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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 2001
---------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Commission File No. 0-15291
-------
ARLINGTON HOSPITALITY, INC.
---------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3312434
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 S. ARLINGTON HEIGHTS ROAD, SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005
---------------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 228-5400
--------------
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
As of November 6, 2001, 4,958,081 shares of the Registrant's Common Stock were
outstanding.
================================================================================
ARLINGTON HOSPITALITY, INC.
FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
INDEX
PART I: Financial Information Page
----------------------------- ----
Item 1 - Financial Statements -
Consolidated Balance Sheets as of September 30, 2001
and December 31, 2000 (unaudited) 4
Consolidated Statements of Operations for the Three and
Nine Months Ended September 30, 2001 and 2000 (unaudited) 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2001 and 2000 (unaudited) 7
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 19
PART II: Other Information
--------------------------
Item 4 - Submission of Matters to a Vote of Securities Holders 20
Item 6 - Exhibits and Reports on Form 8-K 20
Signatures 20
2
Part I: Financial Information
Item 1: Financial Statements
3
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
=================================================================================================================
September 30, December 31,
2001 2000
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,956,635 $ 1,728,869
Accounts receivable, net of allowance of $150,000
at September 30, 2001 and $100,000 at December 31, 2001
(including $170,000 and $361,000 from
related parties) 2,834,970 2,288,865
Interest receivable 324,583 374,960
Notes receivable, current portion 543,485 618,485
Prepaid expenses and other current assets 370,831 1,013,053
Costs and estimated earnings in excess of billings on
uncompleted contracts with related parties 362,558 375,780
--------------- --------------
Total current assets 9,393,062 6,400,012
--------------- --------------
Investments in and advances to unconsolidated
hotel joint ventures 7,197,902 7,031,982
--------------- --------------
Property and equipment:
Land 11,873,384 11,226,664
Buildings 60,442,796 60,122,758
Furniture, fixtures and equipment 21,985,524 21,393,936
Construction in progress 6,630,610 850,238
Leasehold improvements 2,882,851 2,875,379
--------------- --------------
103,815,165 96,468,975
Less accumulated depreciation and amortization 20,894,314 18,666,279
--------------- --------------
82,920,851 77,802,696
--------------- --------------
Notes receivable, less current portion 688,289 801,346
Deferred income taxes 3,357,000 3,402,000
Other assets, net of accumulated amortization of
$997,680 and $805,998 2,681,925 2,704,679
--------------- --------------
6,727,214 6,908,025
$ 106,239,029 $ 98,142,715
=============== ==============
4
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
==================================================================================================================
September 30, December 31,
2001 2000
--------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,560,361 $ 2,313,640
Bank line-of-credit 6,793,702 3,408,133
Accrued payroll and related expenses 867,978 775,714
Accrued real estate and other taxes 2,205,051 1,937,415
Other accrued expenses and current liabilities 447,804 306,146
Current portion of long-term debt 2,437,287 1,698,538
Income taxes payable 754,484 132,420
--------------- --------------
Total current liabilities 16,066,667 10,572,006
--------------- --------------
Long-term debt, net of current portion 58,108,406 56,905,152
--------------- --------------
Deferred income (Note 11) 11,830,152 12,196,330
--------------- --------------
Commitments and contingencies
Minority interests 448,285 203,449
--------------- --------------
Shareholders' equity:
Preferred stock, no par value; authorized 100,000 shares;
none issued - -
Common stock, $.005 par value; authorized 25,000,000 shares;
issued and outstanding 4,970,456 shares at September 30, 2001
and 4,979,244 shares at December 31, 2000 24,920 24,896
Additional paid-in capital 13,255,441 13,125,324
Retained earnings 6,942,033 5,552,433
--------------- --------------
20,222,394 18,702,653
Less:
Stock subscriptions receivable (436,875) (436,875)
19,785,519 18,265,778
$ 106,239,029 $ 98,142,715
=============== ==============
See notes to consolidated financial statements.
5
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
====================================================================================================================
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
--------------- ---------------- --------------- -----------------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 12,939,843 $ 14,533,022 $ 35,057,658 $ 38,291,146
Other hotels 3,121,609 3,769,565 8,259,870 9,523,865
Development and construction 847,745 3,610,293 954,920 7,697,058
Hotel sales and commissions 4,231,045 - 10,089,113 -
Management services 257,808 320,996 729,706 934,234
Employee leasing 1,157,587 1,434,228 3,887,603 4,506,679
Other - 199,422 - 586,276
------------- ------------- ------------- --------------
22,555,637 23,867,526 58,978,870 61,539,258
------------- ------------- ------------- --------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 8,505,417 9,090,650 25,197,975 26,117,093
Other hotels 2,392,241 2,630,603 6,666,418 7,462,832
Development and construction 251,607 3,591,327 839,031 7,365,708
Hotel sales and commissions 3,118,210 - 6,835,678 -
Management services 195,742 208,447 547,654 616,705
Employee leasing 1,152,710 1,423,474 3,849,491 4,451,061
Other 1,618 82,859 1,618 480,854
------------- ------------- ------------- --------------
15,617,545 17,027,360 43,937,865 46,494,253
------------- ------------- ------------- --------------
6,938,092 6,840,166 15,041,005 15,045,005
Depreciation and amortization 1,129,657 1,177,305 3,399,005 3,303,976
Leasehold rents - hotels 1,611,347 1,644,293 5,072,486 5,059,334
Corporate general and administrative 451,520 484,428 1,476,952 1,287,597
------------- ------------- ------------- --------------
Operating income 3,745,568 3,534,140 5,092,562 5,394,098
Other income (expense):
Interest expense (1,207,437) (1,410,867) (4,004,484) (4,353,453)
Interest income 233,891 153,666 503,920 587,406
Other income 507,836 160,173 614,224 272,130
Gain on sale of property 295,893 5,506,883 886,338 6,518,719
Equity in net income and (losses)
of affiliates (122,329) (54,410) (394,869) (42,799)
------------- ------------- ------------- --------------
Income before minority
interests and income taxes 3,453,422 7,889,585 2,697,691 8,376,101
Minority interests in (income)
loss of consolidated subsidiaries
and partnerships (304,300) (88,667) (335,091) (90,485)
------------- ------------- ------------- --------------
Income before income taxes 3,149,122 7,800,918 2,326,600 8,285,616
Income tax expense 1,292,000 3,159,000 973,000 3,342,000
------------- ------------- ------------- --------------
Net income $ 1,857,122 $ 4,641,918 $ 1,389,600 $ 4,943,616
============= ============= ============= ==============
Net income per share - Basic $ 0.37 $ 0.93 $ 0.28 $ 0.99
Net income per share - Diluted $ 0.35 $ 0.87 $ 0.25 $ 0.92
See notes to consolidated financial statements.
