with financial interest 10 10
Other managed 5 5
--- ---
40 32
--- ---
--- ---
Management fees of approximately $652,000 were generated by the twenty-five (25)
owned hotels for the three month period ended June 30, 1998, which were
eliminated for consolidation purposes.
The Company plans to continue its revenue growth by maintaining the following
strategies: (i) enhance operating performance of its existing hotels owned or
under management (ii) develop and build Microtel Inns on sites acquired (iii)
opportunistic acquisition of existing hotels and (iv) pursuing strategies
intending to form a "paperclipped" REIT in order for the Company to benefit from
leasing hotel properties from the REIT.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues,
less direct expenses; departmental expenses, undistributed expenses, property
occupancy costs and insurance costs) for the three months ended June 30, 1998
was 37%, compared to 35% for the three months ended June 30, 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 $210,972, or
33%, to $859,236 from $648,264 for the three month period ended June 30, 1998.
The increase is primarily a result of the following: (1) increases in
professional fees incurred for the three month period ended June 30, 1998,
compared to the three month period ended June 30, 1997 and (2) payroll expense
increased as a result of the addition of employees.
DEPRECIATION AND AMORTIZATION for the three month period ended June 30, 1998
increased $407,916, or 41%, to $1,392,170 from $984,254 for the three month
period ended June 30, 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 June 30, 1998.
OTHER EXPENSE for the three month period ended June 30, 1998 had an overall
expense increase of $1,140,617 to $3,146,300 or 57% from $2,005,683 for the
three month period ended June 30, 1997. The increase is primarily the result
of incurring additional debt for the acquisition of nine (9) hotels on
October 31, 1997. Of the $3,275,258 in total interest expense, for the three
months ended June 30, 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 income incurred from the
Company's equity investment in various hotels. The income for the three month
period ended June 30, 1998 increased $55,253, or 368%, to $70,265 from $15,012
for the comparable three month period June 30, 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 June 30, 1997.
INCOME TAXES - The provision for income taxes for the three month period
ended June 30, 1998, represents federal and state income tax generated by the
net income before tax of $571,535 (including the equity in income from
affiliates and minority interest). The provision includes tax expense/benefit
from the valuation of deferred tax assets and liabilities. The provision for
income taxes of $219,640 for the three month period ended June 30, 1997
represents federal and state tax expense on income before tax.
NET INCOME - As a result of the above factors, net income increased $293,726
from $58,169 for the three month period ended June 30, 1997 to net income of
$351,895 for the three month period ended June 30, 1998, an increase of 505%.
The net income per common share - basic and diluted of $0.06, compared with
net income per common share - basic and diluted of $0.01 for the three month
period ended June 30, 1997.
Six months ended June 30, 1998, compared to the six months ended June 30, 1997
Total operating revenue increased $8,808,362, or 49%, to $26,795,235 for the six
months ended June 30, 1998, from $17,986,873 for the six months ended June 30,
1997, reflecting changes in revenue categories, as discussed below.
HOTEL OPERATING REVENUES were $25,753,648 for the six months ended June 30,
1998, an increase of $8,647,259, or 51%, from $17,106,389 for the six months
ended June 30, 1997. Hotel operations consist of the following:
Six Months Ended
June 30, 1998 June 30, 1997
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Hotel room revenue $22,004,869 $14,089,506
Beach club revenue 761,774 666,572
Food and beverage revenue 2,018,952 1,651,985
Other 968,053 698,326
----------- -----------
TOTAL $25,753,648 $17,106,389
----------- -----------
----------- -----------
Hotel room revenues for the six month period ended June 30, 1998 increased
$7,915,363 or 56% to $22,004,869 from $14,089,506 for the six month period
ended June 30, 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 six months ended June 30, 1998. Occupancy and average daily
room rates for the Company owned hotels were 66.7% and $58.28, respectively,
for the six months ended June 30, 1998 and 65.5% and $55.98, respectively,
for the six months ended June 30, 1997.
The beach club revenue, which totaled $761,774 for the six month period ended
June 30, 1998 and relates to the operation of the beach club at the Seagate
Hotel and Beach Club, increased $95,202, or 14%, 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 $2,018,952 for the six month period ended June 30,
1998, compared to $1,651,985 for the six month period ended June 30, 1997, an
increase of $366,967, or 22%. The increase is primarily the result of additional
volume at the Canandaigua Inn on the Lake.
ROYALTIES for the six month period ended June 30, 1998, have increased $189,091
to $490,214 from $301,123 for the six month period ended June 30, 1997, an
increase of 63%. The increase is attributable to ninety-eight (98) franchised
Microtels in operation at June 30, 1998, as opposed to thirty (30) in operation
at June 30, 1997.
