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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year
ended DECEMBER 31, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 S. ARLINGTON HEIGHTS RD., SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 228-5400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.005 per share
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(Title of class)
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
While it is difficult to determine the number of shares owned by non-affiliates
(within the meaning of the term under the applicable regulations of the
Securities and Exchange Commission), the registrant estimates that the aggregate
market value of the registrant's Common Stock held by non-affiliates on March
25, 2002 (based upon an estimate that 88.8% of the shares are so owned by
non-affiliates and upon the closing price for the Common Stock of $3.00) was
$13,205,403.
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As of March 25, 2002, 4,958,081 shares of the Registrant's Common Stock were
outstanding.
The following documents are incorporated into this Form 10-K by reference: None
PART I
ITEM 1. BUSINESS.
GENERAL
Arlington Hospitality, Inc. and subsidiaries (collectively, where appropriate,
"Arlington," or the "Company") is engaged in the development and construction of
AmeriHost Inn hotels, and the ownership, operation and management of both
AmeriHost Inn hotels and other hotels. The AmeriHost Inn brand was created by
the Company to provide for the consistent, cost-effective development and
operation of mid-price hotels in various markets. After developing and operating
the AmeriHost brand name for approximately 10 years, the Company sold the
AmeriHost Inn and AmeriHost Inn & Suites brand names and franchising rights to
Cendant Corporation ("Cendant") in September 2000. Cendant is the world's
largest franchising company with hotel brand names such as Days Inn, Super 8 and
Wingate. All AmeriHost Inn hotels designed and developed by the Company were
constructed using a standard 60- to 120-room, interior corridor and indoor pool
prototype design and are located in tertiary and secondary markets. The Company
has also designed three- and four-story AmeriHost Inn & Suites prototypes for
larger markets.
Upon the sale of the AmeriHost Inn and AmeriHost Inn & Suites brand names and
franchising rights, 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 of
approximately $5.2 million, net of closing costs. The agreement with Cendant
provides for additional incentives to the Company as the AmeriHost Inn and
AmeriHost Inn & Suites brand names are expanded, including a fee when a hotel
owned by the Company is sold to an operator who enters into a franchise
agreement with Cendant, and royalty sharing for all AmeriHost Inn hotels. In
conjunction with this transaction, the Company changed its name to Arlington
Hospitality, Inc. from Amerihost Properties, Inc.
Since 1993, the Company's growth strategy has focused on the expansion of the
AmeriHost Inn hotel brand through new development and construction.
Historically, the AmeriHost Inn hotels achieved a revenue per available room
("RevPAR") higher than that realized by the Company's other owned hotels,
including those operated under national franchise affiliations. These favorable
operating results experienced by the AmeriHost Inn hotels led to the Company's
decision to focus on expanding this brand rather than acquiring or developing
hotels under other brand affiliations. The Company intends to continue expanding
the development of AmeriHost Inn hotels, and is rewarded for this development
under the Cendant agreement.
The Company believes that the AmeriHost Inn provides a strong brand affiliation
with an excellent reputation for consistency. The AmeriHost Inn franchise
agreements are long-term agreements and provide for a royalty fee, and a system
assessment fee based on the hotel's revenue. In addition, since the Company has
extensive experience in all facets of AmeriHost Inn hotel development and
operation, it can offer this expertise to other Cendant franchisees.
As of December 31, 2001, the Company owned, operated, or managed 78 hotels
located in 16 states. Of these hotels, 66 hotels are operated or managed under
the AmeriHost Inn brand. Of the 78 hotels, the Company owns a 100% or majority
ownership or leasehold interest in 62 hotels and a minority equity interest,
ranging from 1% to 37.2%, in 14 hotels. Of the 76 hotels in which the Company
has an ownership interest, 66 are AmeriHost Inn hotels and 10 are other brands,
which in most cases were acquired, renovated and repositioned in their
respective marketplaces between 1987 and 1993. Unaffiliated third parties also
operated 19 AmeriHost Inn hotels under franchise agreements with Cendant as of
December 31, 2001, which were previously owned and operated by the Company. The
other brand hotels are franchised through Days Inn, Howard Johnson Express,
Holiday Inn and Ramada Inn. The Company also managed two non-AmeriHost Inn
hotels at December 31, 2001 for unaffiliated third parties. As of December 31,
2001, five additional AmeriHost Inn hotels were under construction, three of
which are 100% owned by the Company, one of which is minority owned, and one
being built by the Company for a third party.
-2-
The table below sets forth information regarding the hotels at December 31,
2001.
Open Under
Hotels Construction Total
---------------- ---------------- ---------------
Hotels Rooms Hotels Rooms Hotels Rooms
------- ------ ------ ------- ------ ------
100% or majority owned or leased:
AmeriHost Inn hotels 55 3,509 3 239 58 3,748
Other brands 7 945 - - 7 945
------- ------ ------ ------- ------ ------
62 4,454 3 239 65 4,693
------- ------ ------ ------- ------ ------
Minority ownership interest:
AmeriHost Inn hotels 11 720 1 85 12 805
Other brands 3 349 - - 3 349
------- ------ ------ ------- ------ ------
14 1,069 1 85 15 1,154
------- ------ ------ ------- ------ ------
Managed only hotels:
AmeriHost Inn hotels - - - - - -
Other brands 2 249 - - 2 249
------- ------ ------ ------- ------ ------
2 249 - - 2 249
------- ------ ------ ------- ------ ------
Totals:
AmeriHost Inn hotels 66 4,229 4 324 70 4,553
Other brands 12 1,543 - - 12 1,543
------- ------ ------ ------- ------ ------
78 5,772 4 324 82 6,096
======= ====== ====== ======= ====== ======
For new construction projects, the Company offers "turn-key" development
services, having the in-house expertise to manage a project from inception
through completion, including market research, site selection, architectural
services, the securing of financing and construction management. The
construction contracts entered into between the Company and the entities owning
the hotels have generally been one of two types, providing either for the
Company to receive costs plus developer's and construction overhead fees or a
fixed fee. The Company has used its development and construction expertise for
its own account, for joint ventures in which the Company has an ownership
interest, and for unaffiliated parties, and intends to use its expertise for
Cendant franchisees.
The Company offers complete operational and financial management services,
including sales, marketing, quality control, training, purchasing and
accounting. This expertise is used for the Company's own account, as well as for
joint ventures and unaffiliated entities pursuant to written management
contracts. However, under certain management contracts, the Company's joint
venture partners or co-managers are responsible for the day-to-day operational
management, while the Company provides full financial management and operational
consulting and assistance. The Company is currently managing or co-managing all
of the hotels in which it has a minority ownership interest, and is also
managing two hotels for unaffiliated third parties. These hotels are managed
under contracts ranging from 1 to 10 years, with optional renewal periods of
equal length, and contain provisions under which the Company is paid fees equal
to a percentage of total gross revenues for its services. The Company has
developed centralized systems and procedures which it believes allow it to
manage the hotels effectively and efficiently. The Company may pursue management
contracts with additional third parties, including Cendant franchisees, while
continuing to manage hotels for current as well as future joint ventures.
The Company also provides employee leasing services to hotels in which the
Company has a minority ownership interest and to hotels owned by unaffiliated
third parties which are managed by the Company. Under its employee leasing
program, the Company employs all of the personnel working at the participating
hotels and leases them to the hotels pursuant to written agreements. Employee
leasing affords the Company greater control over payroll costs and allows the
participating hotels to benefit from economies of scale on personnel-related
costs. The Company's employee leasing agreements typically provide for one-year
terms, with automatic one-year renewals. The Company generally receives fees
from each participating hotel in an amount equal to the gross payroll costs for
the leased employees, including all related taxes and benefits, plus a
percentage of the gross payroll.
All revenues attributable to development, construction, management, franchising
and employee leasing services with respect to hotels in which the Company has a
100% or majority ownership interest have been eliminated in
-3-
consolidation. Additionally, all revenues attributable to development,
construction, management, and employee leasing services with respect to hotels
in which the Company has a minority ownership interest and are accounting for
under the equity method, have been eliminated to the extent of the Company's
ownership percentage.
AMERIHOST INN HOTELS
All of the Company's AmeriHost Inn hotels are operated pursuant to 20-year
franchise agreements with Cendant. Pursuant to these agreements, the Company has
access to the reservation system, marketing plans and trademarks. The franchise
agreements require the Company to maintain both the quality and condition of the
hotel, as well as specific operating procedures.
The Company's AmeriHost Inn hotels have been designed and constructed using a
two- or three-story prototype, featuring 60 to 120 rooms, interior corridors and
an indoor pool area. The AmeriHost Inn hotel's amenities and services include an
indoor pool, whirlpool, exercise room, meeting room and extensive exterior
lighting for added security. The standard AmeriHost Inn guest room features an
electronic card-key lock, in-room safe, in-room coffee maker, telephone with
data port for personal computer, a work area and a 25" color television with
premium cable service or movies on demand. In addition, each AmeriHost Inn hotel
typically includes two to 12 whirlpool suites which, in addition to the standard
amenities, include in-room whirlpools, microwave ovens, compact refrigerators
and an expanded sitting area. AmeriHost Inn hotels do not contain food and
beverage facilities normally associated with full-service hotels. Food service
for hotel guests is generally available from adjacent or nearby free-standing
restaurants which are independently owned and operated.
The Company's AmeriHost Inn hotels are operated or managed in accordance with
strict guidelines designed to provide guests with a consistent lodging
experience. The Company believes the quality and consistency of the amenities
and services provided by the AmeriHost Inn hotels increase guest satisfaction
and repeat business. In addition, the AmeriHost Inn brand maintains its
Commitment Plus 100% guest satisfaction guarantee program. This program
guarantees that every guest will leave satisfied. All AmeriHost Inn employees
have the unconditional authority to correct any oversight to the guest's
satisfaction, or we will refund the guest's money, up to 100%. This 100%
satisfaction guarantee will help the brand maintain its quality and consistency.
The Company targets smaller communities in tertiary and secondary markets with
established demand generators such as major traffic arteries, office complexes,
industrial parks, shopping malls, colleges and universities or tourist
attractions, as the principal location for the development and construction of
AmeriHost Inn hotels. An AmeriHost Inn hotel is typically positioned to attract
both business and leisure travelers seeking consistent amenities and quality
rooms at reasonable rates, generally ranging from $50 to $80 per night.
The Company's in-house design staff, centralized purchasing program, strict cost
controls, and low average land costs all contribute to a favorable cost
structure in developing and constructing new AmeriHost Inn hotels. Furthermore,
due to the centralization of all accounting, purchasing, payroll and other
administrative functions, each hotel is operated efficiently and effectively
with a minimal on-site staff. These factors assist the Company in maximizing its
return on invested capital, while offering an excellent value to its guests.
As part of the Company's overall strategy to expand the AmeriHost Inn hotel
brand, the Company has sold 19 AmeriHost Inn hotels to Cendant franchisees, and
intends to pursue the sale of additional AmeriHost Inn hotels in 2002 and
beyond. The Company sold three AmeriHost Inn hotels to franchisees in 1999.
During 2000, the Company sold four AmeriHost Inn hotels to franchisees, while
three joint ventures in which the Company was a partner sold their AmeriHost Inn
hotels to franchisees. During 2001, nine AmeriHost Inn hotels which were
operated by the Company were sold to franchisees. These proceeds were, and any
proceeds from future sales, if and when completed, are expected to be used by
the Company to develop additional AmeriHost Inn hotels.
OTHER OWNED HOTELS
The Company's non-AmeriHost Inn hotels were primarily acquired by the Company
through joint ventures prior to 1993, in most instances at prices below
estimated replacement costs. In addition, the Company acquired one other
-4-
brand hotel in the fourth quarter of 2001. The other hotels have been owned,
operated and managed by the Company independently, or as part of a national
franchise system such as Days Inn, Howard Johnson Express, Holiday Inn, and
Ramada Inn. The Company believes that franchises in these locations are
important in maintaining occupancy levels, which are supported by the
franchisor's national reservation systems and marketing efforts and brand name
recognition.
The Company's non-AmeriHost Inn hotels typically are also located in secondary
and tertiary markets, with nearby demand generators such as airports, major
traffic arteries, office complexes, industrial parks, shopping malls, colleges
and universities or tourist attractions. The non-AmeriHost Inn hotels contain 64
to 215 rooms, generate average daily rates ranging from $40 to $65 per night and
offer a variety of amenities and services. Approximately one-half of these
hotels contain food and beverage facilities.
As part of the Company's strategy to focus its ownership primarily on AmeriHost
Inn hotels, the Company intends to pursue selective sales of certain of these
other hotels, only if and when attractive terms are available. During 1999, the
Company sold one 100% owned non-AmeriHost Inn hotel, and two joint ventures in
which the Company was a partner sold their non-AmeriHost Inn hotels. During
2000, the Company sold one 100% owned non-AmeriHost Inn hotel. These proceeds
were, and any proceeds from future sales, if and when completed, are expected to
be used by the Company to develop additional AmeriHost Inn hotels.
HOTEL PROPERTIES
At December 31, 2001, the Company owned and/or managed 78 hotels in 16 states,
concentrated in the midwestern and southern United States. The Company had five
additional hotels under construction located generally in the same geographical
areas.
Because the hotel industry is seasonal, the revenues generated by the hotels
managed by the Company will increase or decrease depending upon the time of
year. Since the Company's management fees are based upon a percentage of the
hotels' total gross revenues, the Company is further susceptible to these
seasonal variations. Given the location of the properties the Company manages,
the revenues are typically lower in the first and fourth quarters of each year.
The following is a list of hotel properties under the Company's management at
December 31, 2001 by state:
Date
State Hotel (1) Rooms Operations Began
- ----- --------- ------- ----------------
Florida Howard Johnson Express Inn Ft. Myers 123 09/30/92
------
Georgia AmeriHost Inn Eagles Landing, Stockbridge 60 08/08/95
AmeriHost Inn LaGrange 59 03/01/95
AmeriHost Inn Smyrna 60 12/21/95
Days Inn Northwest, Atlanta (3) 107 11/01/91
Days Inn Peachtree, Atlanta (3) 142 11/01/91
------
428
------
Illinois AmeriHost Inn & Suites Freeport 64 07/28/00
AmeriHost Inn Jacksonville 60 06/14/96
AmeriHost Inn Macomb 60 05/19/95
AmeriHost Inn Players Riverboat Hotel, Metropolis 120 02/25/94
AmeriHost Inn Rochelle 61 03/07/97
AmeriHost Inn Sycamore 60 05/31/96
Days Inn Niles 149 01/01/90
------
574
------
-5-
Date
State Hotel (1) Rooms Operations Began
- ----- ----- ------- ----------------
Indiana AmeriHost Inn & Suites Columbia City 60 03/05/99
AmeriHost Inn & Suites Decatur 60 08/30/98
AmeriHost Inn Hammond 86 03/29/96
AmeriHost Inn & Suites Huntington 62 08/21/98
AmeriHost Inn Plainfield 60 09/01/92
Days Inn Plainfield 64 05/01/90
Ramada Inn Lafayette 144 02/02/94
------
536
------
Iowa AmeriHost Inn & Suites Boone 60 08/21/98
AmeriHost Inn & Suites Le Mars 63 01/07/98
AmeriHost Inn & Suites Mt. Pleasant 63 07/02/97
AmeriHost Inn & Suites Pella 60 11/02/01
AmeriHost Inn Storm Lake 61 08/13/97
AmeriHost Inn Waverly 60 08/28/96
------
307
------
Kentucky AmeriHost Inn Murray 60 11/01/96
------
Michigan AmeriHost Inn & Suites Battle Creek 62 03/19/99
AmeriHost Inn Coopersville 59 12/31/95
AmeriHost Inn & Suites Dowagiac 64 09/28/01
AmeriHost Inn Grand Rapids North, Walker 60 07/05/95
AmeriHost Inn Grand Rapids South 61 06/11/97
AmeriHost Inn Hudsonville 61 11/24/97
AmeriHost Inn & Suites Monroe 63 09/19/97
AmeriHost Inn Port Huron 61 07/01/97
------
487
------
Mississippi AmeriHost Inn Batesville 60 04/26/96
AmeriHost Inn Tupelo 61 07/25/97
AmeriHost Inn Vicksburg (Rainbow Hotel Casino) 89 05/13/95
Howard Johnson Express Inn Tupelo 125 12/31/01
------
335
------
Missouri AmeriHost Inn Fulton 62 01/21/99
AmeriHost Inn Mexico 61 12/06/97
AmeriHost Inn Warrenton 63 11/07/97
------
186
------
-6-
Date
State Hotel (1) Rooms Operations Began
- ----- ----- ------- ----------------
Ohio AmeriHost Inn Ashland 62 08/09/96
AmeriHost Inn & Suites Athens (2) 102 11/04/89
AmeriHost Inn & Suites Cambridge (2) 72 02/06/98
AmeriHost Inn & Suites Columbus Southeast (2) 60 04/17/98
AmeriHost Inn Delaware 73 05/16/97
AmeriHost Inn & Suites East Liverpool (2) 66 10/20/00
AmeriHost Inn Jeffersonville North (2) 60 07/20/96
AmeriHost Inn Jeffersonville South (2) 60 10/14/94
AmeriHost Inn Kenton (2) 60 08/02/96
AmeriHost Inn Lancaster (2) 60 09/04/92
AmeriHost Inn Logan (2) 60 04/16/93
AmeriHost Inn Marysville 79 06/01/90
AmeriHost Inn & Suites Newark (2) 72 01/29/99
AmeriHost Inn & Suites Oxford (2) 62 12/04/00
AmeriHost Inn St. Marys (2) 61 11/25/97
AmeriHost Inn Upper Sandusky 60 04/12/95
AmeriHost Inn & Suites Wilmington (2) 61 02/21/97
AmeriHost Inn Wooster East 58 01/18/94
AmeriHost Inn Wooster North 60 10/20/95
AmeriHost Inn Zanesville (2) 60 07/30/96
Days Inn New Philadelphia (2) 104 06/04/92
Ramada Inn Dayton Mall 215 01/20/92
Ramada Inn Middletown 120 07/03/92
------
1,747
------
Oklahoma AmeriHost Inn & Suites Enid 60 06/11/98
------
Pennsylvania AmeriHost Inn Shippensburg 60 08/09/96
Holiday Inn Altoona 144 08/31/92
Arlington Hotel Oil City 106 12/02/92
------
310
------
Tennessee AmeriHost Inn Jackson 60 04/01/98
------
Texas AmeriHost Inn McKinney 61 01/07/97
AmeriHost Inn & Suites San Marcos 61 05/23/97
------
122
------
West Virginia AmeriHost Inn New Martinsville (2) 60 05/03/96
AmeriHost Inn Parkersburg North (2) 79 06/26/95
AmeriHost Inn Parkersburg South (2) 61 12/30/96
------
200
------
Wisconsin AmeriHost Inn & Suites Lomira 60 06/08/01
AmeriHost Inn & Suites Marshfield 60 09/06/00
AmeriHost Inn Mosinee 53 04/30/93
------
173
------
TOTAL ROOMS 5,772
TOTAL PROPERTIES 78
-7-
(1) Unless otherwise noted, the Company owns a direct or indirect
equity or leasehold interest in the hotel.
(2) Indicates properties which are co-managed with an unaffiliated
third party.