6
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
==================================================================================================================
2001 2000
----------------- ----------------
Cash flows from operating activities:
Cash received from customers $ 60,044,114 $ 60,705,916
Cash paid to suppliers and employees (42,230,699) (57,539,209)
Interest received 543,012 760,546
Interest paid, net of $241,687 and $74,459 in capitalized interest (4,004,818) (4,447,662)
Income taxes paid (305,936) (48,827)
---------------- ---------------
Net cash provided by (used in) operating activities 14,045,673 (569,236)
---------------- ---------------
Cash flows from investing activities:
Distributions, and collections on advances,
from affiliates 978,021 2,559,666
Purchase of property and equipment (12,907,470) (4,311,623)
Purchase of investments in, and advances
to, minority owned affiliates (2,412,326) (2,122,000)
Acquisitions of partnership interests,
net of cash acquired (795,384) -
Collections on notes receivable 188,057 78,474
Proceeds from sale of assets 2,500 12,473,537
---------------- ---------------
Net cash (used in) provided by investing activities (14,946,602) 8,678,054
---------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 8,435,866 4,540,817
Principal payments on long-term debt (7,732,627) (6,029,193)
Net proceeds from (repayments of ) line of credit 3,385,569 (7,560,214)
Decrease in minority interest (90,255) (80,053)
Common stock issuances 13,141 -
Other 117,000 27,308
--------------- ----------------
Net cash provided by (used in) financing activities 4,128,694 (9,101,335)
---------------- ---------------
Net increase (decrease) in cash 3,227,766 (992,517)
Cash and cash equivalents, beginning of year 1,728,869 3,766,323
---------------- ---------------
Cash and cash equivalents, end of period $ 4,956,635 $ 2,773,806
=============== ===============
(continued)
7
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
==================================================================================================================
2001 2000
----------------- ----------------
Reconciliation of net income to net
cash provided by (used in) operating activities:
Net income $ 1,389,600 $ 4,943,616
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,399,004 3,303,976
Equity in net (income) loss of affiliates and
amortization of deferred income 394,869 42,799
Minority interests in net income of subsidiaries 335,091 90,485
Amortization of deferred gain (714,955) (1,120,520)
Deferred income taxes 45,000 734,000
Gain on sale of property and equipment (886,338) (6,518,719)
Proceeds from sale of hotels 9,039,507 -
Income from sale of hotels (2,141,769) -
Changes in assets and liabilities, net of effects
of acquisition:
Increase in accounts receivable (522,207) (1,110,753)
Decrease in prepaid expenses and
other current assets 683,254 237,513
Decrease in refundable income taxes 622,064 2,559,173
Decrease (increase) in costs and estimated earnings
in excess of billings 13,222 (199,806)
(Increase) decrease in other assets (161,511) 39,617
Increase in accounts payable 162,571 1,192,893
Increase (decrease) in accrued payroll and other accrued
expenses and current liabilities 483,109 (215,704)
Decrease in accrued interest (335) (98,434)
Increase in deferred income 1,905,498 205,087
---------------- ---------------
Net cash provided by (used in) operating activities $ 14,045,673 $ (569,236)
============= ==============
See notes to consolidated financial statements.
8
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
================================================================================
1. BASIS OF PREPARATION:
---------------------
The consolidated financial statements included herein have been prepared by
the Company, without audit. In the opinion of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments, which
consist only of recurring adjustments necessary to present fairly the
financial position of Arlington Hospitality, Inc. and subsidiaries as of
September 30, 2001 and December 31, 2000 and the results of its operations
and cash flows for the three and nine months ended September 30, 2001 and
2000. The results of operations for the nine months ended September 30,
2001 are not necessarily indicative of the results to be expected for the
full year. It is suggested that the accompanying consolidated financial
statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's 2000 Annual
Report on Form 10-K. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the statements and reported amounts of revenue and expenses during the
reported periods. Actual results may differ from those estimates. Certain
reclassifications have been made to the 2000 consolidated financial
statements in order to conform with the 2001 presentation.
2. PRINCIPLES OF CONSOLIDATION:
----------------------------
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries, and partnerships in which the Company has a
majority ownership interest. Significant intercompany accounts and
transactions have been eliminated.