As a result of the USFS Agreement, the Company has retained the right to
collect franchise placement fees on an additional twenty-two (22) Microtel
properties and ten (10) "suite" properties and retain all royalties on the
fifty (50) Microtels and ten (10) suites. The Company will also receive
royalty payments in the future from US Franchise Systems, Inc., for
franchises they open, along with consulting payments over the next three
years.
Overall, MANAGEMENT FEES for the six month period ended June 30, 1998, remained
consistent with the same three month period ended June 30, 1997. The schedule of
owned and managed hotels is summarized below:
June 30, 1998 June 30, 1997
------------- -------------
Owned 25 17
Managed with financial interest 10 10
Other managed 5 5
--- ---
40 32
--- ---
--- ---
Management fees of approximately $1,209,000 were generated by the twenty-five
(25) owned hotels for the six months ended June 30, 1998, which were eliminated
for consolidation purposes.
The Company plans to continue its revenue growth by implementing the following
strategies: (i) enhance operating performance of its existing hotels owned or
under management (ii) develop and building Microtel Inns on sites acquired (iii)
opportunistic acquisition of existing hotels and (iv) pursuing strategies
intending to form a paperclipped REIT in order for the Company to benefit from
leasing hotel properties from the REIT.
GROSS OPERATING MARGIN for hotel operations (consisting of total hotel revenues,
less direct expenses; departmental expenses, undistributed expenses, property
occupancy costs and insurance costs) for the six months ended June 30, 1998 was
36.1%, compared to 33.8% for the six months ended June 30, 1997. The increase 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 $329,314, or
27%, from $1,226,724 to $1,556,038 for the six month period ended June 30, 1998.
The increase is primarily a result of the following: (1) professional fees
increased for the six month period as a result of Company growth and (2) payroll
expense increased as a result of pay increases and the addition of employees.
DEPRECIATION AND AMORTIZATION for the six month period ended June 30, 1998,
increased $879,720, or 46%, to $2,791,428 from $1,911,708 for the six month
period ended June 30, 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 six month period ended June 30, 1998.
OTHER EXPENSE for the six month period ended June 30, 1998 and overall
expense increase of $2,355,846 to $6,310,984 from $3,955,138 for the six months
ended June 30, 1997. The increase is primarily the result of incurring
additional debt for the acquisition of nine (9) hotels on October 31, 1997.
Of the $6,493,687 in total interest expense, 59% relates to the mortgages
held on the hotels acquired in 1996 and 1997. The remaining 41% represents
interest on the Company's outstanding convertible debentures, mezzanine
financing, additional note payable relating to the purchase of hotels,
Tonawanda bond issue and line of credit.
EQUITY IN OPERATIONS OF AFFILIATES represents the net income incurred from the
Company's equity investment in various hotels. The income for the six month
period ended June 30, 1998 increased $57,086, or 730%, to $64,904 from $7,818
for the comparable six months ended June 30, 1997, as a result of various hotel
properties in a partnership still undergoing a start-up period of lower revenues
for the six months ended June 30, 1997.
INCOME TAXES - The benefit for income taxes for the six month period ended June
30, 1998 and 1997, represents federal and state income tax benefit generated by
the net loss before tax of $322,180 (including the equity in income from
affiliates and minority interest) and $475,829, respectively. The provision
includes benefit from the valuation of deferred tax assets and liabilities.
NET LOSS - As a result of the above factors, net loss decreased $90,186 from
$283,494 for the six month period ended June 30, 1997, to a net loss of
$193,308 for the six month period ended June 30, 1998 a decrease of 32%. The
net loss per common share -basic of $0.05 for the six month period ended June
30, 1998, compared with a net loss per common share basic of $0.07 for the
six month period ended June 30, 1997.
CAPITAL RESOURCES AND LIQUIDITY
At June 30, 1998, the Company had a $400,000 working capital demand line note
with a commercial bank which bears interest a rate of prime plus 1/2%. Amounts
borrowed are collateralized by unencumbered land. At June 30, 1998, $300,000 was
borrowed under the term of this line.
At June 30, 1998, the Company had $1,392,861 of cash and cash equivalents
compared with $670,736 at December 31, 1997. 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 June 30, 1998 and December
31, 1997 were $4,229,550 and $3,463,928, respectively.
Net cash flows provided by operating activities were $2,563,786 for the six
month period ended June 30, 1998, an increase of $937,510 from $1,626,276, for
the comparable period in 1997. The net increase is primarily the result of the
acquisition of nine (9) Hampton Inns on October 31, 1997, which increased
earnings. In addition, the Company increased its other accrued expenses from
December 31, 1997, by approximately $650,000.
Net cash flows used in investing activities was $844,600 for the six month
period ended June 30, 1998, a decrease of $795,102 from $1,639,702, for the
comparable period for 1997. Net cash used by investing activities for the six
months ended June 30, 1998, reflects primarily amounts placed into escrow as
required by the loan agreements $381,481, capital improvements to twenty-five
(25) hotels $276,220 and cash received for the sale of property and equipment
$2,051,831.