(3) Indicates properties in which the Company does not have a direct
or indirect equity or leasehold interest.
The table below shows the average occupancy, average daily rate ("ADR") and
revenue per available room ("RevPAR") experienced by the Company in 2001 in
various locations. These statistics include all hotels open as of December 31,
2001.
Average Average Revenue Per
Occupancy Daily Rate Available Room
--------- ---------- --------------
Ohio (23 hotels) 52.8% $60.02 $31.70
Illinois, Iowa and Wisconsin (16 hotels) 55.6% $55.32 $30.78
Michigan and Pennsylvania (11 hotels) 54.3% $58.30 $31.71
Georgia, Mississippi and West Virginia (12 hotels) 55.4% $55.31 $30.67
Indiana and Kentucky (8 hotels) 51.3% $55.47 $28.45
Texas (2 hotels) 70.0% $59.63 $41.75
Other hotels (6 hotels located in Tennessee, Florida,
Missouri and Oklahoma) 49.6% $57.50 $28.56
All hotels 53.9% $57.47 $31.00
LODGING INDUSTRY
The United States lodging industry's performance is strongly correlated to
economic activity, with changes in gross national product growth affecting both
room supply and demand, resulting in cyclical changes in average occupancy
rates, average daily rates, and revenue per available room. The general downturn
in the economy and the oversupply of rooms during the late 1980's and early
1990's resulted in decreased economic performance in the lodging industry.
Since the early 1990's, the United States lodging industry had shown significant
improvement. The growth in hotel room demand resulted in a positive trend in
industry-wide room revenues. Even as occupancy rates have flattened over the
past few years as the supply of new hotels outpaced the demand for room nights,
the average daily rates continued to increase, resulting in continued growth for
the industry. However, in 2001, the United States lodging industry was
negatively impacted by a general downturn in the economy, as well as the
terrorist attacks on Washington, D.C. and the World Trade Center in New York
City on September 11th. Smith Travel Research reported that revenues for the
entire U.S. lodging industry declined over 40% during the few weeks after the
attacks. Positive trends have been reported since this time, indicating that the
demand for hotel rooms is recovering, however this incident had a significant
impact on the profitability of many hotels. In addition, this incident has
changed the public's opinion regarding the safety of travel. Smith Travel
Research reported that for 2001, occupancy decreased 5.7% and average daily rate
decreased 1.4% for the entire U.S. lodging industry, resulting in a 6.9%
decrease in revenue per available room (RevPAR). The Company's hotels were also
affected, however to a lesser degree. Same room RevPAR for the Company's owned
AmeriHost Inn hotels declined 9.6% for the month of September 2001, compared to
September 2000. These hotels quickly rebounded, as same room RevPAR declined
0.6% in the month of October, increased 5.2% in November, and increased 5.2% in
December. 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. Industry analysts are again
projecting that room demand will outpace room supply in 2002. Smith Travel
Research expects occupancy to increase slightly in 2002, with average daily
rates increasing 2.5%, resulting in a projected increase of 2.3% in RevPAR for
the industry.
-8-
GROWTH STRATEGY
The Company's growth strategy is to increase Cash Flow (defined as net income,
adjusted to eliminate the impact of depreciation and amortization) and net
income per share by: (i) developing, operating and owning or leasing additional
AmeriHost Inn hotels; (ii) selling AmeriHost Inn hotels to Cendant franchisees;
(iii) developing and managing hotels for affiliated and unaffiliated parties;
(iv) maintaining or enhancing occupancy and average daily rate results at all of
its hotels; and (v) controlling operating and corporate overhead expenses. Cash
Flow is used by the Company as a supplemental performance measure along with net
income to report its operating results.
The Company's primary growth strategy is to focus on the expansion of the
AmeriHost Inn brand. During 2001, the Company opened three wholly-owned
AmeriHost Inn hotels, and began construction on four 100% owned AmeriHost Inn
hotels, one minority owned AmeriHost Inn hotel, and one AmeriHost Inn hotel for
an unrelated third party, five of which are under construction at December 31,
2001. The Company may seek to increase its ownership interest in existing
AmeriHost Inn hotels in which the Company has less than a 100% ownership
interest, if available on favorable economic terms.
Due to the expansion of the AmeriHost Inn brand over the past several years, and
the recognition the brand has received for the consistency of guest services and
amenities, the Company decided to begin selling franchises in 1999. After
limited success, the Company decided to sell the AmeriHost Inn name and
franchise rights to Cendant in September 2000. Although the Company had success
in selling its existing hotels to franchisees, it decided to form the
relationship with Cendant to help develop new franchisees on a much larger
scale, requiring resources which the Company did not have. As structured, the
Cendant transaction not only will help in expanding the brand for Cendant's
benefit, but it also is expected to significantly benefit the Company over the
long term. There are four basic deal points of the Cendant transaction:
(1) The Company continues to own all its existing hotels and operate them
under favorable franchise agreements with Cendant using the AmeriHost
Inn name.
(2) Cendant paid the Company an initial one-time fee of approximately $5.5
million, which was recorded in the third quarter of 2000. In addition,
the Company received $400,000 on September 30, 2001, and will receive
$400,000 on September 30, 2002, and $400,000 on September 30, 2003, as
long as the Company maintains certain hotel lease agreements.
(3) For the next 15 years, Cendant will pay the Company a development
incentive fee every time the Company sells one of its existing
AmeriHost Inn hotels to a buyer who executes an AmeriHost Inn franchise
agreement with Cendant. In addition, this fee will also be paid to the
Company for new hotels that the Company develops which are then sold to
a franchisee of Cendant. This fee applies to the next 370 hotels sold
by the Company during the 15-year term of the agreement.
(4) For the next 25 years, Cendant will pay the Company a portion of all
royalty fees Cendant receives from all of its AmeriHost Inn
franchisees. While not expected to significantly impact the earnings of
the Company in the near term, this royalty sharing may be a major
source of cash flow and profits for the Company in the long term, if
the Company and Cendant are successful in growing the AmeriHost Inn
brand.
Due to the significant benefits under the Cendant agreement, the Company's
growth strategy is also focused on selling AmeriHost Inn hotels to operators who
become Cendant franchisees. When a hotel is sold, the Company expects to realize
not only a gain on the sale, but also a development incentive fee and royalty
sharing payments pursuant to the Cendant agreement. In 2001, the Company
received approximately $1.7 million from Cendant in incentive fees and royalty
sharing payments. Consequently, the building and selling of a significant number
of AmeriHost Inn hotels is expected to be reflected in the Company's financial
statements, in the normal course of business, and consistent with the Company's
growth strategy.
Additional potential benefits to the Company as a result of the transaction with
Cendant include referrals from a preferred manager and developer agreement,
whereby Cendant will refer the franchisees to the Company when
-9-
expertise in hotel development and management is needed. In addition, with a
Fortune 500 company behind the AmeriHost Inn brand, operational advantages in
name recognition, purchasing leverage, and marketing opportunities may be
substantial.
The Company intends to continue using its hotel development and management
expertise to build and operate hotels for itself, as well as for future joint
ventures in which the Company holds a minority ownership interest and in some
instances, for Cendant franchisees. In addition, the Company is also pursuing
development contracts and management contracts with unaffiliated entities.
During 2001, the Company began construction on six hotels, and completed
construction of three hotels, all of which were AmeriHost Inn hotels. The
Company intends to continue developing and constructing AmeriHost Inn hotels in
communities located in tertiary and secondary markets which already have
established demand generators, such as major traffic arteries, office complexes,
industrial parks, shopping malls, colleges and universities or tourist
attractions. Typically, the Company seeks communities where an active economic
development program is in place, which suggests long-term growth potential for
additional lodging demand. In most cases, the local community is interested in a
new hotel because existing facilities are dated or inconvenient. The Company
provides comfortable, professionally managed accommodations which are typically
not available in that community.
The Company has an in-house development staff dedicated to identifying and
evaluating new development opportunities. Once a market has been identified and
a site has been selected, the Company initiates its due diligence process prior
to the construction of one of its hotels. Such due diligence typically consists
of environmental surveys, feasibility and engineering studies and the securing
of zoning and building permits. The Company also maintains an in-house
construction and design department, which enables it to manage all phases of
construction. The Company's in-house architects and design personnel prepare the
blueprints for each AmeriHost Inn hotel through the use of computer assisted
drafting equipment, thereby reducing architectural fees. The Company either
hires a general contractor to construct the hotel for a fixed price, or acts as
the general contractor and enters into all sub-contracts directly. Since the
Company builds hotels pursuant to fixed contracts, in order to minimize its risk
associated with any cost overruns, the Company will also enter into fixed
contracts with the general contractor, if any, as well as any subcontractors,
prior to the commencement of construction. The Company's project superintendents
or managers oversee each phase of construction in order to assure the quality
and timing of the construction. With few exceptions, such as the interior color
scheme, each AmeriHost Inn hotel is the same in every detail, including the
overall layout, the room sizes and the indoor pool area. The replication of its
prototype design allows for accurate budgeting of its construction and overhead
costs.
Historically, the Company has financed its hotel development and construction
through a combination of equity and debt or lease financing, with the equity
financing typically provided by the Company and/or its joint venture partners,
debt financing typically provided by local or regional banks, and leasing
arrangements with a REIT (PMC Commercial Trust). In 2001, the Company also
secured a $20 million new construction facility with a lender who also holds the
mortgage on two existing hotels owned by the Company, of which $5.7 million has
been utilized through December 31, 2001. All of the AmeriHost Inn hotels under
construction at December 31, 2001 are being financed through a combination of
debt and equity.
The Company believes that it can develop, operate and sell additional AmeriHost
Inn hotels having occupancies and average daily rates similar to those the
Company has achieved at its existing AmeriHost Inn hotels. Moreover, the Company
believes that the development of additional AmeriHost Inn hotels, through the
Company as well as through Cendant, and expanded geographic diversity will
continue to enhance the awareness of the AmeriHost Inn brand and thus improve
revenues at existing, as well as future, AmeriHost Inn hotels. The Company
believes that leveraging its expertise in hotel development and management by
providing these services to unaffiliated parties and Cendant franchisees will
also assist the Company in reaching its financial objectives.
-10-
OPERATING STRATEGY
The Company's operating strategy is to provide its customers with a consistent
lodging experience by offering a package of amenities and services which meet or
exceed the customer's expectations during each stay. The Company has developed
uniform standards and procedures for each aspect of the development,
construction, operation and marketing of its AmeriHost Inn hotels, from site
selection to operational management. Cendant has also adopted the standards and
procedures developed by the Company to be adhered to by all franchisees.
The Company's operational management activities are overseen by a Senior Vice
President of Operations who supervises regional and area managers, who in turn
oversee the general managers of the hotels. Each regional manager is responsible
for 6 to 10 hotels, depending on each hotel's size and location. Each area
manager is responsible for overseeing the general managers at 1 to 2 hotels, in
addition to having responsibilities as the general manager of a specific hotel.
The Company also has centralized sales and marketing personnel who assist and
direct the general managers and other on-site personnel in their marketing
efforts. The Company's internal auditors perform audits of each hotel at least
two times each year, including tests of financial items such as cash and
receivables, as well as operational, security and ADA (Americans with
Disabilities Act) compliance matters. These auditors are also responsible for
developing and conducting a variety of educational and training seminars for
general managers and other on-site personnel.
The Company has designed a financial management system whereby all accounting
and operating information is processed in the Company's centralized accounting
office at its headquarters. The system includes cash management, accounts
payable and the generation of daily financial and operating information and
monthly financial statements which allow senior management and the regional,
area and general managers to closely monitor performance and to quickly react to
changes in operational conditions. The Company provides each hotel with
standardized forms and procedures to ensure uniform and efficient financial
reporting. The Company's financial management system relieves certain management
and reporting burdens from the individual hotel managers, enabling them to focus
on the operation and marketing of the hotel. The centralized financial
management system also enhances the quality and timing of internal financial
reports. All payroll functions are also centralized at the Company's
headquarters through its employee leasing subsidiary, allowing the Company to
have greater control over payroll costs. In addition, since all of the
approximately 1,400 hotel personnel are employed by the same company, the costs
of certain payroll related expenses are lower than if each hotel maintained its
own employees, and the Company is able to offer a more attractive health
insurance program to its employees.
MARKETING STRATEGY
The Company believes it has a unique marketing strategy which is to actively
seek involvement in and ties to the local communities in which its hotels are
located. The local businesses and residential communities are each hotel's best
referral source. When staying in smaller communities where the Company's hotels
are located, visitors typically seek recommendations from family, friends, and
business associates. The general managers of the hotels are expected to devote a
majority of their time toward marketing activities with local businesses and the
community. In an effort to promote community awareness and build strong
relationships with business leaders and local residents, general managers are
very active in local civic groups and frequently sponsor special events. In
addition, the hotels typically sponsor various local social and community events
and permit the use of their facilities by local clubs and civic organizations.
This community involvement, combined with a professional marketing program,
allows the hotel to showcase its facilities for both business and leisure
purposes. By focusing on the local community as its primary referral source, the
Company believes that each hotel can build a strong sales force of local
residents.
The Company also participates in the Global Distribution System ("GDS"). GDS is
the airline reservation system through which most travel agents make hotel
bookings. GDS offers tremendous exposure of the AmeriHost Inn brand to travel
agents globally. In addition, our guests are now able to book hotel reservations
easily through their preferred travel agent.
With respect to AmeriHost Inn hotels, the Company's primary marketing strategy
is to consistently develop and operate AmeriHost Inn hotels using its prototype
designs under the AmeriHost Inn diamond-shaped logo. The
-11-
Company believes that a consistent product offering, including the same design
features, amenities and quality guest services, will promote guest loyalty,
referrals and repeat business. The amenities and services featured in the
AmeriHost Inn prototype designs are not consistently found in the hotels of
competitors in the markets which the Company targets. By providing amenities and
services on a consistent basis, along with centralized administrative and
financial reporting systems, the Company believes it is able to operate
profitable hotels while offering an excellent value to its guests.
Cendant also maintains a toll-free reservation number for the AmeriHost Inn
hotels. By dialing 800-434-5800, a guest can make a reservation at any one of
the AmeriHost Inn hotels throughout the country. In addition, the Company's
internet web site as well as the AmeriHost Inn web site are capable of accepting
reservations on-line, further improving our guests' ability to book rooms
easily. The Company anticipates that the reservation system will significantly
increase the number of reservations as the brand awareness increases. The
Company also periodically implements a regional marketing campaign using various
media including radio and newspaper. The markets and media selected for the
marketing activities are based on extensive research done by the Company and in
some cases, an advertising consultant. As part of its franchise agreements with
Cendant, the Company, as well as the other AmeriHost Inn franchisees, contribute
monthly to the AmeriHost Inn marketing fund. This fund is used by Cendant to
promote the brand on national and regional levels. Marketing fund contributions
are based on hotel revenues.
The Company targets independent hotel owners and developers to purchase the
Company's AmeriHost Inn hotels. The Company receives numerous inquiries and
offers for its existing hotels primarily through word-of-mouth and the Company's
web sites, including hotelsforsaleonline.com. The Company believes that the
consistency maintained by the AmeriHost Inn hotels with regard to amenities and
service will attract buyers, along with the brand's central reservation system
and marketing programs. With Cendant behind the brand, the interest in
purchasing the Company's AmeriHost Inn hotels is expected to remain significant.
JOINT VENTURES
The Company continued to develop new hotels through joint ventures in 2001
whereby the Company and other investors agree to jointly undertake the
development, construction, acquisition or renovation of a hotel property. As of
December 31, 2001, the Company had 19 projects (one under construction) with
joint venture partners, including multiple projects with certain joint venture
partners.
The Company's joint ventures have taken various forms, including general
partnerships, limited partnerships, and limited liability companies. Each joint
venture has been formed with respect to a particular hotel project and reflects
the characteristics of that project, including the relative contributions, in
cash, property or services, of its partners. In most instances, the joint
venture has taken the form of a limited partnership or a limited liability
company, with a wholly-owned subsidiary of the Company as a general partner or
managing member with sole or joint management authority. The Company's
subsidiary, as general partner or managing member, has typically received an
ownership interest ranging from 1% to 30% for contributing the Company's
expertise. In certain cases, the subsidiary has also contributed a minimal
amount of cash. The limited partners or members (which may include the Company
or its affiliates in some instances) have typically contributed the cash equity
required to fund the project and have received interests proportionate to their
contributions. A typical joint venture agreement provides that the profits and
losses of the entity will be allocated among the partners in proportion to their
respective interests. However, the distribution of operating cash flow and asset
sale proceeds to the Company in proportion to its ownership interest is often
subordinate to the prior return of capital and other distributions payable to
the other joint venture partners. In addition, in two joint venture
arrangements, the equity interests held by the joint venture partners, including
equity interests held by a Director of the Company (Item 13), are exchangeable
into shares of the Company's common stock and the Company has guaranteed minimum
annual distributions to the joint venture partners.
As the general partner or managing member, the Company's subsidiary generally
has significant management authority with respect to the joint venture. However,
in some instances, the joint venture agreement or applicable law may provide to
the other joint venture partners the right to amend the joint venture agreement,
approve a transfer of the general partner's partnership interest, remove the
general partner for cause, or dissolve the joint venture. The
-12-
joint venture agreements do not typically restrict the right of the Company or
its affiliates to engage in related or competitive business activities.
COMPETITION
There is significant competition in the mid-price segment of the lodging
industry. There are numerous hotel chains that operate on a national or regional
basis, as well as other hotels, motor inns and other independent lodging
establishments throughout the United States. Competition is primarily in the
areas of price, location, quality, services and amenities. Many of the Company's
competitors have recognized trade names, greater resources and longer operating
histories than the Company. However, the Company believes that its management is
sufficiently experienced, and the markets which the Company targets for
development typically offer lesser competition, enabling the Company to compete
successfully.
There are a number of companies which develop, construct and renovate hotels.
Some of these companies perform these services only for their own account, while
others actively pursue contracts for these services with third party owners. The
Company believes that it can develop, construct and renovate hotels at costs
which are competitive. The Company believes that its use of a well-developed
prototype, significant experience (the Company has managed the development and
construction of approximately 100 hotels) and volume purchasing of furniture and
amenities result in development costs which are lower than those experienced by
many competitors building comparable hotels. The Company also believes that its
ability to offer additional services, such as hotel management, provides some
competitive advantages.
There are many hotel management companies which provide management services to
hotels similar to the services provided by the Company. While the quantity of
competition may be high, the Company believes that the quality of its services,
including its information and management systems and employee leasing
operations, will enable the Company to compete successfully. The Company
believes that its focus on tertiary and secondary markets also lessens
competition for the types of services provided by the Company.
The Company believes that the relationship between the development and
construction costs and the average daily rates achieved by the AmeriHost Inn
hotels is more favorable than that experienced by many of the Company's
competitors. In addition, a significant portion of the purchasing and accounting
functions related to the hotels is handled in the Company's headquarters, thus
enabling the local general managers and their staff to focus their efforts on
marketing and sales. The centralization of many functions also assists in
keeping costs lower due to certain economies of scale. This allows the AmeriHost
Inn hotels to operate efficiently and compete effectively.