3. INCOME (LOSS) PER SHARE:
------------------------
The Company calculates earnings per share in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 128, "Earnings Per Share"
(FAS 128). Basic earnings per share ("EPS") is calculated by dividing the
income (loss) available to common shareholders by the weighted average
number of common shares outstanding for the period, without consideration
for common stock equivalents. The Company excluded stock options which had
an anti-dilution effect on the EPS computations. Diluted EPS gives effect
to all dilutive potential common shares outstanding for the period. The
following are the calculations of basic and diluted earnings per share:
Three Months Ended Sept. 30, Nine Months Ended Sept. 30,
---------------------------------- ----------------------------------
2001 2000 2001 2000
---------------- --------------- ---------------- -----------------
Net income $ 1,857,122 $ 4,641,918 $ 1,389,600 $ 4,943,616
Impact of convertible
partnership interests (18,385) (31,171) (76,389) (80,396)
------------- -------------- --------------- ---------------
Net income available to
common shareholders $ 1,838,737 $ 4,610,747 $ 1,313,211 $ 4,863,220
============= ============== ============== ===============
Weighted average common
shares outstanding 4,980,731 4,979,244 4,979,844 4,975,334
Dilutive effect of convertible
partnership interests and
common stock equivalents 222,047 316,432 222,198 298,698
Dilutive common shares outstanding 5,202,778 5,295,676 5,202,042 5,274,032
============= ============== ============== ===============
Net income per share - Basic $ 0.37 $ 0.93 $ 0.28 $ 0.99
============= ============== ============== ===============
Net income per share - Diluted $ 0.35 $ 0.87 $ 0.25 $ 0.92
============= ============== ============== ===============
9
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
================================================================================
4. INCOME TAXES:
-------------
Deferred income taxes are provided on the differences in the bases of the
Company's assets and liabilities determined for tax and financial reporting
purposes and relate principally to depreciation of property and equipment
and deferred income. A valuation allowance has not been recorded to reduce
the deferred tax assets as the Company expects to realize all components of
the deferred tax asset in future periods.
The income tax expense for the three and nine months ended September 30,
2001 and 2000 was based on the Company's estimate of the effective tax rate
expected to be applicable for the full year. The Company expects the
effective tax rate to approximate the Federal and state statutory rates.
5. HOTEL LEASES:
-------------
The Company leases 27 hotels as of September 30, 2001 (including 24
sale/leaseback hotels - Note 8), the operations of which are included in
the Company's consolidated financial statements. All of these leases are
triple net and provide for monthly base rent payments ranging from $14,000
to $27,000. The Company leases one of these hotels from a partnership in
which the Company owns an equity interest of 16.33%. This lease also
provides for additional rent payments of approximately $74,000 per annum,
plus percentage rents computed on room revenues in excess of stipulated
amounts. The leases expire through March 2014.
Three of the leases provide for an option to purchase the hotel. The
purchase prices are based upon a fixed amount approximating the fair value
at the lease commencement, subject to increases in the CPI index. At
September 30, 2001, the aggregate purchase price for these three leased
hotels was approximately $11,500,000.
6. LIMITED PARTNERSHIP GUARANTEED DISTRIBUTIONS:
---------------------------------------------
The Company is a general partner in two partnerships, and had been a
general partner in a third partnership, where the Company has guaranteed
minimum annual distributions to the limited partners in the amount of 10%
of their original capital contributions. On September 18, 2000, the Company
finalized the terms of the purchase of the remaining ownership interests
from its partners in these three joint ventures for a total of $2,444,800.
One of these acquisitions was completed in January 2001, with the remaining
two acquisitions in the total amount of $1,644,800, to be completed on or
before December 31, 2001. However, the Company expects to extend the
deadline for the purchase of one of the remaining ownership interests.
7. INVESTMENTS:
------------
Effective January 1, 2001, the Company acquired the remaining ownership
interest in one hotel joint venture. The following is a summary of this
acquisition:
Property and equipment acquired $ 2,100,058
Other assets acquired 37,023
Long-term debt assumed (1,238,763)
Other liabilities assumed (102,934)
-------------
Cash paid, net of cash acquired $ 795,384
=============
10
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
================================================================================
8. SALE/LEASEBACK OF HOTELS:
-------------------------
In 1998 and 1999, the Company completed the sale of 30 AmeriHost Inn
hotels to a Real Estate Investment Trust ("REIT") for $73 million. Upon
the sales to the REIT, the Company entered into agreements to lease back
the hotels for an initial term of ten years, with two five year renewal
options. The lease payments are fixed at 10% of the sale price for the
first three years. Thereafter, the lease payments are subject to a CPI
increase with a 2% annual maximum. The Company has deferred the gain on
the sale of these hotels pursuant to sale/leaseback accounting. In January
2001, the Company amended the master lease with the REIT to provide for
the sale of eight hotels under specified terms, and to extend the initial
lease term by five years. The amendment provides for four increases in
rent payments of 0.25% each, if these hotels are not purchased by an
unrelated third party or the Company by the dates specified. The remaining
deferred gain will be recognized over the remaining term of the lease, as
extended, as a reduction of leasehold rent expense.
The REIT has sold six of their hotels through September 30, 2001,
including five to unrelated third parties, and one to the Company.
Consequently, the Company has terminated the leases with the REIT for
these hotels and recognized revenue from the sale of the five hotels sold
to unrelated parties, which is classified as hotel sales and commissions
in the accompanying consolidated financial statements. The Company did not
recognize revenue from the sale of one hotel to the Company. The
unamortized deferred gain related to the initial sale of the hotels to the
REIT was recognized upon termination of the respective leases as gain on
sale of property and equipment for the five hotels sold to third parties,
and as a reduction of acquisition cost for the one hotel purchased by the
Company.
