================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended MARCH 31, 2002
---------------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 0-15291
-------
ARLINGTON HOSPITALITY, INC.
---------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3312434
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 S. ARLINGTON HEIGHTS ROAD, SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005
- ---------------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 228-5400
--------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
As of May 10, 2002, 4,958,061 shares of the Registrant's Common Stock were
outstanding.
================================================================================
ARLINGTON HOSPITALITY, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2002
INDEX
PART I: Financial Information Page
----------------------------- ----
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2002
and December 31, 2001 4
Consolidated Statements of Operations for the Three Months
Ended March 31, 2002 and 2001 6
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2002 and 2001 7
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis 14
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 21
PART II: Other Information
--------------------------
Item 6 - Exhibits and Reports on Form 8-K 22
Signatures 22
Page 2
Part I: Financial Information
Item 1: Financial Statements
Page 3
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
===================================================================================================================
March 31, December 31,
2002 2001
--------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,019,985 $ 4,748,156
Accounts receivable, less an allowance of $150,000 at
March 31, 2002 and December 31, 2001 (including
approximately $200,000 and
$126,000 from related parties) 2,017,248 2,343,423
Notes receivable, current portion 518,499 518,499
Prepaid expenses and other current assets 549,406 998,559
Refundable income taxes 535,329 -
Costs and estimated earnings in excess of billings on
uncompleted contracts with related parties 1,332,454 1,079,137
--------------- --------------
Total current assets 7,972,921 9,687,774
--------------- --------------
Investments in and advances to unconsolidated
hotel joint ventures 6,301,007 5,404,744
--------------- --------------
Property and equipment:
Land 12,454,360 12,454,360
Buildings 74,017,576 68,095,453
Furniture, fixtures and equipment 25,307,954 24,189,969
Construction in progress 1,247,684 5,973,890
Leasehold improvements 2,929,764 2,899,179
Assets held for sale - 2,187,822
--------------- --------------
115,957,338 115,800,673
Less accumulated depreciation and amortization 24,002,846 22,905,635
--------------- --------------
91,954,492 92,895,038
--------------- --------------
Notes receivable, less current portion 993,279 1,000,000
Deferred income taxes 3,049,000 3,247,000
Other assets, net of accumulated amortization of
$1,034,000 and $1,035,000 2,819,387 2,939,900
--------------- --------------
6,861,666 7,186,900
--------------- --------------
$ 113,090,086 $ 115,174,456
=============== ==============
(continued)
Page 4
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
===================================================================================================================
March 31, December 31,
2002 2001
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,666,941 $ 2,467,704
Bank line-of-credit 6,456,287 6,793,702
Accrued payroll and related expenses 881,974 784,533
Accrued real estate and other taxes 2,189,673 1,952,875
Other accrued expenses and current liabilities 334,577 452,086
Current portion of long-term debt 2,066,688 2,110,652
Income taxes payable - 286,670
--------------- --------------
Total current liabilities 14,596,140 14,848,222
--------------- --------------
Long-term debt, net of current portion 69,508,185 70,088,269
--------------- --------------
Deferred income (Note 11) 10,346,305 10,714,735
--------------- --------------
Commitments and contingencies
Minority interests 330,609 456,631
--------------- --------------
Shareholders' equity:
Preferred stock, no par value; authorized 100,000 shares;
none issued - -
Common stock, $.005 par value; authorized 25,000,000 shares;
issued and outstanding 4,958,081 shares at March 31, 2002
and December 31, 2001 24,790 24,790
Additional paid-in capital 13,171,151 13,171,151
Retained earnings 5,549,781 6,307,533
--------------- --------------
18,745,722 19,503,474
Less:
Stock subscriptions receivable (436,875) (436,875)
--------------- --------------
18,308,847 19,066,599
$ 113,090,086 $ 115,174,456
=============== ==============
See notes to consolidated financial statements.