FRANCHISE AGREEMENTS
At December 31, 2001, the Company had franchise agreements (collectively, the
"Franchise Agreements") with AmeriHost Inn Franchise Systems, Inc., Days Inn of
America, Inc., Howard Johnson's Franchise Systems, Inc., Holiday Inns, Inc.,
Holiday Inns Franchising, Inc. and Ramada Franchise Systems, Inc. Although the
terms of the various Franchise Agreements differ, each requires the Company to
pay a monthly fee for the right to operate the hotel under the "flag" of that
Franchisor and to have access to the other benefits provided by such Franchisor,
including access to reservation systems, marketing plans and use of trademarks.
The fees, including the marketing and reservation system assessments, typically
range between 4% and 10% of gross revenues attributable to room rentals. In
addition, the Company and/or the joint venture which owns a hotel operated
pursuant to a Franchise Agreement will have ongoing obligations to maintain the
quality and condition of the hotel to the standards required by the Franchisor.
The term of a Franchise Agreement typically is between 10 and 20 years, with a
substantial penalty for early termination by the Company. The Company believes
that it is in compliance with its Franchise Agreements, and the loss of any one
of the Franchise Agreements would not have a material impact on the Company.
-13-
EMPLOYEES
As of December 31, 2001, the Company and its subsidiaries had 1,477 full and
part-time employees:
Hotel Management:
Operations 31
Accounting and finance 13
Property general managers 81
Hotel Development: 13
Hotel Operations: 987
Corporate:
General and administrative 10
Officers 2
Employee Leasing:
General and administrative 3
Operations 337
------
1,477
======
To date, the Company has not experienced any work stoppages or significant
employee-related problems. The Company believes that its relationship with its
employees is good.
ITEM 2. PROPERTIES.
The Company owns the office building in which its corporate offices and the
offices of its wholly-owned subsidiaries are located at 2355 South Arlington
Heights Road, Suite 400, Arlington Heights, Illinois 60005. The five-story
building contains approximately 50,000 rentable square feet, of which the
Company occupies approximately 19,000 square feet. Nearly all of the additional
space is leased to various tenants under long-term agreements. This office
building is pledged to secure the related long-term mortgage debt.
At December 31, 2001, the Company had a 100% or majority ownership or leasehold
interest in 62 operating hotels located in 16 states. The land, building,
furniture, fixtures and equipment and construction in progress for these hotels
is reflected in the Company's Consolidated Balance Sheet at December 31, 2001.
These assets were substantially pledged to secure the related long-term mortgage
debt. See Item 1 and Notes 6 and 7 to the Consolidated Financial Statements
under Item 14.
In addition to the foregoing, the Company has an equity interest in partnerships
which own and/or lease property. See Note 4 to Consolidated Financial Statements
under Item 14.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of business.
In management's opinion, currently pending legal proceedings and claims against
the Company will not, individually or in the aggregate, have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year ended December 31, 2001.
-14-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol HOST. As of March 25, 2002 there were 1,250 holders of record of the
Company's Common Stock. The following table shows the range of reported high and
low closing prices per share.
High($) Low($)
------- ------
FISCAL 2000
First quarter 3.75 2.88
Second quarter 3.94 3.00
Third quarter 3.94 3.00
Fourth quarter 4.13 2.31
FISCAL 2001
First quarter 3.75 2.75
Second quarter 4.24 3.01
Third quarter 3.90 2.10
Fourth quarter 3.49 1.95
FISCAL 2002
First quarter (through March 25, 2002) 3.00 1.92
The Company has not declared or paid any cash dividends on its Common Stock. The
Company currently intends to retain any earnings for use in its business and
therefore does not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be made by the Board
of Directors in light of the Company's earnings, financial position, capital
requirements and such other factors as the Board of Directors deems relevant.
The Board of Directors has the authority to issue up to 100,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued shares of
Preferred Stock, including without limitation, dividend rates, conversion
rights, voting rights, redemption and sinking fund provisions, and liquidation
provisions, and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
shareholders. The Board of Directors, without shareholder approval, may issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of the holders of Common Stock and could have the effect of delaying,
deferring or preventing a change in control of the Company. The Company has no
present plans to issue any Preferred Stock.
-15-
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below have been derived from
the Company's consolidated financial statements. The consolidated financial
statements for all years presented have been audited by the Company's
independent certified public accountants, whose reports on such consolidated
financial statements for each of the three years in the period ended December
31, 2001 is included herein under Item 14. The information set forth below
should be read in conjunction with the consolidated financial statements and
notes thereto under Item 14 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(in thousands, except per share data)
(not covered by independent auditor's report)
Fiscal Year Ended December 31,
------------------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenue $ 77,153 $ 76,151 $76,058 $ 68,618 $ 62,666
Operating costs and expenses 58,500 58,736 57,868 54,286 52,285
Depreciation and amortization expense 4,676 4,542 4,567 5,487 4,532
Leasehold rents - hotels 6,510 6,525 7,307 4,192 1,729
Corporate general and administrative 1,908 1,695 1,537 1,569 2,140
Operating income 5,559 4,653 4,780 3,084 1,980
Interest expense, net 4,332 4,819 5,155 5,592 3,299
Gain on sale of assets and franchising rights 886 6,663 553 305 1,698
Income (loss), before extraordinary item and
cumulative effect of change in accounting principle(1) $ 755 $ 4,010 $ 201 $ (1,167) $ (966)
======== ======== ======== ======== ========
Net income (loss) $ 755 $ 4,010 $ 201 $ (2,796) $ (966)
======== ======== ======== ======== ========
Income (loss) per share, before extraordinary item
and cumulative effect of change in accounting principle(1):
Basic $ 0.15 $ 0.81 $ 0.04 $ (0.19) $ (0.15)
======== ======== ======== ======= =======
Diluted $ 0.13 $ 0.74 $ 0.02 $ (0.20) $ (0.19)
======== ======== ======== ======= =======
Net income (loss) per share:
Basic $ 0.15 $ .0.81 $ 0.04 $ (0.45) $ (0.15)
======== ======== ======== ======= =======
Diluted $ 0.13 $ 0.74 $ 0.02 $ (0.45) $ (0.19)
======== ======== ======== ======= =======
Weighted average shares outstanding:
Basic 4,975 4,976 5,567 6,180 6,283
======== ======== ======== ======== ========
Diluted 5,182 5,272 5,857 6,513 6,659
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets $115,174 $ 98,143 $103,108 $115,281 $ 92,668
Long-term debt, including current portion 72,199 58,604 60,349 71,841 60,235
Working capital (deficiency) (5,160) (4,172) (6,817) (6,924) (2,208)
Shareholders' equity 19,067 18,266 14,181 18,316 21,593
OTHER DATA:
Net income plus depreciation (2) $ 5,431 $ 8,552 $ 4,768 $ 4,319 $ 3,566
Cash provided by (used in) operating activities 15,907 1,143 (885) 5,408 1,858
Cash (used in) provided by investing activities (27,505) 2,728 12,344 15,555 (28,463)
Cash provided by (used in) financing activities 14,617 (5,908) (12,187) (18,819) 25,926
Capital expenditures 25,400 10,434 2,103 42,183 29,343
-16-
(1) The Company recorded an extraordinary loss of $333,000 in 1998, net of
income taxes, relating to the early extinguishment of mortgage debt on
hotels sold in connection with a sale/leaseback transaction. The
Company recorded a cumulative effect of a change in accounting
principle of $1,296,000 in 1998, net of income taxes, relating to the
adoption of Statement of Position No. 98-5, "Reporting on the Costs of
Start-up Activities."
(2) "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. "Net Income Plus Depreciation" 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. "Net Income Plus
Depreciation" is defined as net income before extraordinary items and
cumulative effect of a change in accounting principle, adjusted to
eliminate the impact of depreciation and amortization.
-17-
ITEM 7. 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. Since the Company's inception, the Company has constructed
over 100 hotels. In addition, the Company has acquired other brand hotels, or
has formed joint ventures to acquire other brand hotels. As of December 31,
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 three 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 December 31, 2001, three 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, increased
approximately 2.9% during the fourth quarter of 2001, compared to the fourth
quarter of 2000, attributable to a decrease of $0.74 in average daily rate
offset by a 4.2% increase in occupancy. These results relate to the 63 AmeriHost
Inn hotels that were operating for at least thirteen full months during the
three months ended December 31, 2001. During 2001, same room revenue for all
AmeriHost Inn hotels owned and operated by the Company decreased approximately
1.8%, attributable to an increase in average daily rate of $1.23 offset by a
3.4% decrease in occupancy. These results relate to the 70 AmeriHost Inn hotels
that were operating for at least thirteen full months during the twelve months
ended December 31, 2001.
Revenues from hotel operations consist of the revenues from all hotels in which
the Company has a 100% or controlling ownership or leasehold interest
("Consolidated" hotels). Development and construction revenues consist of fees
for new construction and renovation activities performed by the Company for
unconsolidated minority-owned hotels and unrelated third parties. The Company
records commissions and revenue from the sale of its Consolidated 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 unconsolidated minority-owned hotels and
unrelated third parties.
Revenues from Consolidated AmeriHost Inn hotels decreased 8.4% to $45.1 million
during 2001, from revenues of $49.2 million during 2000, due primarily to the
sale of hotels to franchisees. Revenues from the development segment decreased
72.3% to $1.9 million in 2001, from $7.0 million in 2000, due to the decrease in
hotel development activity for minority owned and third party entities. Revenues
from hotel sales and commissions were $12.9 million during 2001, as a result of
the sale of nine AmeriHost Inn hotels. Revenues from hotel management and
employee leasing segments decreased by 20.5% in total during 2001, due primarily
to the sale or termination of hotels under management contracts. Revenues from
Consolidated non-AmeriHost Inn hotels decreased 6.8% during 2001, compared to
2000, as a result primarily of the sale of one non-AmeriHost Inn hotel. Total
revenues increased 1.3% to $77.2 million during 2001, from $76.2 million during
2000, due primarily to the increase from hotel sales and commissions. The
Company recorded net income of $755,100 in 2001, or $0.13 per diluted share,
compared to net income of $4.0 million or $0.74 per diluted share in 2000. In
2000, the Company recorded 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.
On September 30, 2000, the Company sold the AmeriHost Inn and AmeriHost Inn &
Suites brand names and franchising rights to Cendant Corporation. The Company
received approximately $5.2 million upon closing, net of closing costs. The
agreement with Cendant also provides for favorable royalty payment terms and
additional long-term incentives to the Company as the AmeriHost Inn brands are
expanded, including royalty sharing and a hotel development incentive fee each
time a hotel owned by the Company is sold to an operator who becomes a Cendant
franchisee.
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 and amortization 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
-18-
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
$5.4 million during 2001, compared to $8.6 million during 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 9.6% for the month of September,
however the hotels rebounded quickly as same room RevPAR decreased 0.6% for the
month of October, increased 5.2% for the month of November, and increased 5.2%
for the month of December 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.
Excluding hotels under construction, Arlington had an ownership interest in 76
hotels at December 31, 2001, versus 81 hotels at December 31, 2000. The
increased ownership from the development of AmeriHost Inn hotels for the
Company's own account and the acquisition of a non-AmeriHost Inn hotel was
offset by the sale of AmeriHost Inn hotels to franchisees. These figures include
a net decrease of four Consolidated hotels, from 66 at December 31, 2000 to 62
at December 31, 2001.
CRITICAL ACCOUNTING POLICIES
Consolidation Policy
A joint venture project will be consolidated if the Company has a majority
(i.e., greater than 50%) ownership interest, or when the Company has a minority
ownership interest (i.e., less than 50%) and can exercise control over the
critical decisions of the joint venture. The Company will evaluate several
factors in determining whether or not it has control over the joint venture to
warrant consolidation. These factors include the nature of the Company's
ownership (for example, the sole general partner in a limited partnership, the
sole managing member of a limited liability company, etc.), oversight of the
daily operations, and the ability to make major decisions such as to refinance
or sell the hotel asset without the consent of the other partners, among others.
Minority owned joint ventures in which the Company maintains a non-controlling
ownership interest are accounted for by the equity method. Under this method,
the Company maintains an investment account, which is increased by contributions
made and its share of the joint venture's income, and decreased by distributions
received and its share of the joint venture's losses, in accordance with the
terms of the joint venture agreement. The Company's share of each joint
venture's income or loss, including gains and losses from capital transactions,
is reflected on the Company's statement of operations as "Equity in income and
(losses) from unconsolidated joint ventures" in the accompanying financial
statements.
Revenue Recognition
The revenue from the operation of a consolidated hotel is recognized as part of
the hotel operations segment when earned. Typically, cash is collected from the
guest at the time of check-in or check-out, however the Company also extends
credit to selected corporate customers. The Company had a reserve for
specifically identified doubtful corporate accounts receivable in the amount of
$150,000 at December 31, 2001. This reserve represents approximately 14% of the
outstanding corporate account receivable balance at December 31, 2001. The
reserve for doubtful accounts is reviewed periodically for reasonableness and is
considered appropriate at December 31, 2001.
The Company's intention is to operate the consolidated hotels until a buyer is
found at an appropriate price. The Company may actively try to sell the hotel
during the construction period, upon opening, or anytime thereafter.
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Once the sale of the hotel is consummated, the Company will realize the value
from its development. Under this scenario, the Company will depreciate the hotel
assets and classify them as investment assets while it operates the hotel, since
it is not assured that a sale will ultimately be consummated. Beginning in 2001,
the Company records the hotel sale price as development revenue and the net cost
basis of the hotel asset as development expense, when the sale is consummated,
as part of the ongoing operational activity of the Company. Prior to 2001, the
sale of two consolidated AmeriHost Inn hotels (during the third quarter of 1999)
were recorded as operating activity in the hotel development segment. The sales
of all other hotels, which had been operated for longer than 12 months, were
recorded as a "gain on sale" below the operating income line, computed as the
difference between the net sale price and the net cost basis of building the
hotel. This treatment was considered appropriate since the strategy of building
and selling had not yet been solidified until the consummation of the Cendant
transaction in the latter part of 2000.
The Company seeks not only to generate profit from the sale of a hotel, but also
to generate a development incentive fee and a long-term, ongoing royalty sharing
fee from Cendant Corporation. The Company recorded $12.9 million in hotel sales
and commission revenue in 2001. The Company and the REIT which owns certain of
the Company's leased hotels closed on the sale of nine AmeriHost Inn hotels
during 2001.
The Company provides hotel development, management, and staffing services to
unrelated third parties and minority owned joint ventures. Under this scenario,
revenues can be recognized in three ways: (i) the Company will record revenue
from the development and construction of the hotel, (ii) if the Company enters
into a hotel management agreement with the owner, it will recognize revenue in
accordance with the terms of the agreement, and (iii) if the Company enters into
a hotel staffing agreement with the owner, it will recognize revenue in
accordance with the terms of the agreement. An unrelated third party or a
minority owned joint venture may contract with the Company for any or all three
services, however the Company will not provide employee leasing services unless
it also provides hotel management services pursuant to a written agreement.
The Company will recognize revenue from the development and construction of
hotels for third parties and unconsolidated minority-owned entities pursuant to
development and construction contracts with the hotel ownership entity. All
contracts must be fully executed prior to the start of construction. In
addition, the Company will not begin construction on a hotel for a joint venture
or third party until it is assured that both the equity and debt financing are
in place. The Company records revenue as the total contract price, and all
development and construction costs as operating expenses in the hotel
development segment.
Development fee revenue from construction/renovation projects with unaffiliated
third parties or entities in which the Company has a non-controlling minority
ownership interest is recognized using the percentage-of-completion method.
Construction fee revenue from construction/renovation projects with unaffiliated
third parties or entities in which the Company has a non-controlling minority
ownership interest is recognized on the percentage-of-completion method,
generally based on the ratio of costs incurred to estimated total contract
costs. Revenue from contract change orders is recognized to the extent costs
incurred are recoverable. Profit recognition begins when construction reaches a
progress level sufficient to estimate the probable outcome. Provision is made
for anticipated future losses in full at the time they are identified.
For the next 15 years, Cendant will pay the Company a development incentive fee
every time the Company sells one of its existing AmeriHost Inn hotels to a buyer
who executes an AmeriHost Inn franchise agreement with Cendant. In addition,
this fee will also be paid to the Company for new hotels that the Company
develops which are then sold to a franchisee of Cendant. This fee applies to the
first 370 hotels sold by the Company during the 15-year term of the agreement.
The fee is computed based on the most recent twelve months revenue, or a
stipulated per room amount if the hotel has been open less than one year. Since
the Cendant agreement provides for the potential reimbursement of this fee, from
future fees earned, in the event the buyer defaults on the franchise agreement
within the first 76 months, these fees are deferred when received, in accordance
with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements." The deferred fees are amortized as hotel development segment
revenue on a straight-line basis over the 76-month period, as the contingencies
on the revenues are removed. The Company received $1.6 million in development
incentive fees from the sale of AmeriHost Inn hotels during 2001, of which
$147,792 was recognized as hotel development revenue in 2001.
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For the next 25 years, Cendant will pay the Company a portion of all royalty
fees Cendant receives from all of its AmeriHost Inn franchisees. Generally,
Cendant receives royalty fees from each of their franchisees based upon a
percentage of guest room revenue, ranging from 4% to 5%. In turn, Cendant will
pay the Company a portion of this fee as stipulated in the agreement. The
Company received $85,310 in royalty sharing payments in 2001. The Company
records this royalty sharing fee as hotel development segment revenue when the
related royalty fee is received.
The Company recognizes management fee revenue when it performs hotel management
services for unrelated third parties and minority owned joint ventures. The
management fees are computed based upon a percentage of total hotel revenues,
ranging from 4% to 8%, plus incentive fees in certain instances, in accordance
with the terms of the individual written management agreements. The Company
recognizes the management fee revenue in the hotel management segment as the
related hotel revenue is earned.
The Company recognizes employee leasing revenue when it staffs hotels, and
performs related services, for unrelated third parties and minority owned joint
ventures. The Company centrally employs all the employees working at the hotels.
Employee leasing revenues are generally computed as the actual payroll costs
plus an administrative fee ranging from 2% to 3%, in accordance with the terms
of the individual written staffing agreements. The Company recognizes the
employee leasing revenue in the employee leasing segment as the related payroll
cost is incurred. Although the Company maintains employee leasing agreements
with the hotel ownership entities, the Company is still ultimately responsible
for its employees. In addition, the Company is responsible for maintaining and
determining staffing levels, scheduling, hiring, firing, performance reviews,
etc. through the Company's General Managers. Moreover, the Company is at risk
with regard to personnel issues and lawsuits. As such, the Company has recorded
employee leasing revenues primarily as the gross payroll cost plus the
administrative fee, which is considered appropriate.
During 1998 and 1999, the Company sold 30 hotels to a Real Estate Investment
Trust ("REIT") for approximately $73 million. Upon the sale of the hotels, the
Company simultaneously entered into agreements to lease back each of the hotels
from the REIT. The leases are for an initial term of 15 years, as amended, and
provide for rent in the amount of 10% of the original sale price, increased
annually after year three by the lesser of 2% or the CPI adjustment. The gains
from the sale of the hotels in 1998 and 1999 were deferred for financial
statement reporting purposes, due to the continuing involvement with the
long-term lease agreement, and are being amortized on a straight line basis into
income as a reduction of leasehold rent expense over the 15 year initial term.