9. BUSINESS SEGMENTS:
------------------
The Company's business is primarily involved in five segments: (1) hotel
operations, consisting of the operations of all hotels in which the Company
has a 100% or majority ownership or leasehold interest, (2) hotel
development, consisting of development, construction and renovation of
hotels for unconsolidated joint ventures and unrelated third parties, (3)
hotel sales and commissions, resulting from the sale of AmeriHost Inn
hotels, (4) hotel management, consisting of hotel management activities and
(5) employee leasing, consisting of the leasing of employees to various
hotels. Results of operations of the Company's business segments are
reported in the consolidated statements of operations. The following
represents revenues, operating costs and expenses, operating income,
identifiable assets, capital expenditures and depreciation and amortization
for the nine months ended September 30, 2001 and 2000, for each business
segment, which is the information utilized by the Company's decision makers
in managing the business:
Revenues 2001 2000
-------- --------------- ---------------
Hotel operations $ 43,317,528 $ 47,815,011
Hotel development and construction 954,920 7,697,058
Hotel sales and commissions 10,089,113 -
Hotel management 729,706 934,234
Employee leasing 3,887,603 4,506,679
Other - 586,276
--------------- --------------
$ 58,978,870 $ 61,539,258
============== =============
Operating costs and expenses
----------------------------
Hotel operations $ 31,864,393 $ 33,579,925
Hotel development and construction 839,031 7,365,708
Hotel sales and commissions 6,835,678 -
Hotel management 547,654 616,705
Employee leasing 3,849,491 4,451,061
Other 1,618 480,854
--------------- --------------
$ 43,937,865 $ 46,494,253
============== =============
11
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
================================================================================
9. BUSINESS SEGMENTS (CONTINUED):
------------------------------
Operating income 2001 2000
---------------- ---------------- ---------------
Hotel operations $ 3,083,336 $ 5,955,994
Hotel development and construction 102,743 317,080
Hotel sales and commissions 3,253,435 -
Hotel management 140,664 282,009
Employee leasing 35,744 53,880
Other (1,618) 101,022
Corporate (1,521,742) (1,315,887)
--------------- ---------------
$ 5,092,562 $ 5,394,098
============== =============
Identifiable assets
-------------------
Hotel operations $ 98,148,598 $ 93,273,734
Hotel development and construction 1,299,724 1,733,073
Hotel sales and commissions - -
Hotel management (689,533) 75,670
Employee leasing 103,536 887,649
Other - 57,001
Corporate 7,376,704 5,063,521
--------------- --------------
$ 106,239,029 $ 101,090,648
============== =============
Capital Expenditures
--------------------
Hotel operations $ 12,783,412 $ 8,794,471
Hotel development and construction 5,975 7,942
Hotel sales and commissions - -
Hotel management 62,503 29,403
Employee leasing - 4,684
Other - 21,839
Corporate 55,580 107,743
--------------- --------------
$ 12,907,470 $ 8,966,082
============== =============
Depreciation/Amortization
-------------------------
Hotel operations $ 3,297,312 $ 3,219,758
Hotel development and construction 13,147 14,270
Hotel sales and commissions - -
Hotel management 41,388 35,520
Employee leasing 2,368 1,737
Other - 4,400
Corporate 44,790 28,291
--------------- --------------
$ 3,399,005 $ 3,303,976
============== =============
12
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001
================================================================================
10. COMMITMENTS AND CONTINGENCIES:
------------------------------
As a result of the sale of two hotels by the REIT in the first quarter,
pursuant to the Amended Master Lease (Note 8), the Company is obligated to
purchase another two of the sale/leaseback properties. One of these
transactions was closed during the third quarter of 2001, and the second
one is expected to close prior to June 30, 2002.
The Company modified two of its mortgage loan agreements with existing
lenders during the third quarter of 2001, resulting in the reduction of
their respective interest rates to market. These modifications were not
considered to be debt extinguishments, and as such, costs incurred in
connection with the modifications were deferred and amortized, in addition
to the existing deferred loan costs related to the original financing,
over the remaining term of the respective loans.
As of September 30, 2001, the Company had $6.8 million outstanding under
its operating line-of-credit. The operating line-of-credit (i) has a limit
of $7.5 million; (ii) is collateralized by a security interest in certain
of the Company's assets, including its interest in various joint ventures;
(iii) bears interest at an annual rate equal to the lending bank's base
rate plus 1/2% (with a minimum interest rate of 7.5%); and (iv) matures
February 15, 2002.
11. SALE OF AMERIHOST INN BRAND NAMES AND FRANCHISING RIGHTS:
---------------------------------------------------------
Effective September 30, 2000, the Company completed the sale of the
AmeriHost Inn and AmeriHost Inn & Suites brand names and franchising
rights to Cendant Corporation ("Cendant"). The Company simultaneously
entered into franchise agreements with Cendant for its AmeriHost Inn
hotels. The Company received an initial payment of approximately $5.5
million upon closing and recorded a gain from this payment, net of closing
costs of approximately $5.2 million. The agreement with Cendant also
provides for additional incentives to the Company as the AmeriHost Inn and
AmeriHost Inn & Suites brand names are expanded. Certain of these
incentives are deferred for accounting purposes and amortized into income
over a 76 month period, in accordance with Staff Accounting Bulletin No.
101. As a result of the Cendant transaction, the Company intends to create
net income and cash flow by building and selling AmeriHost Inn hotels. As
such, the sales price and related cost basis are recorded as hotel sales
and commission revenue and operating expense in the accompanying
consolidated financial statements upon consummation of the sale of an
AmeriHost Inn hotel.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
GENERAL
The Company is engaged in the development and sale of AmeriHost Inn hotels, and
the ownership, operation and management of AmeriHost Inn hotels and other
mid-price hotels. As of September 30, 2001, the Company had 66 AmeriHost Inn
hotels open, of which 54 were wholly-owned or leased, one was majority-owned,
and 11 were minority-owned. The Company opened four AmeriHost Inn hotels during
the past twelve months. The Company intends to use the AmeriHost Inn brand when
expanding its hotel operations segment. As of September 30, 2001, four
wholly-owned AmeriHost Inn hotels were under construction. Same room revenues
for all AmeriHost Inn hotels owned and operated by the Company, including
minority owned hotels, decreased approximately 5.4% during the third quarter of
2001, compared to the third quarter of 2000, attributable to an increase of
$1.99 in average daily rate offset by a 9.0% decrease in occupancy. These
results relate to the 62 AmeriHost Inn hotels that were operating for at least
thirteen full months during the three months ended September 30, 2001. During
the first nine months of 2001, same room revenue for all AmeriHost Inn hotels
owned and operated by the Company decreased approximately 3.4%, attributable to
an increase in average daily rate of $1.91 offset by a 6.4% decrease in
occupancy. These results relate to the 62 AmeriHost Inn hotels that were
operating for at least thirteen full months during the nine months ended
September 30, 2001.
Revenues from hotel operations consist of the revenues from all hotels in which
the Company has a 100% or majority ownership or leasehold interest
("Consolidated" hotels). Investments in other entities in which the Company has
a minority ownership interest are accounted for using the equity method.