Net cash flows used in financing activities was $997,061for the six month
period ended June 30, 1998. Net cash used in financing activities consists of
net repayments on the line of credit totaling $412,537, proceeds from the
exercise of options totaling $15,000 for the six month period ended June 30,
1998, repayment of mortgages $482,364 and preferred dividends $63,660.
EBITDA increased by $3,332,140, or 61%, to $8,768,304 for the six month period
ended June 30, 1998, compared to $5,436,164 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 primarily 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.
The Company believes that 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 and explore the necessity of other financing
alternatives.
Year 2000 The Company utilizes various servers and PC based computer packages
as tools in running its daily operations. Management does not believe that
the Company will encounter any material problems with this software as a
result of the change of the Millenium of January 1, 2000, based on
communications with software and other key suppliers.
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 January 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.
US Franchise Systems, Inc. ("USFS") has informed Hudson Hotels Corporation
that USFS will claim indemnity under the USFS 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, seeks monetary damages
in the amount of $500,000 and punitive damages of $2,000,000 for injury
arising out of a gun shot wound to the buttocks, which occurred during a
robbery of the hotel. This case was commenced in Alabama State Court on
December 13, 1996. 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 June 18, 1998, Vickie Lynn Webb filed a civil suit against the Company and
others in United States District Court in the Eastern District of Tennessee,
alleging sexual harassment and asking for unspecified damages. The
allegations are based upon alleged actions of the manager and another
employee of the hotel. The Company has obtained a 60-day extension of time to
answer, and intends to vigorously defend this lawsuit.
After taking into consideration legal Counsel's evaluation of all such actions,
management is of the opinion that the outcome of such proceedings or claims
which is pending, or known to be threatened (as described above) individually or
in the aggregate, will not have a significant effect on the Company's financial
statements.
On June 20, 1995, Ladenburg, Thalmann & Co., Inc., the Company's former
investment bankers, filed a complaint in New York State Supreme Court against
the Company alleging breach of contract and damages of $906,250 relating to the
Company's rescission of a warrant granted to them in connection with the
investment advisory agreement. In February 1994, the Board of Directors of the
Company determined that Ladenburg had been otherwise adequately compensated for
such services as were actually performed, and voted to rescind the warrant. The
Company has answered the complaint, denying the relevant allegations and
asserting several affirmative defenses. The case is expected to go to trail in
September, 1998. 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.
Item 2. Change in Securities - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of the stockholders of the Company, held on June 11, 1998,
the stockholders of the Company approved the following:
The election of the Board of Directors consisting
of six Directors. Each Director shall hold office until the next annual meeting
of shareholders and until the successor of the Director is duly elected and
qualifies.
Amending the Company's 1993 Director Stock Option Plan to increase the number
of Common Shares reserved for issuance thereunder from 135,000 shares to
216,000 shares.
The adoption of the Company's 1998 Long-Term Incentive Compensation Plan.
Amending the Company's Certificate of Incorporation to permit authorization of
fundamental changes (including merger or consolidation, sale, lease or exchange
of all or substantially all of the assets of the Company, and dissolution of the
Company) by a majority vote of the shareholders of the Company.
The appointment of PricewaterhouseCoopers, LLP, as the Company's independent
public accountants for the year ending December 31, 1998.
The table below sets forth the number of votes cast for, against or withheld
for each nominee to the Company's Board of Directors, as well as votes cast
for other proposals discussed above at the June 11, 1998 shareholders meeting.
Nominee For Authority
Withheld
E. Anthony Wilson 4,384,173 37,778
Michael Cahill 4,306,569 115,382
Michael George 4,384,978 36,973
Ralph L. Peek 4,384,978 36,973
Robert Fagenson 4,384,978 36,973
John P. Buza 4,384,978 36,973
As to the proposal to increase the number of Common Shares allocated to the
Company's 1993 Directors Stock Option Plan
2,646,194 shares have voted FOR
180,460 shares have voted AGAINST
As to the proposal to approve the 1998 Long-Term Incentive Compensation Plan
2,642,361 shares have voted FOR
177,843 shares have noted AGAINST
As to the proposal to amend the Certificate of Incorporation
2,716,358 shares have voted FOR
112,796 shares have voted AGAINST
As to the proposal to appoint PricewaterhouseCoopers, LLP as the Company's
independent public accountant for the year ending December 31, 1998
4,357,605 shares have voted FOR
54,767 shares have voted AGAINST
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: 7/31/98 /s/ John Sabin
-------------------------------------------------
John Sabin, Executive Vice President and
Chief Financial Officer
Date: 7/31/98 /s/ Taras M. Kolcio
-------------------------------------------------
Taras M. Kolcio, Vice President, Controller and
Principal Accounting Officer