Assuming the Company leases all of the remaining REIT hotels until the end of
the initial term, approximately $757,000 will be amortized annually as a
reduction of leasehold rent expense.
When the Company builds a hotel for a minority owned joint venture, a portion of
the profit is deferred. The deferral is computed as the Company's ownership in
the joint venture multiplied by the development fee profit and the construction
profit (as it is recognized on the percentage of completion basis). The deferred
income is recognized by the Company over the estimated useful life of the
related hotel asset. A portion of the deferral is amortized over the same life
the joint venture is depreciating the hotel asset (generally, 39 years), and the
remaining portion is amortized over the same life the joint venture is
depreciating the furniture, fixtures & equipment (generally, 7 years).
Impairment of Long-Lived Assets
The Company periodically reviews the carrying value of certain of its long-lived
assets, including its investment in joint ventures which own long-lived assets,
in relation to historical results, current business conditions and trends to
identify potential situations in which the carrying value of assets may not be
recoverable. If such reviews indicate that the carrying value of such assets may
not be recoverable, the Company would estimate the undiscounted sum of the
expected cash flows of such assets to determine if such sum is less than the
carrying value of such assets to ascertain if an impairment exists. If an
impairment exists, the Company would determine the fair value by using quoted
market prices, if available for such assets, or if quoted market prices are not
available, the Company would obtain an
-21-
appraisal or discount the expected future cash flows of such assets. During
2001, our reviews indicated that there was no permanent impairment of the
Company's long-lived assets. During 2000, the Company reduced the carrying value
of an investment in a joint venture by approximately $110,000 in connection with
such review. The adjustment is reflected in the equity in income of
unconsolidated joint ventures line in the accompanying consolidated financial
statements.
RESULTS OF OPERATIONS
The following table sets forth the percentages of revenues of the Company
represented by components of net income for 2001, 2000 and 1999.
Percentage of Total Revenue
Year Ended December 31, (unaudited)
----------------------------------------------
2001 2000 1999
-------- -------- --------
Revenue 100.0% 100.0% 100.0%
Operating costs and expenses 75.8 77.1 76.1
------ ----- -------
24.2 22.9 23.9
Depreciation and amortization 6.1 6.0 6.0
Leasehold rents - hotels 8.4 8.6 9.6
Corporate general and administrative 2.5 2.2 2.0
------ ----- -------
Operating income 7.2 6.1 6.3
Interest expense (6.7) (7.4) (7.9)
Interest and other income 1.8 1.5 1.9
Equity in income and losses of affiliates (1.2) (0.1) (0.2)
Gain on sale of assets 1.1 8.8 0.7
Income before minority interests and
income taxes 2.2 8.9 0.8
Minority interests in operations of consolidated
subsidiaries and partnerships (0.4) (0.1) (0.3)
------ ----- -------
Income before income taxes 1.8 8.8 0.5
Income tax expense (0.8) (3.5) (0.2)
Net income 1.0% 5.3% 0.3%
====== ====== =======
2001 compared to 2000
Revenues increased 1.3% to $77.2 million during 2001, from $76.2 million during
2000. The increase in the hotel sales and commissions segment was offset by
decreases in the hotel operations, hotel development, hotel management and
employee leasing segments.
Hotel operations revenue decreased 8.1% to $56.4 million during 2001, from $61.4
million during 2000. Revenues from Consolidated AmeriHost Inn hotels decreased
8.4% to $45.1 million during 2001, from $49.2 million during 2000. This decrease
was attributable primarily to the decrease in same room revenues and the sale of
nine Consolidated AmeriHost Inn hotels in 2001, partially offset by the opening
of three new Consolidated AmeriHost Inn hotels, and the acquisition of one
Consolidated AmeriHost Inn hotel from an unconsolidated minority owned
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joint venture in 2001. Revenues from Consolidated non-AmeriHost Inn hotels
decreased 6.8% during 2001, compared to 2000. This decrease was primarily the
result of the sale of one Consolidated non-AmeriHost Inn hotel at the end of
2000. The hotel operations segment included the operations of 63 Consolidated
hotels (including 55 AmeriHost Inn hotels) comprising 4,560 rooms at December
31, 2001, compared to 66 Consolidated hotels (including 60 AmeriHost Inn hotels)
comprising 4,630 rooms at December 31, 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 activity is summarized as follows:
2001 2000 1999
-------------------------- --------------------------- ------------------------
Unaffiliated & Unaffiliated & Unaffiliated &
Minority- Consolidated Minority- Consolidated Minority- Consolidated
Owned (1) Hotels (2) Owned (1) Hotels (2) Owned (1) Hotels (2)
--------- ---------- --------- ---------- --------- ----------
Under construction at
beginning of year - 2 4 - 1 5
Starts 2 4 - 3 4 -
Completions - 3 4 1 1 5
Under construction at
--- --- ---- ---- --- ---
end of year 2 3 - 2 4 -
=== === ==== ==== === ===
(1) hotels developed/constructed for unaffiliated third parties and
entities in which the Company holds a minority ownership interest
(2) hotels developed/constructed for the Company's own account and for
entities in which the Company holds a majority ownership interest
Hotel development revenue decreased 72.3% to $1.9 million during 2001, from $7.0
million during 2000. The Company was constructing one hotel for a minority-owned
joint venture and one hotel for an unrelated third party during 2001, both of
which were under construction at December 31, 2001. In 2000, four hotels were
under construction during the year, all of which were completed prior to
December 31, 2000. The Company also had several additional projects in various
stages of pre-construction development during these periods.
Hotel management revenue decreased 14.7% to $1.1 million during 2001, from $1.3
million in 2000. The number of hotels managed for third parties and
minority-owned entities decreased from 17 hotels, representing 1,378 rooms, at
December 31, 2000 to 16 hotels, representing 1,318 rooms, at December 31, 2001.
The decrease in revenue is primarily due to a 4.4% reduction in rooms under
contract and the decrease in same room revenues of those hotels.
Employee leasing revenue decreased 21.8% to $4.7 million during 2001, from $6.0
million during 2000, due primarily to the reduction in hotels 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.
Other revenue, consisting primarily of leasing revenue from the Company's office
building in 2001, and franchising revenue in 2000, decreased to $169,612 in
2001, from $586,276 during 2000. On October 1, 2001, the Company purchased the
office building in which its headquarters is located. The building contains
approximately 50,000 rentable square feet, of which the Company occupies
approximately 19,000 square feet. Nearly all of the remaining space is leased to
unrelated third parties pursuant to long-term leases. On September 30, 2000, the
Company sold the AmeriHost Inn franchising rights to Cendant Corporation. As a
result, the Company did not report franchising revenue in 2001.
-23-
Total operating costs and expenses decreased 0.4% to $58.5 million (75.8% of
total revenues) in 2001, from $58.7 million (77.1% of total revenues) during
2000, primarily due to decreases in operating costs and expenses from the hotel
operations and 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 5.7% to $42.1 million during 2001, from $44.7
million in 2000. A decrease in operating costs associated with the fewer number
of hotels included in this segment (62 hotels at December 31, 2001 versus 66
hotels at December 31, 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 74.7% during 2001, from
72.8% during 2000, due primarily to the inflationary increases and higher energy
costs. Operating costs and expenses as a percentage of revenues for the
Consolidated AmeriHost Inn hotels increased to 73.0% in 2001, from 70.7% in
2000.
Operating costs and expenses for the hotel development segment decreased 78.6%
to $1.5 million during 2001, from $6.9 million during 2000, consistent with the
72.3% decrease in hotel development revenues for 2001. Operating costs and
expenses in the hotel development segment as a percentage of segment revenue
decreased to 76.5% during 2001, from 98.8% during 2000, due to the decrease in
hotel development activity for unrelated third parties and unconsolidated joint
ventures. The results for 2000 consisted of a greater amount of construction
activity, which resulted in higher operating costs in relation to the revenue
recognized. The results for 2001 consisted of a greater amount of
pre-construction, hotel development activity, which resulted in lower operating
costs in relation to the revenue recognized.
Hotel management segment operating costs and expenses decreased 11.2% to
$716,802 during 2001, from $806,959 during 2000. This decrease was primarily due
to the decrease in the number of hotels operated and managed for unrelated third
parties and minority-owned entities and consistent with the 14.7% decrease in
hotel management segment revenue. Employee leasing operating costs and expenses
decreased 22.2% to $4.6 million in 2001, from $5.9 million during 2000, which is
consistent with the 21.8% decrease in segment revenue during 2001.
Other operating costs and expenses, consisted primarily of expenses related to
the management of the Company's office building in 2001, and franchising
activity in 2000. Other operating expenses were $2,958 in 2001 and $489,064 in
2000. On October 1, 2001, the Company purchased the office building in which its
headquarters is located and assumed the landlord duties for the other tenants.
On September 30, 2000, the Company sold the AmeriHost Inn brand names and
franchising rights to Cendant Corporation. As a result, the Company did not
report franchising operating costs in 2001.
Depreciation and amortization expense increased 2.9% to $4.7 million during
2001, from $4.5 million during 2000. This increase was primarily attributable to
the opening of three new Consolidated AmeriHost Inn hotels, and the acquisition
of one AmeriHost Inn hotel from a joint venture in 2001 and the resulting
depreciation and amortization therefrom, partially offset by the sale of nine
Consolidated Hotels that closed in 2001.
Leasehold rents - hotels remained relatively unchanged at $6.5 million during
both 2001 and 2000. The decrease primarily attributable to the termination of
four leased hotels as a result of the lessor selling these hotels during 2001,
was offset by the reduction in deferred gain amortization as a result of the
extension of the hotel leases with the REIT. The amortization of deferred gain
from the sale of the hotels to the REIT was $818,000 and $1,487,000 in 2001 and
2000, respectively.
Corporate general and administrative expense increased 12.6% to $1.9 million
during 2001, from $1.7 million during 2000, and can be attributed primarily to
the overall growth of the Company and the recognition of $167,000 in expenses
during the first quarter of 2001 related to the issuance of stock options to a
non-employee for consulting services and transitional accounting fees, offset by
a concerted effort to reduce administrative expenses.
The Company's operating income increased 19.2% to $5.5 million during 2001, from
$4.7 million during 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 45.1% to $3.1
million during 2001, from $5.6 million during 2000. This decrease in operating
income was due to the decrease in the number of
-24-
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
$445,952 during 2001, from $62,872 during 2000. The increase in hotel
development operating income was due to the increase in pre-construction hotel
development activity for unrelated third parties and unconsolidated joint
ventures during 2001, compared to 2000, which has a higher gross profit margin
than the construction activity. The hotel management segment had operating
income of $295,356 during 2001, compared to $399,771 during 2000. This decrease
was due primarily to a reduction in the number of hotel rooms managed for
unrelated third parties and unconsolidated joint ventures. Employee leasing
operating income increased slightly to $110,642 during 2001, compared to
$108,812 during 2000, due primarily to the decrease in employee leasing
agreements with unrelated third parties and unconsolidated joint ventures,
offset by the allocation of certain costs.
During 2001, the Company modified the terms of three hotel loan agreements with
the related lenders to obtain more favorable interest rates. In addition, the
Company assisted three joint ventures in modifying their loan agreements to
obtain lower interest rates. Based upon a discounted cash flow analysis of the
interest rate differentials, the modification transactions did not qualify to be
treated as an extinguishment of debt with the simultaneous acquisition of new
debt. Interest expense decreased 8.1% to $5.2 million during 2001, from $5.6
million during 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 loan agreements, partially offset by the mortgage
financing of newly constructed Consolidated hotels. The Company capitalizes
interest expense incurred during the pre-opening construction period of a
Company Owned hotel project, as part of the total development cost. The amount
capitalized includes both interest charges from a direct construction loan, plus
interest computed at the Company's incremental borrowing rate on the total costs
incurred to date in excess of the construction loan funding. The Company
capitalized $336,748, $100,275 and $121,238 in 2001, 2000, and 1999,
respectively, in construction period interest which is included in property and
equipment.
The Company's share of equity in income (loss) of affiliates was ($925,654)
during 2001, compared to ($101,872) during 2000. The decrease in equity of
affiliates during 2001 was primarily attributable to the sale of two
minority-owned properties in the first half of 2000 at a significant gain, as
well as the recognition of losses in 2001 in excess of the Company's ownership
interest for two joint ventures. Distributions from affiliates were $19,220
during 2001, compared to $473,808 during 2000.
The Company recorded gains from the sale of assets of $886,338 during 2001,
compared to $6.7 million in 2000. During 2001, the gains were comprised
primarily of the unamortized deferred gains remaining from the original sale of
four hotels to the REIT, which were recognized upon the consummation of the
sales of these hotels by the REIT to unrelated third parties in 2001 and the
simultaneous termination of the Company's leases with the REIT. The Company
expects to continue recognizing the unamortized deferred gain from the future
sale of REIT owned hotels. The Company reported a gain on sale from the sale of
the AmeriHost Inn name and franchising rights in 2000 for approximately $5.2
million. In addition, four Consolidated Hotels were sold in 2000, where the
Company recorded gains on the sales.
The Company recorded income tax expenses of $615,000 in 2001, compared to $2.7
million in 2000, which are directly related to the pre-tax income incurred in
2001 and 2000, respectively. The Company reported net income of $755,100 in
2001, compared to $4.0 million in 2000, primarily due to the factors discussed
above.
2000 compared to 1999
Revenues increased 0.1% to $76.2 million during 2000, from $76.1 million during
1999. The increases in the hotel development segment and other revenue
(AmeriHost Inn franchising) were offset by decreases in the hotel operations
segment.
Hotel operations revenue decreased 1.2% to $61.4 million during 2000, from $62.1
million during 1999. Revenues from Consolidated AmeriHost Inn hotels decreased
0.6% to $49.2 million during 2000, from $49.5 million during 1999. This decrease
was attributable primarily to the addition of seven Consolidated AmeriHost Inn
hotels which
-25-
opened during 1999 and 2000, and an increase in same room revenues, offset by
the sale of seven Consolidated AmeriHost Inn hotels in 1999 and 2000. Revenues
from Consolidated non-AmeriHost Inn hotels decreased 3.7% during 2000, compared
to 1999. This decrease was primarily the result of the sale of three
Consolidated non-AmeriHost Inn hotels during 1999 and 2000. The hotel operations
segment included the operations of 66 Consolidated hotels (including 60
AmeriHost Inn hotels) comprising 4,630 rooms at December 31, 2000, compared to
69 Consolidated hotels (including 62 AmeriHost Inn hotels) comprising 4,867
rooms at December 31, 1999. After considering the Company's ownership interest
in the majority-owned Consolidated hotels, this translates to 4,391 and 4,624
equivalent owned rooms as of December 31, 2000 and 1999, respectively, or a
decrease of 5.0%. 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 increased 8.6% to $7.0 million during 2000, from $6.4
million during 1999. The Company was constructing three hotels for
minority-owned entities during 2000, all of which began construction in 1999 and
opened during 2000. The majority of the revenues for these projects was
recognized in 2000, however the Company also sold two AmeriHost Inn hotels in
1999 and recognized related development segment revenues and expenses. The
Company also had several additional projects in various stages of
pre-construction development during these periods.
Hotel management revenue remained consistent at $1.3 million during both 2000
and 1999. The number of hotels managed for third parties and minority-owned
entities decreased from 18 hotels, representing 1,696 rooms, at December 31,
1999 to 17 hotels, representing 1,378 rooms, at December 31, 2000. The
fluctuation in revenue is primarily due to an 18.8% reduction in rooms under
contract offset by increases in same room revenues of those hotels.
Employee leasing revenue remained flat, at $6.0 million during both 2000 and
1999, due primarily to the reduction in hotels managed for minority-owned
entities and unrelated third parties as described above offset by increases in
payroll costs which is the basis for the employee leasing revenue.
Other revenue, consisting primarily of franchising revenue increased to $586,276
during 2000, from $222,187 during 1999. On September 30, 2000, the Company sold
the AmeriHost Inn franchising rights to Cendant Corporation. As a result, the
Company will no longer report franchising revenue.
Total operating costs and expenses increased 1.5% to $58.7 million (77.1% of
total revenues) during 2000, from $57.9 million (76.1% of total revenues) during
1999 primarily due to increases in operating costs and expenses from the
development segment as described below. Operating costs and expenses in the
hotel operations segment remained essentially flat as anticipated inflationary
increases were offset by the reduction in the number of Consolidated hotels.
Hotel operations segment operating costs and expenses as a percentage of segment
revenue remained consistent at 72.8% during 2000, from 72.7% during 1999, due
primarily to inflationary increases and start up costs associated with new
hotels, offset by increased operational efficiencies. Operating costs and
expenses as a percentage of revenues for the Consolidated AmeriHost Inn hotels
changed only slightly during 2000, compared to 1999. Operating costs and
expenses for the hotel development segment increased 27.9% to $6.9 million
during 2000, from $5.4 million during 1999, consistent with the 8.6% increase in
hotel development revenues for 2000. Operating costs and expenses in the hotel
development segment as a percentage of segment revenue increased to 98.8% during
2000, from 83.9% during 1999. The third quarter of 1999 consisted primarily of
the sale of two AmeriHost Inn hotels. The results for 2000 consisted of a
greater amount of construction activity, which resulted in higher operating
costs in relation to the revenue recognized.
Hotel management segment operating costs and expenses decreased 0.3% to $806,959
during 2000, from $809,061 during 1999. This decrease was primarily due to the
decrease in the number of hotels operated and managed for unrelated third
parties and minority-owned entities offset by increases in same room revenue.
Employee leasing operating costs and expenses increased 2.1% to $5.9 million
during 2000, from $5.7 million during 1999, which is the result of increased
payroll costs during 2000 compared to 1999.
-26-
Other operating costs and expenses, consisting primarily of franchising activity
operating costs and expenses decreased 37.8% to $489,064 during 2000, from
$786,658 during 1999. On September 30, 2000, the Company sold the AmeriHost Inn
brand names and franchising rights to Cendant Corporation. As a result, the
Company will no longer report franchising operating costs.
Depreciation and amortization expense decreased 0.5% to $4.5 million during
2000, from $4.6 million during 1999. This decrease was primarily attributable to
the sale of ten Consolidated hotels that closed in 1999 and 2000, partially
offset by the addition of eight Consolidated hotels to the hotel operations
segment opened during 1999 and 2000, and the resulting depreciation and
amortization therefrom.
Leasehold rents - hotels decreased 10.7% to $6.5 million during 2000, compared
to $7.3 million during 1999. The decrease was primarily attributable to the
termination of two leased hotels as a result of the lessor selling these hotels
during 1999 and 2000.
Corporate general and administrative expense increased 10.3% to $1.7 million
during 2000, from $1.5 million during 1999, and can be attributed primarily to
the overall growth of the Company and the allocation of certain general and
administrative expenses.
The Company's operating income decreased 2.6% to $4.7 million during 2000, from
$4.8 million during 1999. The following discussion of operating income by
segment is exclusive of any corporate general and administrative expense.
Operating income from Consolidated AmeriHost Inn hotels increased 10.3% to $5.7
million during 2000, from $5.2 million during 1999. These increases in operating
income were due to the increase in same room revenues as a significant number of
recently opened Consolidated AmeriHost Inn hotels were still operating in 1999
during their pre-stabilization period when revenues are typically lower, offset
by the sale of Consolidated AmeriHost Inn hotels during the past 12 months.