Development and construction revenues consist of fees for new construction and
renovation activities performed by the Company for minority-owned hotels and
unrelated third parties. The Company records commissions and revenue from the
sale of its AmeriHost Inn hotels, based upon the net sale price, as these sales
are considered part of the Company's strategy of building and selling hotels,
and therefore expanding the AmeriHost Inn brand. The Company also receives
revenue from management and employee leasing services provided to minority-owned
hotels and unrelated third parties.
Revenues from Consolidated AmeriHost Inn hotels decreased 11.0% and 8.4% to
$12.9 million and $35.1 million during the three and nine months ended September
30, 2001, from revenues of $14.5 million and $38.3 million during the three and
nine months ended September 30, 2000, respectively, due primarily to the sale of
hotels to franchisees. Revenues from the development segment decreased 76.5% and
87.6% to $847,745 and $954,920 during the three and nine months ended September
30, 2001, from $3.6 million and $7.7 million for the three and nine months ended
September 30, 2000, respectively, due to the decrease in hotel development
activity for minority owned and third party entities. Revenues from hotel sales
and commissions was $4.2 million and $10.1 million during the three and nine
months ended September 30, 2001, respectively, as a result of the sale of eight
AmeriHost Inn hotels, including three in the third quarter. Revenues from hotel
management and employee leasing segments decreased by 19.4% and 15.1% in total
during the three and nine months ended September 30, 2001, respectively, due
primarily to the sale or termination of hotels under management contracts.
Revenues from Consolidated non-AmeriHost Inn hotels decreased 17.2% and 13.3%
during the three and nine months ended September 30, 2001, respectively,
compared to 2000, as a result primarily of the sale of one non-AmeriHost Inn
hotel. Total revenues decreased 5.5% and 4.2% to $22.6 million and $59.0 million
during the three and nine months ended September 30, 2001, from $23.9 million
and $61.5 million during the three and nine months ended September 30, 2000. The
Company recorded net income of $1.8 million for the third quarter of 2001, or
$0.35 per diluted share, compared to net income of $4.6 million or $0.87 per
diluted share in 2000. The Company recorded net income of $1.4 million for the
nine months ended September 30, 2001, or $0.25 per diluted share, compared to
net income of $4.9 million, or $0.92 per diluted share, for the nine months
ended September 30, 2000. The third quarter of 2000 included a gain on the sale
of the AmeriHost Inn brand names and franchising rights in the amount of
approximately $5.2 million, net of closing costs, as discussed below.
After developing and operating the AmeriHost Inn brand name for approximately 10
years, the Company decided to begin franchising this brand in 1999. As
previously announced, on September 30, 2000, the Company sold the AmeriHost Inn
and AmeriHost Inn & Suites brand names and franchising rights to Cendant
Corporation. Cendant is the world's largest franchising company with hotel brand
names such as Days Inn, Super 8 and Wingate. The Company received $5.2 million
upon closing, net of closing costs. The agreement with Cendant also provides for
additional long-term incentives to the Company as the AmeriHost Inn brands are
expanded, including royalty
14
sharing and a fee each time a hotel owned by the Company is sold to an operator
who becomes a Cendant franchisee. In conjunction with this transaction, the
Company has changed its name to Arlington Hospitality, Inc.
The Company uses cash flow, defined as net income plus depreciation and
amortization, as a supplemental performance measure, along with net income, to
report its operating results. Net income plus depreciation is not defined by
Generally Accepted Accounting Principles ("GAAP"), however the Company believes
it provides relevant information about its operations and is necessary for an
understanding of the Company's operations, given its significant investment in
real estate. Cash flow, as defined, should not be considered as an alternative
to operating income (as determined in accordance with GAAP) as an indicator of
the Company's operating performance or to cash flows from operating activities
(as determined in accordance with GAAP) as a measure of liquidity. Cash flow, as
defined, was $3.2 million during the third quarter of 2001, compared to $5.8
million during the third quarter of 2000. Cash flow, as defined, was $5.0
million during the first nine months of 2001, compared to $8.2 million during
the first nine months of 2000.
The United States lodging industry was negatively impacted by the terrorist
attacks on the World Trade Center in New York City on September 11, 2001. Smith
Travel Research reported that revenue per available room (RevPAR) for the entire
U.S. lodging industry declined over 40% during the week ended September 22,
2001. Smith Travel Research has reported positive trends since this week,
indicating the demand for hotel rooms is recovering, however this incident had a
significant impact on the profitability of many hotels. The Company's hotels
were also negatively impacted, however to a lesser degree. Same room RevPAR for
the Company's AmeriHost Inn hotels declined 8.4% for the month of September,
however the hotels rebounded quickly, realizing an increase in same room RevPAR
of 1.5% for the month of October 2001. Since the Company's hotels are limited
service hotels, located in smaller towns primarily in the Midwest, they were not
impacted as much as hotels located in larger cities and near airports.
Amerihost had an ownership interest in 75 hotels at September 30, 2001 versus 80
hotels at September 30, 2000 (excluding hotels under construction). The
increased ownership from the development of AmeriHost Inn hotels for the
Company's own account and for minority-owned entities was offset by the sale of
AmeriHost Inn hotels to franchisees and non-AmeriHost Inn hotels to unrelated
third parties. These figures include a net decrease of six Consolidated hotels,
from 67 at September 30, 2000 to 61 at September 30, 2001.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
Revenues decreased 5.5% and 4.2% to $22.6 million and $59.0 million during the
three and nine months ended September 30, 2001, respectively, from $23.9 million
and $61.5 million during the three and nine months ended September 30, 2000. The
decrease in revenue was primarily due to decreases in hotel development and
construction revenues and hotel operating revenues, partially offset by revenues
from the sale of AmeriHost Inn hotels.