Operating income from the hotel development segment decreased to $62,872 during
2000, from $1.0 million during 1999. The decrease in hotel development operating
income was due to the sale of two AmeriHost Inn hotels open less than 12 months
during the third quarter 1999, offset by the greater number of hotels developed
and constructed for third parties and minority-owned entities during 2000,
compared with 1999. The hotel management segment had operating income of
$399,771 during 2000, from operating income of $448,710 during 1999. This
decrease was due primarily to a reduction in general and administrative costs
for the management segment, offset by fewer hotels managed during the past
twelve months for unrelated third parties and minority-owned properties.
Employee leasing operating income decreased to $108,812 during 2000, from
$242,309 during 1999, due primarily to the decrease in employee leasing
agreements with minority-owned entities and unrelated third parties.
Interest expense decreased 7.1% to $5.6 million during 2000, from $6.0 million
during 1999. 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, partially offset by the mortgage financing of
newly constructed Consolidated hotels.
The Company's share of equity in income (loss) of affiliates was ($101,872)
during 2000, compared to ($160,837) during 1999. The fluctuation in equity of
affiliates during 2000 was primarily attributable to the sale of minority-owned
properties in 1999 and 2000 at various gains. Distributions from affiliates were
$473,808 during 2000, compared to $278,096 during 1999.
The Company recorded gains on the sale of assets of $6.7 million in 2000,
compared to $553,298 in 1999. The increase in gain on sale was due to the sale
of the AmeriHost Inn name and franchising rights in 2000 for approximately $5.2
million. In addition, four consolidated hotels were sold in 2000, compared to
three consolidated hotels in 1999, where the Company recorded gains on the
sales.
The Company recorded income tax expenses of $2.7 million in 2000, compared to
$160,000 in 1999, which are directly related to the pre-tax income incurred in
2000 and 1999, respectively.
-27-
The Company reported net income of $4.0 million in 2000, compared to net income
of $200,591 in 1999, primarily due to the factors discussed above.
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) hotel
development 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 are
typically 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 on
or before the pay date. The Company typically receives an earnest money deposit
from the buyer of a hotel when a sales contract is signed. The remaining
proceeds from the sale of hotel assets are received at the time of closing. The
development incentive fee from Cendant is typically received within 20 days of
the closing. Royalty sharing payments from Cendant are received quarterly, based
on the actual royalty payments received by Cendant from the AmeriHost Inn
franchisees.
During 2001, the Company's cash provided from operations was $15.9 million,
compared to $1.2 million during 2000, or an increase in cash provided by
operations of $14.7 million. The increase in cash flow from operations during
2001, when compared to 2000, can be attributed primarily to the sale of nine
AmeriHost Inn hotels during 2001.
The Company invests cash in three principal areas: (i) the purchase of property
and equipment through the construction, renovation and acquisition 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. From time to time, the Company may
also utilize cash to purchase its own common stock.
Pursuant to an amendment to the master lease agreement with the REIT, the
Company can facilitate the sale of up to eight leased hotels by the REIT. When
the REIT sells a leased hotel to a buyer who becomes an AmeriHost Inn franchisee
of Cendant, the Company receives: (i) a commission for facilitating the
transaction which is based upon the sale price, (ii) an incremental fee from
Cendant, and (iii) long-term royalty sharing fees from Cendant from the future
royalties paid to Cendant. Both the Company and the REIT choose which properties
are sold. For each hotel chosen by the Company, one hotel is also chosen by the
REIT. The Company's choice is final when the sale transaction closes. The REIT
makes its corresponding choice at this time. If the Company and the REIT are not
successful in selling the REIT's choice within a 12-month period, then the
Company is obligated under the agreement to purchase the hotel from the REIT. If
the Company does not complete the purchase of the hotel within the specified
time period, then the Company's rent payment for all REIT hotels shall be
increased by 0.25% each time. The Company cannot close on the sale of its third
and fourth choice until the first and second REIT choices have been sold (or
purchased by the Company), respectively. During 2001, the Company facilitated
the sale of two hotels by the REIT (the Company's first and second choices), and
purchased one hotel from the REIT (the REIT's first choice). The Company must
either facilitate the sale of the REIT's second choice, or purchase the hotel,
by June 2, 2002, in order to avoid the scheduled rent increase of 0.25%. The
Company expects to acquire this hotel prior to June 2, 2002, with approximately
$700,000 in cash, plus mortgage financing already committed from an affiliate of
the REIT.
On September 18, 2000, the Company finalized the terms of an agreement to
purchase the remaining ownership interests in three existing joint ventures at a
specified price. One of these acquisitions was completed in 2001, with the
remaining two to be completed before December 31, 2002. The Company expects to
use approximately $1.6 million for the purchase of these two joint venture
interests.
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During 2001, the Company used $27.5 million in investing activities compared to
receiving $2.7 million during 2000. During 2001, the Company bought out a
partner's interest in one joint venture for $795,384, used $25.4 million to
purchase property and equipment for Consolidated Hotels, and used $1.5 million
for investments in and advances to affiliates, net of distributions and
collections on advances from affiliates. During 2000, the Company received $13.1
million from the sale of hotels, used $10.4 million to purchase property and
equipment for Consolidated Hotels, and used $2,655 for investment in and
advances to affiliates, net of distributions and collections on advances from
affiliates.
Cash provided by financing activities was $14.6 million during 2001 compared to
cash used by financing activities of $6.0 million during 2000. In 2001, the
primary factors were principal repayments of $9.2 million on the mortgage
financing of Consolidated hotels, including the repayment of mortgages in
connection with the sale of hotels, offset by $20.6 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 $6.4 million on the mortgage financing of Consolidated
hotels, including the repayment of mortgages in connection with the sale of
hotels, and $4.2 million in net repayments on the Company's operating
line-of-credit, offset by $4.7 million in proceeds from the issuance of
long-term debt.
The Company modified three 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. Based upon a discounted cash flow analysis of the
interest rate differentials, these modifications did not qualify to be treated
as debt extinguishments. 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.
The Company, through wholly owned subsidiaries, is a general partner or managing
member in 18 joint ventures. As such, the Company is secondarily liable for the
obligations and liabilities of these joint ventures. As of December 31, 2001,
these joint ventures had $29.9 million outstanding under mortgage loan
agreements. Approximately $7.6 million of this amount has been included in the
Company's consolidated financial statements as of December 31, 2001 since it is
from joint ventures in which the Company has a majority or controlling ownership
interest, leaving approximately $22.3 million in off balance sheet mortgage debt
with unconsolidated joint ventures. Of this amount, the Company has also
provided approximately $15.6 million in guarantees to the lenders. Other
partners have also guaranteed portions of this amount. Two unconsolidated joint
venture mortgage loans in the amount of $3.2 million at December 31, 2001 mature
in 2002. The lender for one of these mortgage loans in the amount of $1.6
million has indicated they would extend the loan for up to ten years, and the
extension of the other mortgage loan in the amount of $1.6 million is currently
being negotiated. The Company expects both of these loans to be extended prior
to their maturity. One unconsolidated joint venture mortgage loan in the amount
of $1.8 million at December 31, 2001 matures in 2003. The Company expects this
loan to be extended or refinanced prior to its maturity. The remaining joint
venture mortgage loans mature after 2003.
From time to time, the Company advances funds to joint ventures for working
capital and renovation projects. The Company has also provided the mortgage
financing for one unconsolidated joint venture. The advances, including the
mortgage note, bear interest at rates ranging from prime to 10% per annum and
are due upon demand. The advances were $7.0 and $8.5 million at December 31,
2001 and 2000, respectively, and are included in investments in and advances to
unconsolidated hotel joint ventures in the Company's consolidated financial
statements. The Company expects the joint ventures to repay these advances
through cash flow generated from hotel operations, mortgage financing, and/or
the sale of the hotel.
Certain of the Company's hotel mortgage notes and the Company's office building
mortgage note contain financial covenants, principally minimum net worth
requirements, debt to equity ratios, and minimum debt service coverage ratios.
At December 31, 2001, the Company was not in compliance with the minimum debt
service coverage ratio contained in one mortgage loan agreement, aggregating
approximately $1.6 million. However the Company has obtained a waiver with
respect to this violation. In addition, one joint venture where the Company has
guaranteed the mortgage debt was not in compliance with the minimum debt service
coverage ratio covenant contained in the mortgage loan agreement. This joint
venture has also obtained a waiver from the lender regarding this violation.
-29-
At December 31, 2001, the Company had $6.8 million outstanding under its
operating line-of-credit. The operating line-of-credit (i) had a limit of $7.5
million; (ii) was collateralized by a security interest in certain of the
Company's assets, including its interest in various joint ventures; (iii) bore
interest at an annual rate equal to the lending bank's base rate plus 1/2%; and
(iv) matured February 28, 2002. The line of credit note contained financial
covenants, requiring a minimum net worth, a maximum debt to net worth ratio, and
a minimum debt service coverage ratio. The Company was in compliance with these
covenants as of December 31, 2001. Prior to its expiration in February 2002, the
Company replaced its line-of-credit with another bank. The new operating
line-of-credit has a limit of $8.5 million, is collateralized by substantially
all the assets of the Company, subject to first mortgages from other lenders on
hotel assets, bears interest at a rate based on either the prime rate or LIBOR
as chosen quarterly by the Company, plus a spread adjusted quarterly based on
the Company's leverage ratio, ranging from zero to 0.5% (if Prime based) or 3.0%
(if LIBOR based), and matures February 19, 2003. The new line-of-credit
agreement also provides for the maintenance of certain financial covenants,
including minimum tangible net worth, a maximum leverage ratio, and a minimum
debt service coverage ratio.
The aggregate maturities of long-term debt and future minimum rent payments
under all operating leases are as follows:
Year Ending Long-term Operating
December 31, Debt Leases
------------- ---------------- -----------------
2002 $ 2,110,652 $ 6,383,000
2003 14,808,979 6,409,000
2004 7,562,016 6,359,000
2005 1,851,855 6,517,000
2006 4,947,081 6,642,000
Thereafter 40,918,338 47,187,000
---------------- -----------------
$ 72,198,921 $ 79,497,000
================ =================
The Company expects cash from operations, including proceeds from the sale of
hotels, to be sufficient to pay all operating and interest expenses in 2002, as
well as commitments to purchase hotel assets.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 has been amended by SFAS No. 137,
which delayed the effective date to periods beginning after June 15, 2000, and
by SFAS No. 138,
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which amends the accounting and reporting standards for certain derivative
instruments and certain hedging activities. The Company, to date, has not
engaged in derivative and hedging activities.
Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill
and Other Intangible Assets," issued in 2001, requires, among other things, that
effective January 1, 2002, goodwill resulting from a business combination
accounted for as a purchase no longer be amortized, but be subjected to ongoing
impairment review. The Company does not have any goodwill recorded as of
December 31, 2001.
In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, "Accounting for the Impairments or
Disposal of Long-Lived Assets" ("SFAS 144"). Adoption of SFAS 144 is required
for fiscal years beginning after December 15, 2001, and interim periods within
those years, with early adoption encouraged. SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supercedes SFAS 121 and related literature and establishes a
single accounting model, based on the framework established in SFAS 121, for
long-lived assets to be disposed of by sale. The Company will adopt SFAS 144 in
the first quarter of 2002. The Company is in the process of determining the
impact, if any, of adopting SFAS 144.
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 7A. 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 December 31, 2001. The carrying amounts reflected approximate
the estimated fair values. As the table incorporates only those exposures that
existed as of December 31, 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.
-31-
Average Nominal
Carrying Value Interest Rate
-------------- -------------
Operating line of credit - variable rate $ 6,793,702 5.50%
Mortgage debt - fixed rate $ 30,810,118 7.41%
Mortgage debt - variable rate $ 41,388,803 5.33%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements filed as part of this Form 10-K are
included under "Exhibits, Financial Statements and Reports on Form 8-K" under
Item 14. Selected quarterly financial data is presented in Note 16 to the
consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with KPMG on accounting and financial
disclosure matters which are required to be described by Item 304 of Regulation
S-K.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers and directors are:
Name Age Position
---- --- --------
Michael P. Holtz 45 Chairman of the Board of Directors,
President and Chief Executive Officer
James B. Dale 38 Senior Vice President of Finance,
Secretary, Treasurer and Chief
Financial Officer
Russell J. Cerqua 45 Director
Reno J. Bernardo 70 Director
Salomon J. Dayan 56 Director
Jon K. Haahr 48 Director
Thomas J. Romano 49 Director
Michael P. Holtz has been a Director of the Company since August 1985. From 1985
to 1989, Mr. Holtz served as the Company's Treasurer and Secretary. In 1986, Mr.
Holtz was promoted to Chief Operating Officer of the Company with direct
responsibility for the Company's day-to-day operations. In 1989, Mr. Holtz was
elected President and Chief Executive Officer of the Company. In 1999, in
addition to his other responsibilities, Mr. Holtz was elected Chairman of the
Board of Directors. Mr. Holtz is responsible for development and implementation
of all Company operations including hotel development, finance and management.
Mr. Holtz has over 22 years experience in the operation, development and
management of hotel properties.
James B. Dale was promoted to Chief Financial Officer in 1998, in addition to
his responsibilities as Senior Vice President of Finance. Mr. Dale began his
employment with the Company in May 1994 as the Company's first Corporate
Controller. He has been responsible for overseeing all aspects of the Company's
property and corporate accounting departments, including preparation of all SEC
filings. In 1999, Mr. Dale was elected Secretary by the Board of Directors.
Prior to joining the Company, Mr. Dale was an Audit Manager with an
international public accounting firm, with nearly nine years of experience in
auditing, financial reporting and taxation. Mr. Dale is a Certified Public
Accountant and is a member of the American Institute of Certified Public
Accountants and the Illinois CPA Society.
Russell J. Cerqua served as the Executive Vice President of Finance, Chief
Financial Officer, Treasurer and Secretary of the Company from 1987 through
1998, where his primary responsibilities included internal and external
financial reporting, corporate financing, development of financial management
systems, and financial analysis. Mr. Cerqua is currently the President and Chief
Financial Officer of Datavations LLC, a software development and consulting
company, and was previously Chief Financial Officer of Metro Technologies, LLC.
Prior to joining the Company, Mr. Cerqua was an audit manager with Laventhol &
Horwath, the Company's former independent certified public accountants. Mr.
Cerqua was involved in public accounting for over 9 years, with experience in
auditing, financial reporting and taxation. Mr. Cerqua is a Certified Public
Accountant.
Reno J. Bernardo served as the Senior Vice President of Construction of the
Company from 1987 through March 1994, when he retired. His primary
responsibilities included managing construction of new properties and directing
renovation projects. In 1989, Mr. Bernardo became a Director of the Company and
continues to serve in this capacity. From 1985 to 1986, Mr. Bernardo was Vice
President of Construction with Devcon Corporation, a hotel
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construction company. From 1982 to 1985, Mr. Bernardo was Project Superintendent
with J.R. Trueman and Associates, a hotel construction company, and a subsidiary
of Red Roof Inns, where his responsibilities included supervision of the
development and construction of several Red Roof Inns.
Salomon J. Dayan, M.D., a physician certified in internal and geriatric
medicine, was formerly the Chief Executive Officer of Salomon J. Dayan Ltd., a
multi-specialty medical group he founded which was dedicated to the care of the
elderly in hospital, nursing home and outpatient settings. Dr. Dayan was the
Medical Director and Executive Director of Healthfirst, a corporation which he
started in 1986 which operated multiple medical ambulatory facilities in the
Chicago, Illinois area. Since 1994 he has been an Assistant Professor of
Medicine at Rush Medical Center in Chicago. Dr. Dayan is currently the Chairman
of the Board of Directors of J. D. Financial, a bank holding company owning Pan
American Bank. Additionally, Dr. Dayan also has numerous investments in
residential and commercial real estate.
Mr. Haahr's background includes fifteen years as an investment banker and more
than 20 years of capital markets experience. He is co-founder and Managing
Principal of Silver Portal Capital, an investment/merchant banking and
investment advisory firm. He directs a team that provides services in the areas
of capital formation, strategic advice and portfolio sales to a focused group of
private and public real estate clients owning commercial, healthcare and lodging
assets. Prior to founding Silver Portal, Mr. Haahr was Co-head and Managing
Director of Real Estate Investment Banking for First Union Securities from
1999-2000, where he was instrumental in re-engineering the group's business
strategy. Mr. Haahr also founded and ran the same industry group for EVEREN
Securities from 1991 until joining First Union. He originally joined the
Investment Banking Department of Kemper Securities (EVEREN'S predecessor firm)
in 1987 and, prior to establishing the Real Estate Group, provided banking
expertise to corporate finance clients in the financial services sector and in
the area of closed-end funds. Mr. Haahr is a member of the Board of Directors of
the Center for Urban Land Economics Research at the University of Wisconsin Real
Estate School, and speaks regularly at a variety of real estate industry events.
Thomas J. Romano is currently an Executive Vice President for the Bridgeview
Bank Group. Mr. Romano is a member of the Executive Management Committee and is
responsible for all lending activities for a significant loan portfolio. His
experience includes nineteen years with First of America Bank where his
responsibilities included the management of commercial lending functions and
numerous branch locations. Mr. Romano is currently a member of the Lake County
Muscular Dystrophy Association and a member of Robert Morris Associates. Mr.
Romano is a member of the Board of Directors for both Laserage Technology
Corporation and Bridgeview Bank Oklahoma City, N.A.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the annual and
long-term compensation for services as officers to the Company for the fiscal
years ended December 31, 2001, 2000 and 1999, of those persons who were, at
December 31, 2001: The chief executive officer and the other executive officer
of the Company (the "Named Officers"). See "Compensation of Directors" under
Item 11.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation ------------------------------
----------------------------- Restricted Securities
Name and Principal Stock Underlying All Other
Position Year Salary Bonus Awards Options(#)(1) Compensation(2)
- ------------------------ ------ -------- ---------- ------ -------------- ---------------
Michael P. Holtz 2001 325,000 - - 100,000 23,422
Chairman of the Board, President 2000 325,000 36,500 - 100,000 17,500
and Chief Executive Officer 1999 325,000 20,000 - - 17,500
James B. Dale 2001 132,115 9,000 - 21,000 2,214
Senior Vice President Finance, 2000 125,000 5,000 - 21,000 1,300
Secretary, Treasurer, and 1999 120,000 5,500 - 20,500 1,251
Chief Financial Officer
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(1) All options were fully vested as of December 31, 2001, except for 50,000
options held by Mr. Holtz and 21,000 options held by Mr. Dale.
(2) Represents life and disability insurance premiums paid by the Company on
behalf of the Named Officers and the Company's 401(k) matching
contributions of $2,625, $2,500 and $2,500 for Mr. Holtz, and $1,764,
$1,300 and $1,251 for Mr. Dale, for 2001, 2000 and 1999, respectively.
STOCK OPTIONS
The following table summarizes the number and terms of stock options granted to
each of the Named Officers during the year ended December 31, 2001.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
---------------------------------------------------------- -----------------------------
% of Total Options
Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- -------------------- ------------- --------------- ------------ ------------ ---------- -----------
Michael P. Holtz 100,000 54.4% $2.938 Jan. 2011 30,428 201,064
James B. Dale 21,000 11.4% $3.74 May 2011 - 33,143
The following table provides information concerning the exercise of stock
options during 2001, and the year-end value of unexercised options for each of
the Named Officers and Directors of the Company.