Hotel operations revenue decreased 12.2% and 9.4% to $16.1 million and $43.3
million during the three and nine months ended September 30, 2001 respectively,
from $18.3 million and $47.8 million during the three and nine months ended
September 30, 2000. Revenues from Consolidated AmeriHost Inn hotels decreased
11.0% and 8.4% to $12.9 million and $35.1 million during the three and nine
months ended September 30, 2001, respectively, from $14.5 million and $38.3
million during the three and nine months ended September 30, 2000. These
decreases were attributable primarily to a decrease in same room revenues, and
the sale of nine Consolidated AmeriHost Inn hotels. Revenues from Consolidated
other brand hotels decreased 17.2% and 13.3% to $3.1 million and $8.3 million
during the three and nine months ended September 30, 2001, respectively. These
decreases were primarily the result of the sale of one non-AmeriHost Inn
Consolidated hotels. The hotel operations segment included the operations of 61
Consolidated hotels (including 55 AmeriHost Inn hotels) comprising 4,329 rooms
at September 30, 2001, compared to 67 Consolidated hotels (including 60
AmeriHost Inn hotels) comprising 4,748 rooms at September 30, 2000. The Company
has experienced an increase in competition in certain markets, primarily from
newly constructed hotels. As a result, there is increased downward pressure on
occupancy levels and average daily rates. The Company believes that as the
number of AmeriHost Inn hotels increases, the greater the benefits will be at
all locations from marketplace recognition and repeat business. In addition, the
Company typically builds new hotels in growing markets where it anticipates a
certain level of additional hotel development.
Hotel development revenue decreased 76.5% and 87.6% to $847,745 and $954,920
during the three and nine months ended September 30, 2001, respectively, from
$3.6 million and $7.7 million during the three and nine months ended
15
September 30, 2000. Hotel development revenues are directly related to the
number of hotels being developed and constructed for minority-owned entities or
unrelated third parties. The Company was not constructing any hotels for
minority-owned entities or unrelated third parties during the first nine months
of 2001, however was close to breaking ground on two such projects at the end of
the third quarter. Last year, four hotels were under construction during the
first nine months of 2000. However, the Company also had several additional
projects in various stages of pre-construction development during both
nine-month periods.
The Company recorded $4.2 million and $10.1 million in hotel sales and
commission revenue during the three and nine months ended September 30, 2001,
respectively. The Company and the REIT which owns certain of the Company's
leased hotels, closed on the sale of four AmeriHost Inn hotels during the first
nine months of 2001, including one in the third quarter. The Company intends to
continue to build and sell AmeriHost Inn hotels in order to maximize the value
inherent in the Cendant transaction while enhancing net income and cash flow.
Hotel management revenue decreased 19.7% and 21.9% to $257,808 and $729,706
during the three and nine months ended September 30, 2001, respectively, from
$320,996 and $934,234 during the three and nine months ended September 30, 2000.
The number of hotels managed for third parties and minority-owned entities was
16 hotels, representing 1,574 rooms, at September 30, 2000 versus 16 hotels,
representing 1,318 rooms, at September 30, 2001. The decrease in revenues was
primarily due to the termination of one management contract for a 324 room hotel
and the sale or buyout of minority owned AmeriHost Inn hotels, offset by the
addition of two minority owned AmeriHost Inn hotels.
Employee leasing revenue decreased 19.3% and 13.7% to $1.2 million and $3.9
million during the three and nine months ended September 30, 2001, respectively,
from $1.4 million and $4.5 million during the three and nine months ended
September 30, 2000, due primarily to the reduction in rooms managed for
minority-owned entities and unrelated third parties as described above, and the
associated decrease in payroll costs which is the basis for the employee leasing
revenue.
Total operating costs and expenses decreased 8.3% and 5.5% to $15.6 million
(69.2% of total revenues) and $43.9 million (74.5% of total revenues) during the
three and nine months ended September 30, 2001, respectively, from $17.0 million
(71.3% of total revenues) and $46.5 million (75.6% of total revenues) during the
three and nine months ended September 30, 2000, primarily due to decreases in
operating costs and expenses from the hotel operations and hotel development
segments as described below, offset by an increase in operating costs from hotel
sales. Operating costs and expenses in the hotel operations segment decreased
7.0% and 5.1% to $10.9 million and $31.9 million during the three and nine
months ended September 30, 2001, respectively. A decrease in operating costs
associated with the fewer number of hotels included in this segment (61 hotels
at September 30, 2001 versus 67 hotels at September 30, 2000), were partially
offset by significant increases in energy costs, inflationary increases in
operating expenses and the greater number of stabilized hotels. Hotel operations
segment operating costs and expenses as a percentage of segment revenue
increased to 67.9% and 73.6% during the three and nine months ended September
30, 2001, from 64.0% and 70.2% during the three and nine months ended September
30, 2000. Operating costs and expenses as a percentage of revenues for the
Consolidated AmeriHost Inn hotels increased to 65.7% and 71.9% during the three
and nine months ended September 30, 2001, from 62.6% and 68.2% during the three
and nine months ended September 30, 2000.
Operating costs and expenses for the hotel development and construction segment
decreased 93.0% and 88.6%, to $251,607 and $839,031 during the three and nine
months ended September 30, 2001, from $3.6 million and $7.4 million during the
three and nine months ended September 30, 2000, consistent with the 76.5% and
87.6% decrease in hotel development revenues for the three and nine months ended
September 30, 2001. Operating costs and expenses in the hotel development
segment as a percentage of segment revenue increased during the three and nine
month periods ended September 30, 2001 due to the decrease in hotel construction
activity.
Hotel management segment operating costs and expenses decreased 6.1% and 11.2%
to $195,742 and $547,654 during the three and nine months ended September 30,
2001, respectively, from $208,447 and $616,705 during the three and nine months
ended September 30, 2000. These decreases were primarily due to the decrease in
the number of hotel rooms operated and managed for unrelated third parties and
minority-owned entities. Employee leasing operating costs and expenses decreased
19.0% and 13.5% to $1.2 million and $3.8 million during the three and nine
months ended September 30, 2001, respectively, from $1.4 million and $4.5
million during the three and nine months ended September 30, 2000, which is
consistent with the 19.3% and 13.7% decrease in segment revenue for the three
and nine months ended September 30, 2001.