OPTION EXERCISES AND YEAR-END VALUE TABLE
Number of Unexercised Value of Unexercised
Options Held at in-the-Money Options at
Shares December 31, 2001 December 31, 2001 (1)
Acquired Value --------------------------- --------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- -------------------- ----------- -------- ----------- ------------- ----------- -------------
Michael P. Holtz - - 876,100 50,000 $ 27,938 $ -
James B. Dale - - 59,500 21,000 - -
Russell J. Cerqua - - 203,458 3,500 8,730 -
Reno J. Bernardo - - 7,500 3,500 - -
Salomon J. Dayan - - 70,000 3,500 - -
Jon K. Haahr - - 4,500 3,500 - -
Thomas J. Romano - - 3,500 3,500 - -
(1) The closing sale price of the Company's Common Stock on such date on
the Nasdaq National Market was $2.09.
EMPLOYMENT AGREEMENT
The Company's President and Chief Executive Officer, Michael P. Holtz, provides
services to the Company under the terms of an employment agreement dated January
1, 1995, amended February 4, 1997, amended November 23, 1999 and amended August
3, 2000. Pursuant to Amendment No. 3 dated November 23, 1999, the agreement
renewed for an additional three-year period ending December 31, 2003. Pursuant
to Amendment No. 3, Mr. Holtz receives 100,000 options each year, with 50,000
vesting 90 days from the date of issuance and 50,000 vesting only if the Company
attains certain financial performance criteria. Amendment No. 3 also provides
for a cash bonus based upon financial performance and hotel operation
performance. In 2001, the Company did not meet the financial performance
criteria, therefore 50,000 of the options issued to Mr. Holtz in 2001 did not
vest, and Mr. Holtz did not receive a cash bonus. Under the terms of the amended
employment agreement, stock awards were eliminated as a component of annual
compensation.
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The employment agreement entitles the executive officer to receive severance
payments, equal to two years' compensation, if his employment is terminated by
the Company without cause or if he elects to terminate such employment for a
"good reason," including a change of control of the Company. Pursuant to
Amendment No. 4 dated August 3, 2000, for purposes of the employment agreement,
a change in control shall be defined as any simultaneous change in the Company's
Board of Directors such that a majority of the Board is composed of members who
were not members of the Board on the date of this Amendment No. 4. In addition,
a change of control means removal of the executive from membership on the Board
of Directors by a vote of a majority of the shareholders of the Company or
failure of the Board of Directors to nominate the executive for re-election to
Board membership. The executive officer is also entitled to severance payments,
equal to one year's compensation, if he voluntarily terminates his employment
with the Company for a reason other than a "good reason" and provides
appropriate notice of such resignation.
COMPENSATION OF DIRECTORS
Each nonemployee Director of the Company received an annual retainer fee of
$9,000 ($750 per month) in 2001. Each nonemployee Director of the Company also
received $250 for each Board of Directors meeting attended in person, $150 for
each Board of Directors meeting conducted by telephone and $150 for each
committee meeting. Each Director is reimbursed for all out-of-pocket expenses
related to attendance at Board meetings. Non-employee Directors may elect to
receive their retainer fee in restricted common stock of the Company.
Each nonemployee Director of the Company receives an option to purchase 1,000
shares of Common Stock annually, pursuant to the 1996 Stock Option Plan for
Nonemployee Directors. In addition, beginning in 2000, each nonemployee Director
receives 2,500 options annually which vest only if the Company meets certain
performance criteria, including earnings per share, EBITDA or net operating
income, as defined. The performance options issued in 2001 were terminated in
2002, since the Company did not meet the financial performance criteria in 2001.
All Director stock options are priced at the market price on the date of
issuance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 25, 2002, by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's Directors, (iii) each of the Named
Officers and (iv) all Directors and executive officers as a group.
Shares Beneficially Owned
As of March 25, 2002
-------------------------
Name Number Percent
- ------------------------------------------- -------------------- -----------
Michael P. Holtz 1,144597 (1) 19.5%
Wellington Management Company 615,000 (2) 12.4
Kenneth M. Fell 451,420 (3) 9.1
Massachusetts Financial Services Company 400,000 (4) 8.1
H. Andrew Torchia 411,132 (5) 8.1
Dimensional Fund Advisors, Inc. 397,100 (6) 8.0
Raymond and Liliane R. Dayan 388,988 (7) 7.9
Salomon J. Dayan 381,862 (1) 7.5
Richard A. D'Onofrio 342,319 (5) 6.7
Russell J. Cerqua 261,913 (1) 5.1
James B. Dale 67,775 (1) 1.4
Reno J. Bernardo 40,112 (1) 0.8
Thomas J. Romano 13,500 (1) 0.3
Jon K. Haahr 12,129 (1) 0.2
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (7 PERSONS) 1,921,888 30.4%
========= ====
-36-
(1) Includes shares subject to options exercisable presently or within 60
days as follows: Mr. Holtz, 926,100 shares, Dr. Dayan, 154,050 shares,
Mr. Cerqua, 203,458 shares, Mr. Dale, 66,500 shares, Mr. Bernardo,
7,500 shares, Mr. Romano, 3,500 shares, and Haahr, 4,500 shares.
(2) Based upon information provided in its Schedule 13G dated December 31,
2001, Wellington Management Company ("WMC"), in its capacity as
investment advisor, may be deemed beneficial owner of 615,000 shares of
the Company which are owned by numerous investment counseling clients.
Of the shares shown above, WMC has shared voting power for 615,000
shares and shared investment power for 615,000 shares.
(3) Based upon information provided in his Schedule 13D dated November
3, 2000, Mr. Fell owns 451,420 shares of the Company.
Mr. Fell has sole voting and investment power for these shares.
(4) Based upon information provided in its Schedule 13G dated December 31,
2001, Massachusetts Financial Services Company ("MFS"), in its capacity
as investment manager, may be deemed beneficial owner of 400,000 shares
of the Company which are also beneficially owned by MFS Series Trust II
- MFS Emerging Growth Stock Fund, shares of which are owned by numerous
investors. MFS has sole voting and investment power for the 400,000
shares.
(5) Based upon information provided in a 13D joint filing dated October
15, 1999. Includes 65,543 and 4,400 shares owned directly by Messrs.
Torchia and D'Onofrio, respectively, and 150,000 options each owned by
Messrs. Torchia and D'Onofrio which are currently exercisable. In
addition, it includes 383,508 shares owned by Urban 2000 Corp. Mr.
Torchia is the 51% stockholder of Urban 2000 Corp. and disclaims
beneficial ownership of all but an aggregate of 195,589 shares owned
directly, or indirectly, by Urban 2000 Corp. Mr. D'Onofrio is the 49%
stockholder of Urban 2000 Corp. and disclaims beneficial ownership of
all but an aggregate of 187,919 shares owned directly, or indirectly
by Urban 2000 Corp.
(6) Based upon information provided in its Schedule 13G dated January 30,
2001, Dimensional Fund Advisors, Inc. ("DFA"), in its capacity as
investment advisor, may be deemed beneficial owner of 397,100 shares of
the Company which are owned by numerous investment counseling clients.
Of the shares shown above, DFA has sole voting and investment power for
397,100 shares.
(7) Based upon information provided in their Schedule 13D dated October
23, 2000, Mr. and Mrs. Dayan beneficially own 388,988 shares of the
Company. Of the shares shown above, Mr. and Mrs. Dayan have sole
voting and investment power for 388,988 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In the past, certain of the Company's directors and executive officers have,
directly or indirectly, invested in joint ventures with the Company. For
example, Dr. Dayan, a director of the Company, has invested approximately $1.6
million in seven joint ventures since 1988. In two joint ventures, the partners,
including Dr. Dayan, have been guaranteed minimum annual distributions by the
Company equal to 10% of their original capital contribution, and also have the
right to convert their existing partnership interests into shares of the
Company's common stock, under certain conditions. Dr. Dayan and each of the
Company's directors and executive officers who have made such investments have
done so on the same terms as all other investors in such joint ventures.
Dr. Dayan is also the owner and Chairman of the Board of Directors of the
company that owns Pan American Bank. Pan American Bank has provided mortgage
financing to the Company in the amount of $756,000 at December 31, 2001, and
mortgage financing to a joint venture in which the Company is a partner, in the
amount of $948,000 at December 31, 2001.
Mr. Romano is an executive officer of Bridgeview Bank & Trust, which was the
bank that maintained the Company's operating line-of-credit until February 19,
2002, at which time the Company transferred the line-of-credit to another
lender. The Company currently maintains several demand deposit accounts at
Bridgeview Bank & Trust, however expects to transfer these accounts to the bank
which is now providing the Company's line-of-credit.
-37-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
Financial Statements:
---------------------
The following consolidated financial statements are filed as part of this Report
on Form 10-K for the fiscal year ended December 31, 2001.
(a)(1) Financial Statements:
Independent Auditors' Report............................. F-1
Consolidated Balance Sheets at December 31, 2001
and 2000................................................ F-3
Consolidated Statements of Operations for the years
ended December 31, 2001, 2000 and1999................... F-5
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2001, 2000 and 1999... F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 2001, 2000, and 1999................. F-7
Notes to Consolidated Financial Statements............... F-9
(a)(2) Financial Statement Schedules:
No financial statement schedules are submitted as part of this report because
they are not applicable or are not required under regulation S-X or because the
required information is included in the financial statements or notes thereto.
(a)(3) Exhibits:
The following exhibits were included in the Registrant's Report on Form 10-K
filed on March 26, 1993, and are incorporated by reference herein:
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Certificate of Incorporation of
Arlington Hospitality, Inc. (formerly Amerihost
Properties, Inc.)
3.2 By-laws of Arlington Hospitality, Inc. (formerly
Amerihost Properties, Inc.)
4.2 Specimen Common Stock Purchase Warrant for Employees
-38-
The following exhibits were included in the Registrant's Amendment No. 1 to Form
S-2 filed on July 3, 1996, and are incorporated by reference herein:
Exhibit No. Description
----------- -----------
10.4 Employment Agreement between Arlington Hospitality,
Inc. (formerly Amerihost Properties, Inc.) and
Michael P. Holtz
The following exhibits were included in the Registrant's Proxy Statement for
Annual Meeting of Shareholders filed on July 25, 1996, and are incorporated by
reference herein:
Exhibit No. Description
----------- -----------
10.2 1996 Omnibus Incentive Stock Plan (Annex A)
10.3 1996 Stock Option Plan for Nonemployee Directors
(Annex B)
The following exhibits were included in the Registrant's Report on Form 10-K
filed March 24, 1997; and are incorporated herein by reference:
Exhibit No. Description
----------- -----------
10.9 Amendment of Employment Agreement between Arlington
Hospitality, Inc. (formerly Amerihost Properties,
Inc.) and Michael P. Holtz
The following exhibit was included in the Registrant's Report on Form 10-K filed
March 30, 1999:
Exhibit No. Description
- ----------- -----------
10.5 Agreement of Purchase and Sale between PMC Commercial
Trust and Arlington Hospitality, Inc. (formerly
Amerihost Properties, Inc.), including exhibits
thereto
The following exhibit was included in the Registrant's Report on Form 10-K filed
March 23, 2000:
Exhibit No. Description
- ----------- -----------
10.6.1 Amendment No. 3 of Employment Agreement between
Arlington Hospitality, Inc. (formerly Amerihost
Properties, Inc.) and Michael P. Holtz
The following exhibits were included in the Registrant's Report on Form 10-Q
filed November 7, 2000:
Exhibit No. Description
- ----------- -----------
10.10 Asset Purchase Agreement
10.11 Royalty Sharing Agreement
10.12 Development Agreement
-39-
The following exhibit was included in this Report on Form 10-K filed March 19,
2001:
Exhibit No. Description
- ----------- -----------
10.12.1 Amendment No. 4 of Employment Agreement between
Arlington Hospitality, Inc. (formerly Amerihost
Properties, Inc.) and Michael P. Holtz
The following exhibits are included in this Report on Form 10-K filed March 28,
2002:
Exhibit No. Description
- ----------- -----------
3.1(a) Sixth Certificate of Amendment of the Restated
Certificate of Incorporation of Amerihost Properties,
Inc.
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
23.2 Consent of BDO LLP
Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended December 31,
2001.
-40-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Michael P. Holtz
------------------------
Michael P. Holtz
Chief Executive Officer
By: /s/ James B. Dale
------------------------
James B. Dale
Chief Financial Officer
March 25, 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Michael P. Holtz /s/ Reno J. Bernardo
- -------------------------------------- --------------------------------
Michael P. Holtz, Director Reno J. Bernardo, Director
March 25, 2002 March 25, 2002
/s/ Russell J. Cerqua /s/ Jon K. Haahr
- -------------------------------------- --------------------------------
Russell J. Cerqua, Director Jon K. Haahr, Director
March 25, 2002 March 25, 2002
/s/ Salomon J. Dayan /s/ Thomas Romano
- -------------------------------------- --------------------------------
Salomon J. Dayan, Director Thomas Romano, Director
March 25, 2002 March 25, 2002
-41-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Arlington Hospitality, Inc.
We have audited the accompanying consolidated balance sheets of Arlington
Hospitality, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Arlington
Hospitality, Inc. and subsidiaries at December 31, 2001 and 2000, and the
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
KPMG LLP
Chicago, Illinois
March 5, 2002
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors of
Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.)
We have audited the accompanying consolidated statements of operations,
shareholders' equity, and cash flows of Arlington Hospitality, Inc. (formerly
Amerihost Properties, Inc.) and subsidiaries for the year ended December 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated changes in shareholders'
equity, results of operations, and cash flows of Arlington Hospitality, Inc.
(formerly Amerihost Properties, Inc.) and subsidiaries for the year ended
December 331, 1999 in conformity with generally accepted accounting principles.
BDO Seidman, LLP
Chicago, Illinois
March 8, 2000
F-2
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
===================================================================================================================
December 31, December 31,
2001 2000
--------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,748,156 $ 1,728,869
Accounts receivable, less an allowance of $150,000 and $100,000
at December 31, 2001 and 2000, respectively (including
approximately $126,000 and $361,000 from related parties) 2,343,423 2,663,825
Notes receivable, current portion (Note 2) 518,499 618,485
Prepaid expenses and other current assets 998,559 1,013,053
Costs and estimated earnings in excess of billings on
uncompleted contracts with related parties (Note 3) 1,079,137 375,780
--------------- --------------
Total current assets 9,687,774 6,400,012
--------------- --------------
Investments in and advances to unconsolidated
hotel joint ventures (Notes 4 and 6) 5,404,744 7,031,982
--------------- ---------------
Property and equipment (Notes 6, 7 and 13):
Land 12,454,360 11,226,664
Buildings 68,095,453 60,122,758
Furniture, fixtures and equipment 24,189,969 21,393,936
Construction in progress 5,973,890 850,238
Leasehold improvements 2,899,179 2,875,379
Assets held for sale 2,187,822 -
--------------- --------------
115,800,673 96,468,975
Less accumulated depreciation and amortization 22,905,635 18,666,279
--------------- --------------
92,895,038 77,802,696
--------------- --------------
Notes receivable, less current portion (Note 2) 1,000,000 801,346
Deferred income taxes (Note 9) 3,247,000 3,402,000
Other assets, net of accumulated amortization of
$1,035,000 and $885,000 (Note 5) 2,939,900 2,704,679
--------------- --------------
7,186,900 6,908,025
$ 115,174,456 $ 98,142,715
=============== ==============
F-3
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
==================================================================================================================
December 31, December 31,
2001 2000
--------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,467,704 $ 2,313,640
Bank line-of-credit (Note 6) 6,793,702 3,408,133
Accrued payroll and related expenses 784,533 775,714
Accrued real estate and other taxes 1,952,875 1,937,415
Other accrued expenses and current liabilities 452,086 306,146
Current portion of long-term debt (Note 7) 2,110,652 1,698,538
Income taxes payable 286,670 132,420
--------------- ---------------
Total current liabilities 14,848,222 10,572,006
--------------- --------------
Long-term debt, net of current portion (Note 7) 70,088,269 56,905,152
--------------- --------------
Deferred income (Note 13) 10,714,735 12,196,330
--------------- --------------
Commitments and contingencies (Notes 4, 8, 12 and 13)
Minority interests 456,631 203,449
--------------- --------------
Shareholders' equity (Notes 8 and 12):
Preferred stock, no par value; authorized 100,000 shares;
none issued - -
Common stock, $.005 par value; authorized 25,000,000 shares;
issued and outstanding 4,958,081 shares at December 31,
2001, and 4,979,244 shares at December 31, 2000 24,790 24,896
Additional paid-in capital 13,171,151 13,125,324
Retained earnings 6,307,533 5,552,433
--------------- --------------
19,503,474 18,702,653
Less:
Stock subscriptions receivable (Note 8) (436,875) (436,875)
19,066,599 18,265,778
--------------- --------------
$ 115,174,456 $ 98,142,715
=============== ==============
See notes to consolidated financial statements.
F-4
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
======================================================================================================================
2001 2000 1999
----------------- --------------- -----------------
Revenue (Note 10):
Hotel operations:
AmeriHost Inn hotels $ 45,081,431 $ 49,228,661 $ 49,508,745
Other hotels 11,301,017 12,123,035 12,587,253
Development and construction 1,933,882 6,982,678 6,431,995
Hotel sales and commissions 12,922,459 - -
Management services 1,066,645 1,251,107 1,315,212
Employee leasing 4,678,189 5,979,363 5,992,580
Other 169,612 586,276 222,187
-------------- ------------- -------------
77,153,235 76,151,120 76,057,972
-------------- ------------- -------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 32,919,678 34,811,649 34,866,053
Other hotels 9,194,835 9,858,175 10,260,074
Development and construction 1,479,947 6,901,617 5,398,384
Hotel sales and commissions 9,621,536 - -
Management services 716,802 806,959 809,061
Employee leasing 4,564,508 5,868,189 5,747,351
Other 2,958 489,064 786,658
-------------- ------------- -------------
58,500,264 58,735,653 57,867,581
-------------- ------------- -------------
18,652,971 17,415,467 18,190,391
Depreciation and amortization 4,676,069 4,542,461 4,567,030
Leasehold rents - hotels (Note 13) 6,510,436 6,524,930 7,306,691
Corporate general and administrative 1,907,742 1,694,611 1,537,052
-------------- ------------- -------------
Operating income 5,558,724 4,653,465 4,779,618
Other income (expense):
Interest expense (5,153,590) (5,605,550) (6,031,759)
Interest income 821,839 786,806 877,194
Other income 525,880 381,868 555,749
Equity in net income and (losses) from
unconsolidated joint ventures (925,654) (101,872) (160,837)
Gain on sale of property 886,338 6,663,124 553,298
-------------- ------------- -------------
Income before minority interests and income taxes 1,713,537 6,777,841 573,263
Minority interests in operations of
consolidated subsidiaries and partnerships (343,437) (60,939) (212,672)
-------------- ------------- -------------
Income before income taxes 1,370,100 6,716,902 360,591
Income tax expense (Note 9) (615,000) (2,707,000) (160,000)
-------------- ------------- -------------
Net income $ 755,100 $ 4,009,902 $ 200,591
============== ============= =============
Net income per share - Basic $ 0.15 $ 0.81 $ 0.04
Net income per share - Diluted $ 0.13 $ 0.74 $ 0.02
See notes to consolidated financial statements.
F-5
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
===================================================================================================================================
Stock
Common stock subscrip-
----------------------- Additional tions Total
paid-in Retained and notes shareholders'
Shares Amount capital earnings receivable equity
--------- ---------- ------------ ------------ ------------ -------------
BALANCE AT JANUARY 1, 1999 6,089,550 $ 30,488 $ 17,380,295 $ 1,341,940 $ (436,875) $ 18,315,808
Acquisition of common stock (Note 8) (1,121,002) (5,606) (4,330,558) -- -- (4,336,164)
Shares issued for compensation 125 1 332 -- -- 333
Net income for the year ended
December 31, 1999 -- -- -- 200,591 -- 200,591
--------- ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1999 4,968,673 $ 24,843 $ 13,050,069 $ 1,542,531 $ (436,875) $ 14,180,568
Shares issued for compensation 10,571 53 75,255 -- -- 75,308
Net income for the year ended
December 31, 2000 -- -- -- 4,009,902
4,009,902
--------- ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2000 4,979,244 $ 24,896 $ 13,125,324 $ 5,552,433 $ (436,875) $ 18,265,778
Acquisition of common stock (Note 8) (26,100) (131) (84,984) -- -- (85,115)
Shares and options issued for
compensation and investment 4,937 25 130,811 -- -- 130,836
Net income for the year ended
December 31, 2001 -- -- -- 755,100 -- 755,100
--------- ------------ ------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2001 4,958,081 $ 24,790 $ 13,171,151 $ 6,307,533 $ (436,875) $ 19,066,599
========= ============ ============ ============ ============ ============
See notes to consolidated financial statements.
F-6
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
=======================================================================================================================
2001 2000 1999
---------------- ---------------- ----------------
Cash flows from operating activities:
Cash received from customers $ 78,329,783 $ 77,110,459 $ 80,716,593
Cash paid to suppliers and employees (57,792,786) (69,503,958) (76,876,079)
Interest received 870,945 883,422 729,089
Interest paid (5,194,741) (5,679,212) (6,076,002)
Income taxes (paid) refunds received (305,750) (1,592,704) 621,319
--------------- --------------- ---------------
Net cash provided by (used in) operating activities 15,907,451 1,218,007 (885,080)
--------------- --------------- ---------------
Cash flows from investing activities:
Distributions, and collections on advances,
from affiliates 1,183,012 2,712,840 967,465
Purchase of property and equipment (25,399,733) (10,433,566) (2,102,832)
Purchase of investments in, and advances
to, minority owned affiliates (2,687,328) (2,715,495) (3,124,618)
Acquisitions of partnership interests,
net of cash acquired (804,613) - (260,648)
Collection on notes receivable 201,332 91,315 138,876
Proceeds from sale of assets and franchising rights 2,500 13,072,813 16,726,198
--------------- --------------- ---------------
Net cash (used in) provided by investing activities (27,504,830) 2,727,907 12,344,441
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 20,612,595 4,696,807 7,203,482
Principal payments on long-term debt (9,206,128) (6,442,369) (20,328,540)
Net (repayments) borrowings of line of credit 3,385,569 (4,152,081) 5,599,002
Distributions to minority interests (90,255) (85,725) (324,985)
Common stock repurchases (85,115) - (4,336,164)
Other - - 333
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 14,616,666 (5,983,368) (12,186,872)
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents 3,019,287 (2,037,454) (727,511)
Cash and cash equivalents, beginning of year 1,728,869 3,766,323 4,493,834
--------------- --------------- ---------------
Cash and cash equivalents, end of year $ 4,748,156 $ 1,728,869 $ 3,766,323
=============== =============== ===============
F-7
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
==================================================================================================================
2001 2000 1999
------------- ------------- --------------
Reconciliation of net income to net cash
provided by (used in) operating activities:
Net income $ 755,100 $ 4,009,902 $ 200,591
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,676,069 4,542,461 4,567,030
Equity in net (income) loss and interest income from
unconsolidated joint ventures and amortization
of deferred income 1,174,630 101,872 160,837
Minority interests in operations of consolidated
subsidiaries and partnerships 343,437 60,939 212,672
Amortization of deferred interest and loan discount - - 34,045
Bad debt expense (recoveries) 50,000 192,351 (150,000)
Issuance of common stock and common stock options 130,836 75,308 -
Gains on sale of assets and franchising rights (886,338) (6,663,124) (528,297)
Deferred income taxes 155,000 925,000 (423,000)
Amortization of deferred gain (966,232) (1,487,118) (1,462,096)
Proceeds from sale of hotels 11,511,336 - -
Income from sale of hotels (2,189,256) - -
Changes in assets and liabilities, net of effects
of acquisitions:
Decrease in accounts receivable 255,675 95,439 156,910
Decrease (increase) in prepaid expenses and
other current assets 99,344 (41,217) (211,565)
Decrease in refundable income taxes 154,250 189,296 1,204,318
(Increase) decrease in costs and estimated
earnings in excess of billings (703,357) 459,040 (184,962)
Increase in other assets (413,336) (72,303) (358,890)
Increase in assets held for sale - - (959,002)
Increase (decrease) in accounts payable 23,530 (309,750) (3,035,113)
Increase (decrease) in accrued payroll and other
accrued expenses and current liabilities 165,246 (905,846) (37,645)
Decrease in accrued interest (41,151) (73,852) (78,288)
Increase in deferred income 1,612,668 119,609 7,375
------------- ------------- --------------
Net cash provided by (used in) operating activities $ 15,907,451 $ 1,218,007 $ (885,080)
============= ============= ==============
See notes to consolidated financial statements.
F-8
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Business:
--------------------------
Arlington Hospitality, Inc. and its subsidiaries (collectively, where
appropriate, "Arlington," or the "Company") was incorporated under the laws
of Delaware on September 19, 1984. The Company is engaged in the
development, construction and sale of AmeriHost Inn hotels, and the
ownership, operation and management of both AmeriHost Inn hotels and other
hotels (Note 15). The AmeriHost Inn brand is used by the Company to provide
for the consistent, cost-effective development and operation of mid-price
hotels in various markets. All AmeriHost Inn hotels are designed and
developed using a 60 to 120 room, interior corridor and indoor pool
prototype design and are located in tertiary and secondary markets.
The Company's operations are 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.
Principles of consolidation:
----------------------------
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries, and entities in which the Company has a
majority or controlling ownership interest. All significant intercompany
accounts and transactions have been eliminated.
Construction accounting:
------------------------
Development fee revenue from construction/renovation projects with
unaffiliated third parties or entities in which the Company has a minority
ownership interest is recognized using the percentage-of-completion method.
Construction fee revenue from construction/renovation projects with
unaffiliated third parties or entities in which the Company has a minority
ownership interest is recognized on the percentage-of-completion method,
generally based on the ratio of costs incurred to estimated total contract
costs. Revenue from contract change orders is recognized to the extent costs
incurred are recoverable. Profit recognition begins when construction
reaches a progress level sufficient to estimate the probable outcome.
Provision is made for anticipated future losses in full at the time they are
identified.
Cash equivalents:
-----------------
The Company considers all investments with an initial maturity of three
months or less to be cash equivalents.
Concentrations of credit risk:
------------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments, accounts receivable and notes receivable. The Company invests
temporary cash balances in financial instruments of highly rated financial
institutions generally with maturities of less than three months.
F-9
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Fair values of financial instruments:
-------------------------------------
The carrying values reflected in the consolidated balance sheet at December
31, 2001 and 2000 reasonably approximate the fair values for cash and cash
equivalents, accounts and contracts receivable and payable, and variable
rate long-term debt. The carrying value of the note receivable approximates
its fair value based upon the estimated fair value of the underlying
collateral (Note 2). The Company estimates that the fair value of its fixed
rate long-term debt at December 31, 2001 approximates the carrying value
considering the property specific nature of the notes. In making such
assessments, the Company considered the current rate at which the Company
could borrow funds with similar remaining maturities and discounted cash
flow analyses as appropriate.
Investments:
------------
Investments in entities in which the Company has a non-majority,
non-controlling ownership interest are accounted for using the equity
method, under which method the original investment is increased (decreased)
for the Company's share of the joint venture's net income (loss), increased
by contributions made, and reduced by distributions received.
Property and equipment:
-----------------------
Property and equipment are stated at cost. Repairs and maintenance are
charged to expense as incurred and renewals and betterments are capitalized.
Depreciation is being provided for assets placed in service, principally by
use of the straight-line method over their estimated useful lives. Leasehold
improvements are being amortized by use of the straight-line method over the
term of the lease. Construction period interest in the amount of $336,748,
$100,275 and $121,238 was capitalized in 2001, 2000 and 1999, respectively,
and is included in property and equipment.
For each classification of property and equipment, depreciable periods are
as follows:
Building 31.5-39 years
Furniture, fixtures and equipment 5-7 years
Leasehold improvements 3-28 years
The Company sells hotel assets in the ordinary course of business as part of
its hotel development strategy. However, due to the uncertainties associated
with pending sales, the Company does not specifically identify hotel assets
as held for sale, unless they are actively marketed and expected to sell
within one year. Due to the Company's limited history in selling hotels in
1999 and 2000, the Company has classified the net gain from the sale of
hotels as gain on sale of assets in the accompanying consolidated financial
statements during these years.
Other assets:
-------------
Deferred lease costs:
Deferred lease costs represents the amounts paid for the acquisition of
leasehold interests for certain hotels. These costs are being amortized by
use of the straight-line method over the terms of the leases.
F-10
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Deferred loan costs:
Deferred loan costs represent the costs incurred in issuing mortgage notes.
These costs are being amortized by use of the interest method over the life
of the debt.
Initial franchise fees:
Initial franchise fees paid by the Company to franchisors for certain hotels
are capitalized and amortized by use of the straight-line method over the
terms of the franchise licenses, ranging from 10 to 20 years.
Deferred income:
----------------
Deferred income includes the gain from the sale of 24 hotels in 1998 and
1999 which were simultaneously leased-back (Note 13). This gain is being
recognized on a straight-line basis over the 15-year term of the lease, as
amended, as an adjustment to leasehold rent expense.
Deferred income includes incentive fees received in connection with the sale
of AmeriHost Inn hotels. These fees are recognized on a straight-line basis
over a 76-month period in which the unamortized portion of the fees may be
considered refundable under certain conditions.
Deferred income also includes that portion of development, construction and
renovation fees earned from entities in which the Company holds an ownership
interest. The portion of fees deferred is equal to the Company's
proportional ownership interest in the entity and is being recognized in
income over the life of the operating assets. The balance of the fees are
recorded in income as earned.
Income taxes:
-------------
Deferred income taxes are provided on the differences in the bases of the
Company's assets and liabilities as determined for tax and financial
reporting purposes and relate principally to depreciation of property and
equipment and deferred income.
Earnings per share:
-------------------
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. Diluted EPS gives effect to all dilutive potential common
shares outstanding for the period. The Company excluded stock options which
had an anti-dilution effect on the EPS computations.
F-11
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The calculation of basic and diluted earnings per share for each of the
three years ended December 31 is as follows:
2001 2000 1999
------------- ------------- --------------
Net income $ 755,100 $ 4,009,902 $ 200,591
Impact of convertible partnership interests (78,178) (117,028) (88,117)
------------- ------------- --------------
Net income available to common
shareholders - diluted $ 676,922 $ 3,892,874 $ 112,474
============= ============= ==============
Weighted average common shares
outstanding 4,974,821 4,976,236 5,566,957
Dilutive effect of:
Convertible partnership interests 168,100 249,350 249,350
Stock options 38,650 46,266 40,373
------------- ------------- --------------
Dilutive common shares outstanding 5,181,571 5,271,852 5,856,680
============= ============= ==============
Net income per share - Basic $ 0.15 $ 0.81 $ 0.04
============= ============= ==============
Net income per share - Diluted $ 0.13 $ 0.74 $ 0.02
============= ============= ==============
Advertising:
------------
The costs of advertising, promotion and marketing programs are charged to
operations in the year incurred. These costs were approximately $1,389,000,
$1,418,000 and $1,514,000 for the years ended December 31, 2001, 2000 and
1999.
Use of Estimates:
-----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Asset impairments:
------------------
The Company periodically reviews the carrying value of certain of its
long-lived assets in relation to historical results, current business
conditions and trends to identify potential situations in which the carrying
value of assets may not be recoverable. If such reviews indicate that the
carrying value of such assets may not be recoverable, the Company would
estimate the undiscounted sum of the expected cash flows of such assets to
determine if such sum is less than the carrying value of such assets to
ascertain if an impairment exists. If an impairment exists, the Company
would determine the fair value by using quoted market prices, if available
for such assets, or if quoted market prices are not available, the Company
would discount the expected future cash flows of such assets. During 2000,
the Company reduced the carrying value of an investment in a joint venture
by approximately $110,000 in connection with such review. The adjustment is
reflected in the equity in income of unconsolidated joint ventures line in
the accompanying consolidated financial statements.
F-12
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
2. NOTES RECEIVABLE:
Notes receivable consists of: 2001 2000
----------- -----------
Diversified Innkeepers, Inc. $ 1,093,499 $ 1,069,831
Other notes 425,000 350,000
----------- -----------
1,518,499 1,419,831
Less current portion 518,499 618,485
----------- -----------
Notes receivable, less current portion $ 1,000,000 $ 801,346
=========== ===========
In connection with the purchase of management contracts from Diversified
Innkeepers, Inc. ("Diversified") in a prior year, the Company accepted notes
to provide financing to the shareholders of Diversified, collateralized by
125,000 shares of the Company's common stock, a limited partnership interest
in a hotel, a second mortgage on another hotel property, and personal
guarantees by the shareholders. The notes provide for monthly payments of
$16,250, including interest at the rate of 10% per annum, and were due
September 30, 2000. The Company currently has an agreement with the
shareholders of Diversified whereby the current portion of this note will be
repaid in 2002 upon the sale of a hotel owned by the shareholders of
Diversified, with the remaining balance to be converted to an investment in
another hotel owned by the shareholders of Diversified. The Company will
have a preferred position with respect to the new partnership interest.
Management believes that the entire balance is collectible.
3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS:
Information regarding contracts-in-progress is as follows at December 31,
2001 and 2000:
2001 2000
----------- ---------
Costs incurred on uncompleted contracts $ 512,270 $ 206,108
Estimated earnings 852,872 169,672
----------- ---------
1,365,142 375,780
Less billings to date 286,005 -
----------- ---------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,079,137 $ 375,780
=========== =========
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES:
The Company has non-controlling ownership interests, ranging from 1% to
37.2%, in general partnerships, limited partnerships and limited liability
companies formed for the purpose of owning and operating hotels. These
investments are accounted for using the equity method. The Company had
investments in 15 hotels at December 31, 2001, with a total balance of
($1,621,631), and 17 hotels at December 31, 2000 with a total balance of
($1,462,234). The Company is secondarily liable for the obligations and
liabilities of the limited partnerships in which it holds a general
partnership interest.
F-13
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES
(CONTINUED):
The Company advances funds to hotels in which the Company has a minority
ownership interest for working capital and construction purposes. The
advances bear interest ranging from the prime rate to 10% per annum and are
due on demand. The Company expects the partnerships to repay these advances
through cash flow generated from hotel operations and mortgage financing.
The advances were $7,026,375 and $8,494,216 at December 31, 2001 and 2000,
respectively, and are included in investments in and advances to
unconsolidated hotel joint ventures on the accompanying consolidated balance
sheets.
Effective January 1, 2001, the Company acquired the remaining ownership
interest in one hotel joint venture, resulting in this hotel being 100%
owned by the Company subsequent to the acquisition date. In addition, the
Company began consolidating a minority-owned joint venture as of September
1, 2001, when the Company guaranteed certain underlying debt and assumed
control of the joint venture, in connection with a mortgage refinancing. The
following is a summary of the acquisition and consolidation:
Property and equipment $ 3,038,557
Other assets 131,478
Long-term debt (2,188,764)
Other liabilities (176,658)
-------------
Cash paid $ 804,613
=============
The following represents condensed financial information for all of the
Company's investments in affiliated companies accounted for under the equity
method at December 31, 2001, 2000 and 1999.
2001 2000 1999
------------- ------------- -------------
Current assets $ 581,390 $ 787,037 $ 1,211,864
Noncurrent assets 29,215,768 32,703,002 35,420,633
Current liabilities 6,049,363 4,550,271 5,240,776
Long-term debt 26,095,565 31,282,189 31,494,212
Equity (deficit) (2,347,770) (2,342,421) (102,491)
Gross revenue 12,173,902 14,253,813 15,210,884
Gross operating profit 3,716,282 3,944,469 4,853,626
Depreciation and amortization 1,824,408 2,201,762 2,422,002
Net loss (1,680,699) (100,027) (1,586,557)
The Company has provided approximately $15.6 million in guarantees as of
December 31, 2001 on mortgage loan obligations for eleven joint ventures in
which the Company holds a minority equity interest, which expire at various
dates through March 2021. Other partners have also guaranteed portions of
the same obligations. The partners of one of the partnerships have entered
into a cross indemnity agreement whereby each partner has agreed to
indemnify the others for any payments made by any partner in relation to the
guarantee in excess of their ownership interest.
F-14
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
5. OTHER ASSETS:
Other assets, net of accumulated amortization, at December 31, 2001 and 2000
are comprised of the following:
2001 2000
------------- --------------
Deposits, franchise fees and other assets $ 1,693,912 $ 1,406,444
Deferred loan costs 1,067,816 1,072,616
Deferred lease costs 178,172 225,619
------------- --------------
Total $ 2,939,900 $ 2,704,679
============= ==============
6. BANK LINE-OF-CREDIT:
The Company had a $7,500,000 bank operating line-of-credit, of which
$6,793,702 and $3,408,133 was outstanding at December 31, 2001 and 2000,
respectively. The operating line-of-credit was collateralized by a security
interest in certain of the Company's assets, including its interests in
various joint ventures, bore interest at an annual rate equal to the bank's
base lending rate (5.0% at December 31, 2001) plus one-half of one percent,
and matured February 28, 2002. The line-of-credit note contained financial
covenants, requiring a minimum net worth, a maximum debt to net worth ratio,
and a minimum debt service coverage ratio. The Company was in compliance
with these covenants as of December 31, 2001. Prior to its expiration in
February 2002, the Company replaced its line-of-credit with another lender.
The new operating line-of-credit has a limit of $8.5 million, is
collateralized by substantially all the assets of the Company, subject to
first mortgages from other lenders on hotel assets, bears interest at a rate
based on either the prime rate or LIBOR as chosen quarterly by the Company,
plus a spread adjusted quarterly based on the Company's leverage ratio,
ranging from zero to 0.5% (if Prime based) or 3.0% (if LIBOR based), and
matures February 19, 2003. The new line-of-credit agreement also provides
for the maintenance of certain financial covenants, including minimum
tangible net worth, a maximum leverage ratio, and a minimum debt service
coverage ratio.