16
Depreciation and amortization expense decreased 4.1% and increased 2.9% to $1.1
million and $3.4 million during the three and nine months ended September 30,
2001, respectively, from $1.2 million and $3.3 million during the three and nine
months ended September 30, 2000. The fluctuations were primarily attributable to
the additional three hotels opened during 2001, offset by the sale of four owned
consolidated hotels that closed in 2001, including two which closed in the third
quarter.
Leasehold rents - hotels decreased 2.0% and increased 0.3% to $1.6 million and
$5.1 million during the three and nine months ended September 30, 2001,
respectively, compared to $1.6 million and $5.1 million during the three and
nine months ended September 30, 2000. The fluctuations were primarily
attributable to the termination of four leased hotels during the first nine
months of 2001 as a result of the lessor selling these hotels, offset by the
extension of the hotel leases with a REIT.
Corporate general and administrative expense decreased 6.8% and increased 14.7%
to $451,520 and $1.5 million during the three and nine months ended September
30, 2001, respectively, from $484,428 and $1.3 million during the three and nine
months ended September 30, 2000, and can be attributed primarily to a concerted
effort to reduce administrative costs during the third quarter of 2001, the
overall growth of the Company, and the recognition of expenses during the first
quarter of 2001 related to the issuance of stock options and transitional
accounting fees.
The Company's operating income increased 6.0% and decreased 5.6% to $3.7 million
and $5.1 million during the three and nine months ended September 30, 2001,
respectively, from $3.5 million and $5.4 million during the three and nine
months ended September 30, 2000. The following discussion of operating income by
segment is exclusive of any corporate general and administrative expense.
Operating income from Consolidated AmeriHost Inn hotels decreased 31.5% and
45.5% to $2.2 million and $3.0 during the three and nine months ended September
30, 2001, respectively, from $3.2 million and $5.5 million during the three and
nine months ended September 30, 2000. These decreases in operating income were
due to the decrease in the number of consolidated AmeriHost Inn hotels operated
by the Company, a decrease in same room revenues, and increases in certain hotel
operating expenses including energy costs. Operating income from the hotel
development segment increased to $595,776 during the three months ended
September 30, 2001, from $14,210 during the three months ended September 30,
2000 and decreased to $102,742 during the first nine months of 2001 from
$317,080 during the first nine months of 2000. The fluctuations in hotel
development operating income were due to the timing of hotels developed and
constructed for third parties and minority-owned entities during the third
quarter and first nine months of 2001, compared with the third quarter and first
nine months of 2000, and the overall decrease in the number of hotels developed
and constructed for third parties and minority-owned entities during 2001.
Operating income from the sale of AmeriHost Inn hotels was $1.1 million and $3.3
million during the three and nine months ended September 30, 2001, as a result
of the sale of eight AmeriHost Inn hotels during the first nine months of 2001,
including three during the third quarter. The hotel management segment had
operating income of $49,478 and $140,664 during the three and nine months ended
September 30, 2001, compared to operating income of $100,709 and $282,009 during
the three and nine months ended September 30, 2000. These decreases were due
primarily to a reduction in the number of hotel rooms managed during the past
twelve months for unrelated third parties and minority-owned properties.
Employee leasing operating income decreased to $4,103 during the three months
ended September 30, 2001, from $10,174 during the three months ended September
30, 2000, and decreased to $35,744 during the nine months ended September 30,
2001, from $53,880 during the nine months ended September 30, 2000, due
primarily to the decrease in employee leasing agreements with minority-owned
entities and unrelated third parties, and the allocation of certain costs.
Interest expense decreased 14.4% and 8.0% to $1.2 million and $4.0 million
during the three and nine months ended September 30, 2001, respectively, from
$1.4 million and $4.4 million during the three and nine months ended September
30, 2000. This decrease was primarily attributable to the aforementioned sales
of hotels whereby the Company does not incur any interest expense on the sold
hotels after the sale dates as well as the reduction of interest rates on
certain floating rate loan agreements, partially offset by the mortgage
financing of newly constructed Consolidated hotels.
The Company's share of equity in income (loss) of affiliates decreased to
($122,329) during the three months ended September 30, 2001, from ($54,410)
during the three months ended September 30, 2000. The Company's share of equity
in income (loss) of affiliates decreased to ($394,869) during the nine months
ended September 30, 2001, from ($42,799) during the nine months ended September
30, 2000. The decrease in equity of affiliates during the third quarter and
first nine months of 2001 was primarily attributable to the sale of two
minority-owned properties in the
17
first half of 2000 at a significant gain. Distributions from affiliates were
$14,173 during the nine months ended September 30, 2001, compared to $315,219
during the nine months ended September 30, 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has five main sources of cash from operating activities: (i)
revenues from hotel operations; (ii) fees from development, construction and
renovation projects including the sale of hotel assets; (iii) fees from
management contracts; (iv) fees from employee leasing services; and (v)
incentive fees and royalty sharing pursuant to the Cendant transaction. Cash
from hotel operations is typically received at the time the guest checks out of
the hotel. Approximately 10% of the Company's hotel operations revenues is
generated through other businesses and contracts and is usually paid within 30
to 45 days from billing. Fees from development, construction and renovation
projects are typically received within 15 to 45 days from billing. Due to the
procedures in place for processing its construction draws, the Company typically
does not pay its contractors until the Company receives its draw from the equity
or lending source. Management fee revenues typically are received by the Company
within five working days from the end of each month. Cash from the Company's
employee leasing segment typically is received 24 to 48 hours prior to the pay
date.
During the first nine months of 2001, the Company provided cash from operations
of $14.0 million, compared to ($569,236) during the first nine months of 2000,
or an increase in cash provided by operations of $14.6 million. The increase in
cash flow from operations during the first nine months of 2001, when compared to
2000, can be attributed primarily to the sale of eight AmeriHost Inn hotels
during 2001.