7. LONG-TERM DEBT:
Long-term debt consists of: 2001 2000
------------- ---------------
Mortgage notes maturing 2002 through 2021, with a
weighted average interest rate of 6.57% $ 72,177,428 $ 58,581,769
Other 21,493 21,921
------------- --------------
72,198,921 58,603,690
Less current portion 2,110,652 1,698,538
------------- --------------
$ 70,088,269 $ 56,905,152
============= ==============
The mortgage notes are collateralized by certain hotel properties and the
Company's office building. The notes provide for monthly payments of
principal and interest, with interest on the fixed rate notes ranging from
7.25% to 9.25% (weighted average interest rate of 7.41% at December 31,
2001), and interest on the floating rate notes ranging from LIBOR plus 2.25%
to prime plus 1.0% (weighted average interest rate of 5.33% at December 31,
2001).
F-15
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
7. LONG-TERM DEBT (CONTINUED):
In February 2001, the Company secured a $20 million new construction loan
facility with a lender who also holds the mortgage on two existing hotels
owned by the Company. This facility provides for both construction financing
as well as long-term permanent mortgage financing as the projects open. The
Company has until March 31, 2002 to utilize this loan facility, subject to
lender's approval of each project. The lender has indicated that this
facility will be extended for a one-year period. As of December 31, 2001
approximately $5.7 million has been utilized, and is included in long-term
debt in the accompanying financial statements.
Certain of the hotel mortgage notes, as well as the office building
mortgage, provide for financial covenants, principally minimum net worth
requirements, debt to equity ratios, and minimum debt service coverage
ratios. At December 31, 2001, the Company was not in compliance with the
minimum debt service coverage ratio contained in one mortgage loan
aggregating approximately $1.6 million, however the Company has obtained a
waiver with respect to the violation. In addition, one joint venture where
the Company has guaranteed the mortgage debt was not in compliance with the
minimum debt service coverage ratio covenant contained in the mortgage loan.
The joint venture has obtained a waiver from the lender regarding this
violation.
The aggregate maturities of long-term debt are approximately as follows:
Year Ending December 31, Amount
------------------------ ---------------
2002 $ 2,110,652
2003 14,808,979
2004 7,562,016
2005 1,851,855
2006 4,947,081
Thereafter 40,918,338
------------
$ 72,198,921
============
8. SHAREHOLDERS' EQUITY:
Authorized shares:
------------------
The Company's corporate charter authorizes 25,000,000 shares of Common Stock
with a par value of $0.005 per share and 100,000 shares of Preferred Stock
without par value. The Preferred Stock may be issued in series and the Board
of Directors shall determine the voting powers, designations, preferences
and relative participating optional or other special rights and the
qualifications, limitations or restrictions thereof.
Non-employee stock options and warrants:
----------------------------------------
The Company has issued options to acquire shares of the Company's common
stock to certain of its partners in various hotel joint ventures referred to
in Note 4. At December 31, 2001, options to purchase 125,000 shares of
common stock are outstanding with an exercise price of $3.794 per share and
are exercisable through October 2005. The Company has accounted for these
options in accordance with FASB Statement No. 123. In connection with this
issuance, the Company cancelled previously issued options to purchase 60,000
shares of common stock.
F-16
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
8. SHAREHOLDERS' EQUITY (CONTINUED):
Limited partnership conversion rights:
--------------------------------------
The Company is a general partner in two partnerships where the limited
partners, including a Director of the Company, have the right at certain
times and under certain conditions to convert their limited partnership
interests into 168,100 shares of the Company's common stock. These
conversion rights will expire in 2002 as the Company acquires these limited
partner interests (Note 13).
Stock subscriptions receivable:
-------------------------------
In connection with the Diversified transaction (Note 2), the Company issued
125,000 stock options which were exercised in January 1993, in consideration
for a secured promissory note in the amount of $436,875 with interest at
6.5% per annum, collateralized by the 125,000 shares of common stock issued
upon the exercise of the options and limited partnership interests. The
total principal balance is due the earlier of the date the stock is sold or
the related management contracts are terminated. This note receivable has
been classified as a reduction of shareholders' equity on the accompanying
consolidated balance sheets.
9. TAXES ON INCOME:
The provision for income taxes in the consolidated statements of operations
is as follows:
2001 2000 1999
-------------- ------------- ---------------
Current $ 460,000 $ 1,782,000 $ 583,000
Deferred 155,000 925,000 (423,000)
Income tax expense $ 615,000 $ 2,707,000 $ 160,000
============== ============= ==============
The following reconciles income tax expense for 2001 at the federal
statutory tax rate with the effective rate:
2001 2000 1999
-------------- ------------- ---------------
Income taxes at the
federal statutory rate 34.0% 34.0% 34.0%
State taxes, net of federal tax benefit 10.9% 6.3% 10.4%
------------- ------------- --------------
Effective tax rate 44.9% 40.3% 44.4%
============= ============= ==============
F-17
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
9. TAXES ON INCOME (CONTINUED):
Temporary differences between the carrying amounts of assets and liabilities
for financial reporting and income tax purposes that give rise to a net
deferred income tax asset relate to the following:
2001 2000
------------- ---------------
Deferred income recognized for tax purposes
and deferred for financial reporting purposes $ 1,402,000 $ 420,000
Gain on sale/leaseback transaction recognized
for tax purposes and deferred for financial
reporting purposes 3,612,000 4,581,000
Start-up costs capitalized for tax purposes and
expensed for financial reporting purposes 104,000 192,000
Differences in the basis of investments, property and equipment
from partner acquisitions and due to majority owned
partnerships consolidated for
financial reporting purposes but not for tax purposes 841,000 (612,000)
------------- --------------
5,959,000 4,581,000
Cumulative depreciation differences (2,712,000) (1,179,000)
------------- --------------
Net deferred income tax asset $ 3,247,000 $ 3,402,000
============= ==============
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.
10. RELATED PARTY TRANSACTIONS:
The following table summarizes related party revenue recorded in 2001, 2000,
and 1999 from various unconsolidated partnerships in which the Company has
an ownership interest:
2001 2000 1999
-------------- ------------- ---------------
Development revenue $ 652,815 $ 6,982,678 $ 1,173,054
Hotel management revenue 709,631 1,025,632 1,005,201
Employee leasing revenue 2,830,719 4,275,476 4,001,188
Other - 586,276 41,313
Interest income 530,035 516,511 601,477
The Company eliminates its proportionate ownership interest in these
revenues in consolidation.
F-18
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
11. 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 each business segment,
which is the information utilized by the Company's decision makers in
managing the business:
Revenues 2001 2000 1999
-------- -------------- ------------- --------------
Hotel operations $ 56,382,448 $ 61,351,696 $ 62,095,998
Hotel development and construction 1,933,882 6,982,678 6,431,995
Hotel sales and commissions 12,922,459 - -
Hotel management 1,066,645 1,251,107 1,315,212
Employee leasing 4,678,189 5,979,363 5,992,580
Other 169,612 586,276 222,187
-------------- ------------- ---------------
$ 77,153,235 $ 76,151,120 $ 76,057,972
============== ============= ==============
Operating costs and expenses
----------------------------
Hotel operations $ 42,114,513 $ 44,669,824 $ 45,126,127
Hotel development and construction 1,479,947 6,901,617 5,398,384
Hotel sales and commissions 9,621,536 - -
Hotel management 716,802 806,959 809,061
Employee leasing 4,564,508 5,868,189 5,747,351
Other 2,958 489,064 786,658
-------------- ------------- ---------------
$ 58,500,264 $ 58,735,653 $ 57,867,581
============== ============= ==============
Operating income
----------------
Hotel operations $ 3,229,462 $ 5,737,820 $ 5,249,019
Hotel development and construction 445,952 62,871 1,009,720
Hotel sales and commissions 3,300,922 - -
Hotel management 295,356 399,771 448,710
Employee leasing 110,642 108,812 242,309
Other 130,831 92,812 (566,857)
Corporate (1,954,441) (1,748,621) (1,603,283)
-------------- ------------- --------------
$ 5,558,724 $ 4,653,465 $ 4,779,618
============== ============= ==============
F-19
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
11. BUSINESS SEGMENTS (CONTINUED):
Identifiable assets 2001 2000 1999
-------------------- -------------- ------------- --------------
Hotel operations $ 99,086,728 $ 92,406,355 $ 94,606,864
Hotel development and construction 1,467,116 660,620 1,272,184
Hotel sales and commissions - - -
Hotel management 119,236 (42,842) 674,489
Employee leasing 70,584 329,833 494,806
Other (primarily the office building in 2001) 6,553,474 - 164,485
Corporate 7,877,318 4,788,749 5,895,339
-------------- ------------- --------------
$ 115,174,456 $ 98,142,715 $ 103,108,167
============== ============= ==============
Capital Expenditures
--------------------
Hotel operations $ 18,874,420 $ 10,253,713 $ 1,920,734
Hotel development and construction 5,975 7,942 2,091
Hotel sales and commissions - - -
Hotel management 52,173 34,161 69,697
Employee leasing - 5,831 -
Other (primarily the office building in 2001) 6,411,585 17,422 29,335
Corporate 55,580 114,497 80,975
-------------- ------------- --------------
$ 25,399,733 $ 10,433,566 $ 2,102,832
============== ============= ==============
Depreciation/Amortization
-------------------------
Hotel operations $ 4,528,036 $ 4,419,121 $ 4,414,161
Hotel development and construction 7,983 18,189 23,891
Hotel sales and commissions - - -
Hotel management 54,487 44,377 57,441
Employee leasing 3,039 2,362 2,921
Other 35,822 4,400 2,387
Corporate 46,702 54,012 66,229
-------------- ------------- --------------
$ 4,676,069 $ 4,542,461 $ 4,567,030
============== ============= ==============
12. STOCK BASED COMPENSATION:
The Company applies APB No. 25, Accounting for Stock Issued to Employees,
and related interpretations, in accounting for options granted to
employees.
The Company established qualified incentive stock option plans for employees
and directors. Under the plan for employees, on an annual basis, options for
up to 3% of its common stock, as defined, can be granted. Under the plan for
directors, a total of 50,000 options can be granted. The exercise price per
share may not be less than the fair market value per share on the date the
options are granted. Generally, options vest over a period of up to two
years and are exercisable for a period of ten years from the date of grant.
At December 31, 2001, options to purchase 830,100 shares of common stock are
outstanding under the plans.
F-20
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
12. STOCK BASED COMPENSATION (CONTINUED):
The Company has granted to various key employees and directors,
non-qualified options to purchase shares of common stock with exercise
prices ranging from $3.25 to $6.50 per share. The exercise price is the
market price on the date of grant. At December 31, 2001, options to purchase
1,054,333 shares of common stock are outstanding. These options are
currently exercisable and expire through May 2011.
In 1997, the Company granted to two officers, options to purchase 65,625
shares of common stock with an exercise price of $1.53 per share. These
options are currently exercisable and expire in February 2007.
The following table summarizes the employee stock options granted, exercised
and outstanding:
Weighted Average
Shares Exercise Price
------------ --------------------
Options outstanding January 1, 1999 1,605,558 4.71
Forfeitures (156,500) 5.30
Options granted 157,000 3.44
----------- -------------
Options outstanding December 31, 1999 1,606,058 4.52
Forfeitures (80,000) 3.57
Options granted 238,500 3.23
----------- -------------
Options outstanding December 31, 2000 1,764,558 4.39
Forfeitures (16,000) 3.23
Options granted 201,500 3.34
----------- -------------
Options outstanding December 31, 2001 1,950,058 $ 4.29
=========== =============
Options exercisable December 31, 2001 1,781,891 $ 4.37
=========== =============
The weighted-average grant-date fair value of stock options granted to
employees during the year and the weighted-average significant assumptions
used to determine those fair values, using a modified Black-Sholes option
pricing model, and the pro forma effect on earnings of the fair value
accounting for employee stock options under Statement of Financial
Accounting Standards No. 123 are as follows:
2001 2000 1999
-------------- ------------- --------------
Grant-date fair value per share:
Options issued at market $ 2.04 $ 1.67 $ 1.47
Weighted average exercise prices:
Options issued at market $ 3.34 $ 3.38 $ 3.47
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 5.19% 6.50% 5.17%
Expected stock price volatility 0.53 0.30 0.40
Expected dividend payout n/a n/a n/a
Expected option life (years) (a) 7.91 8.28 6.00
Net income (loss):
As reported $ 755,100 $ 4,009,902 $ 200,591
Pro forma $ 558,068 $ 3,757,451 $ (30,927)
Net income (loss) per share - Basic:
As reported $ 0.15 $ 0.81 $ 0.04
Pro forma $ 0.11 $ 0.76 $ (0.01)
Net income (loss) per share - Diluted:
As reported $ 0.13 $ 0.74 $ 0.02
Pro forma $ 0.09 $ 0.69 $ (0.02)
F-21
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
(a) The expected option life considers historical option exercise patterns
and future changes to those exercise patterns anticipated at the date of
grant.
The following table summarizes information about employee stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 1.53 to 4.38 1,330,625 5.66 Years $3.43 1,162,458 $3.43
$ 5.75 to 7.81 619,433 5.71 6.15 619,433 6.15
-------------- ---------- ----- ----- --------- ------
$ 1.53 to 7.81 1,950,058 5.68 $4.29 1,781,891 $4.37
============== ========= ===== ===== ========= =======
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
Sale/leaseback of hotels:
-------------------------
On June 30, 1998, the Company completed the sale of 26 AmeriHost Inn hotels
to a Real Estate Investment Trust ("REIT") for $62.2 million. The Company
completed the sale of four additional AmeriHost Inn hotels to the same REIT
in March 1999. Upon the respective 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. In January 2001, the
Company amended the master lease with the REIT to provide for the purchase
of eight unidentified hotels from the lessor 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 sold to a
third party or purchased by the Company by the dates specified. As of
December 31, 2001, the Company is obligated under the terms of the amendment
to either facilitate the sale, or purchase from the REIT, one hotel prior to
June 2, 2002, or the 0.25% rent increase becomes effective.
In 2000, one hotel owned by the REIT was sold, and in 2001, four hotels
owned by the REIT were sold. Accordingly, the leases with the REIT for these
hotels were terminated, and the remaining unamortized gain of approximately
$1.0 million and $402,000 was recognized in 2001 and 2000, respectively, as
a gain on sale of property in the accompanying consolidated financial
statements. In addition, the Company acquired one hotel owned by the REIT in
2001, in accordance with the terms of the amendment.
Hotel leases:
-------------
Including the hotels leased from the REIT, the Company leases 27 hotels as
of December 31, 2001, 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 subleases 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.
F-22
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
The three leases, other than the REIT leases, each 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 December 31, 2001, the aggregate purchase price for
these leased hotels was approximately $11,500,000. The Company intends to
obtain a mortgage financing commitment and exercise the purchase option for
one hotel in the amount of $4.5 million prior to April 30, 2002.
Total rent expense for all operating leases was approximately $6,747,000,
$6,892,000, and $7,542,000 in 2001, 2000, and 1999, respectively, including
approximately $278,000, $686,000 and $811,000 in 2001, 2000, and 1999,
respectively, to entities in which the Company has a minority ownership
interest. Minimum future rent payments under all operating leases are as
follows:
Year Ending December 31, Amount
------------------------ ----------------
2002 $ 6,383,000
2003 6,409,000
2004 6,359,000
2005 6,517,000
2006 6,642,000
Thereafter 47,187,000
------------
$ 79,497,000
Limited partnership guaranteed distributions:
---------------------------------------------
The Company is a general partner in two partnerships where the Company has
guaranteed minimum annual distributions to the limited partners, including a
Director of the Company, in the amount of 10% of their original capital
contributions. On September 18, 2000, the Company finalized the terms of an
agreement to purchase the remaining ownership interests from its partners in
these joint ventures for a total of approximately $1.7 million. The two
acquisitions must be completed on or before December 31, 2002. A third joint
venture was previously acquired in January 2001 under the terms of this
agreement.
Construction in progress:
-------------------------
As of December 31, 2001, the Company had entered into non-cancelable
sub-contracts for approximately $5.9 million in connection with the
construction of six hotels, representing a portion of the total estimated
construction costs for these hotels. These commitments will be funded
through construction and long-term mortgage financing currently in place.
Employment agreements:
----------------------
The Company has entered into an employment agreement with an executive
officer expiring December 31, 2003, providing for an annual base salary of
$325,000. The employment agreement provides for a cash bonus based upon
financial performance and hotel operations performance; stock options, a
portion of which vest only if the Company achieves certain financial
performance criteria; and severance pay should the officer be terminated
without cause.
F-23
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
Legal matters:
--------------
The Company and certain of its subsidiaries are defendants in various
litigation matters arising in the ordinary course of business. In the
opinion of management, the ultimate resolution of all such litigation
matters is not likely to have a material effect on the Company's financial
condition, results of operation or liquidity. The Company currently has a
remaining receivable of approximately $113,000 in connection with the
construction of a hotel. The Company has received a favorable court ruling
with regard to this case and has previously received the majority of its
claim. The Company believes the remaining funds will be collected in full.
14. SUPPLEMENTAL CASH FLOW DATA:
The following represents the supplemental schedule of noncash investing and
financing activities for the years ended December 31 (Note 4):
2001 2000 1999
------------- ------------- --------------
Sale of assets and franchising rights:
Cost basis of assets sold $ 8,200,961
Accumulated depreciation at sale (1,172,929)
Deferred assets 83,747
Deferred income (402,090)
Notes received, less $50,000 allowance (300,000)
Gain on sale 6,663,124
-------------
Net cash proceeds $ 13,072,813
=============
Liabilities assumed in connection with
acquisition and consolidation of hotel
partnership interests $ 2,365,422 $ 1,655,422
============= ==============
Assets classified as held for sale $ 2,187,822
=============
15. 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. In conjunction with this transaction, the Company
began doing business as Arlington Hospitality, Inc. and legally changed the
name at the 2001 shareholder meeting.
16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected quarterly financial data (in thousands, except per share amounts)
for 2001 and 2000 is summarized below. The sum of the quarterly earnings
(loss) per share amounts may not equal the annual earnings per share amounts
due primarily to changes in the number of common shares and common share
equivalents outstanding from quarter to quarter.
F-24
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================
Three Months Ended
------------------------------------------------------ Year Ended
3/31 6/30 9/30 12/31 12/31
---------- ---------- --------- ---------- -----------
2001:
Total revenue $ 19,461 $ 16,963 $ 22,556 $ 18,174 $ 77,153
Operating income (loss) (32) 1,379 3,746 454 5,547
Gains on sale of assets 315 275 296 - 886
Net income (loss) (620) 153 1,857 (635) 755
Net income (loss) per share:
Basic $ (0.12) $ 0.03 $ 0.37 $ (0.13) $ 0.15
Diluted $ (0.13) $ 0.03 $ 0.35 $ (0.13) $ 0.13
2000:
Total revenue $ 15,867 $ 21,805 $ 23,868 $ 14,612 $ 76,151
Operating income (loss) (651) 2,511 3,534 (741) 4,653
Gains on sale of assets and
franchising rights 172 840 5,507 144 6,663
Net income (loss) (904) 1,206 4,642 (934) 4,010
Net income (loss) per share:
Basic $ (0.18) $ 0.24 $ 0.93 $ (0.19) $ 0.81
Diluted $ (0.18) $ 0.23 $ 0.87 $ (0.19) $ 0.74
F-25