The Company invests cash in three principal areas: (i) the purchase of property
and equipment through the construction and renovation of Consolidated hotels;
(ii) the purchase of equity interests in hotels; and (iii) the making of loans
to affiliated and non-affiliated hotels for the purpose of construction,
renovation and working capital. During the first nine months of 2001, the
Company used $14.9 million in investing activities compared to receiving $8.7
million during the first nine months of 2000. During the first nine months of
2001, the Company bought out a partner's interest in one joint venture for
$795,384, used $12.9 million to purchase property and equipment for Consolidated
AmeriHost Inn hotels, and used $1.4 million for investments in and advances to
affiliates, net of distributions and collections on advances from affiliates.
During the first nine months of 2000, the Company received $12.5 million from
the sale of hotels, used $4.3 million to purchase property and equipment for
Consolidated AmeriHost Inn hotels, and received $437,666 in distributions and
collections on advances to affiliates, net of investments in and advances to
affiliates.
Cash provided by financing activities was $4.1 million during the first nine
months of 2001 compared to cash used by financing activities of $9.1 million
during the first nine months of 2000. In 2001, the primary factors were
principal repayments of $7.7 million on the mortgage financing of Consolidated
hotels, including the repayment of mortgages in connection with the sale of
hotels, offset by $8.4 million in proceeds from the mortgage financing of
Consolidated hotels, and net proceeds of $3.4 million on the Company's operating
line-of-credit. In 2000, the contributing factors were principal repayments of
$6.0 million on the mortgage financing of Consolidated hotels, including the
repayment of mortgages in connection with the sale of hotels, offset by $4.5
million in proceeds from the issuance of long-term debt, and $7.6 million in net
proceeds from the Company's operating line-of-credit.
The Company modified two of its mortgage loan agreements with existing lenders
during the third quarter of 2001, resulting in the reduction of their respective
interest rates to market. These modifications were not considered to be debt
extinguishments, and as such, costs incurred in connection with the
modifications were deferred and amortized, in addition to the existing deferred
loan costs related to the original financing, over the remaining term of the
respective loans.
At September 30, 2001, the Company had $6.8 million outstanding under its
operating line-of-credit. The operating line-of-credit (i) has a limit of $7.5
million; (ii) is collateralized by a security interest in certain of the
Company's assets, including its interest in various joint ventures; (iii) bears
interest at an annual rate equal to the lending bank's base rate plus 1/2% (with
a minimum interest rate of 7.5%); and (iv) matures February 15, 2002. The
Company has initiated discussions with other lenders interested in assuming the
Company's line-of-credit.
The Company expects cash from operations, including proceeds from the sale of
hotels, to be sufficient to pay all operating and interest expenses in 2001, as
well as commitments to purchase hotel assets.
18
SEASONALITY
The lodging industry, in general, is seasonal by nature. The Company's hotel
revenues are generally greater in the second and third calendar quarters than in
the first and fourth quarters due to weather conditions in the markets in which
the Company's hotels are located, as well as general business and leisure travel
trends. This seasonality can be expected to continue to cause quarterly
fluctuations in the Company's revenues, and is expected to have a greater impact
as the number of Consolidated hotels increases. Quarterly earnings may also be
adversely affected by events beyond the Company's control, such as extreme
weather conditions, economic factors and other general factors affecting travel.
In addition, hotel construction is seasonal, depending upon the geographic
location of the construction projects. Construction activity in the Midwest may
be slower in the first and fourth calendar quarters due to weather conditions.
INFLATION
Management does not believe that inflation has had, or is expected to have, any
significant adverse impact on the Company's financial condition or results of
operations for the periods presented.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding the Company's hotels under construction and
the operation of AmeriHost Inn hotels are based on current expectations. These
statements are forward looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plan on
terms satisfactory to the Company; competitive factors, such as the introduction
of new hotels or renovation of existing hotels in the same markets; changes in
travel patterns which could affect demand for the Company's hotels; changes in
development and operating costs, including labor, construction, land, equipment,
and capital costs; general business and economic conditions; and other risk
factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission. The Company wishes to caution readers not to
place undue reliance on any such forward looking statements, which statements
are made pursuant to the Private Securities Litigation Reform Act of 1995 and,
as such, speak only as of the date made.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations. The Company has some cash
flow exposure on its long-term debt obligations to changes in market interest
rates. The Company primarily enters into long-term debt obligations in
connection with the development and financing of hotels. The Company maintains a
mix of fixed and floating debt to mitigate its exposure to interest rate
fluctuations.
The Company's management believes that fluctuations in interest rates in the
near term would not materially affect the Company's consolidated operating
results, financial position or cash flows as the Company has limited risks
related to interest rate fluctuations.
The table below provides information about financial instruments that are
sensitive to changes in interest rates, for each interest rate sensitive asset
or liability as of September 30, 2001. The carrying amounts reflected
approximate the estimated fair values. As the table incorporates only those
exposures that existed as of September 30, 2001, it does not consider those
exposures or positions which could arise after that date. Moreover, the
information presented therein is merely an estimate and has limited predictive
value. As a result, the ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arise during future periods,
hedging strategies and prevailing interest rates at the time.
Average Nominal
Carrying Value Interest Rate
-------------- ---------------
Operating line of credit - variable rate $ 6,793,702 7.50%
Mortgage debt - fixed rate $ 29,774,177 8.09%
Mortgage debt - variable rate $ 30,771,516 7.81%
19
PART II: Other Information
Item 4. Submission of Matters to a Vote of Securities Holders:
-------
There were no matters submitted to a vote of securities holders
during the three months ended September 30, 2001.
Item 6. Exhibits and Reports on Form 8-K:
-------
(a) Reports on Form 8-K:
There were no reports on Form 8-K filed during this
period covered by this report.
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.
ARLINGTON HOSPITALITY, INC.
---------------------------
Registrant
Date: November 6, 2001
By: /s/ James B. Dale
----------------------------------------
James B. Dale
Treasurer/Senior Vice President, Finance
20