Page 5
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
==================================================================================================================
2002 2001
--------------- ----------------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 9,159,927 $ 9,866,663
Other hotels 2,256,553 2,174,338
Development and construction 2,065,283 65,157
Hotel sales and commissions 3,207,897 5,764,695
Management services 233,937 229,808
Employee leasing 852,361 1,359,882
Other 161,670 -
--------------- --------------
17,937,628 19,460,543
--------------- --------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 7,579,449 8,185,024
Other hotels 2,595,179 2,175,315
Development and construction 1,997,567 376,168
Hotel sales and commissions 2,030,948 3,717,468
Management services 154,530 192,457
Employee leasing 820,637 1,354,914
Other 16,823 -
--------------- --------------
15,195,133 16,001,346
--------------- --------------
2,742,495 3,459,197
Depreciation and amortization 1,323,689 1,121,346
Leasehold rents - hotels 1,481,812 1,755,859
Corporate general and administrative 387,159 613,628
--------------- --------------
Operating loss (450,165) (31,636)
Other income (expense):
Interest expense (1,423,674) (1,407,573)
Interest income 123,830 147,866
Other income 60,010 43,245
Equity in net income and (losses) from unconsolidated joint ventures 86,968 (112,773)
Gain on sale of assets 327,076 315,238
--------------- --------------
Loss before minority interests and income taxes (1,275,955) (1,045,633)
Minority interests in operations of consolidated
subsidiaries and partnerships 13,203 3,515
--------------- --------------
Loss before income tax (1,262,752) (1,042,118)
Income tax benefit 505,000 422,000
--------------- --------------
Net loss $ (757,752) $ (620,118)
=============== ==============
Net loss per share:
Basic $ (0.15) $ (0.12)
=============== ==============
Diluted $ (0.15) $ (0.13)
=============== ==============
See notes to consolidated financial statements.
Page 6
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
===================================================================================================================
2002 2001
---------------- -----------------
Cash flows from operating activities:
Cash received from customers $ 18,672,124 $ 23,915,752
Cash paid to suppliers and employees (14,801,544) (18,602,930)
Interest received 225,545 127,778
Interest paid (1,446,687) (1,400,989)
Income taxes paid (118,999) (261,176)
--------------- --------------
Net cash provided by operating activities 2,530,439 3,778,435
--------------- --------------
Cash flows from investing activities:
Distributions, and collections on advances,
from unconsolidated joint ventures 165,228 351,348
Purchase of property and equipment (2,370,365) (1,974,918)
Purchase of investments in, and advances
to, unconsolidated joint ventures (979,212) (1,177,328)
Acquisitions of partnership interests,
net of cash acquired (Note 7) - (795,384)
Collections on notes receivable 6,721 13,057
Proceeds from sale of assets (6,700) -
--------------- --------------
Net cash used in investing activities (3,184,328) (3,583,225)
--------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,741,110 37,587
Principal payments on long-term debt (2,365,158) (3,889,373)
Net (repayment) borrowings on the line of credit (337,415) 4,394,569
Distributions to minority interest (112,819) -
Other - 117,000
--------------- --------------
Net cash (used in) provided by financing activities (1,074,282) 659,783
--------------- --------------
Net increase (decrease) in cash (1,728,171) 854,993
Cash and cash equivalents, beginning of year 4,748,156 1,728,869
--------------- --------------
Cash and cash equivalents, end of period $ 3,019,985 $ 2,583,862
=============== ==============
(continued)
Page 7
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
====================================================================================================================
2002 2001
---------------- ------------------
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $ (757,752) $ (620,118)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 1,323,689 1,121,346
Equity in net (income) loss from unconsolidated joint
ventures and amortization of deferred income (86,968) 112,773
Minority interests in net income of consolidated subsidiaries
and partnerships (13,203) (3,515)
Amortization of deferred gain (254,390) (217,888)
Deferred income taxes 198,000 (122,000)
Gain on sale of fixed assets (327,076) (315,238)
Proceeds from sale of hotels 2,915,630 4,230,948
Income from sale of hotels (884,682) (513,480)
Changes in assets and liabilities, net of effects
of acquisition:
Decrease (increase) in accounts receivable 224,460 (413,797)
Decrease in prepaid expenses and
other current assets 550,868 31,344
Increase in refundable income taxes (821,999) (561,176)
(Increase) decrease in costs and estimated earnings
in excess of billings (253,317) 239,696
Decrease in other assets 58,056 40,548
Increase (decrease) in accounts payable 199,237 (180,907)
Increase in accrued payroll and other accrued
expenses and current liabilities 239,743 136,239
(Decrease) increase in accrued interest (23,013) 6,584
Increase in deferred income 243,156 807,076
--------------- --------------
Net cash provided by operating activities $ 2,530,439 $ 3,778,435
=============== ==============
See notes to consolidated financial statements.
Page 8
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
================================================================================
1. BASIS OF PREPARATION:
---------------------
The financial statements included herein have been prepared by the
Company, without audit. In the opinion of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments, which
consist only of recurring adjustments necessary to present fairly the
financial position of Arlington Hospitality, Inc. and subsidiaries as of
March 31, 2002 and December 31, 2001, and the results of its operations
and cash flows for the three months ended March 31, 2002 and 2001. The
results of operations for the three months ended March 31, 2002, are not
necessarily indicative of the results to be expected for the full year. It
is suggested that the accompanying consolidated financial statements be
read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's 2001 Annual Report on Form 10-K.
Certain reclassifications have been made to the 2001 financial statements
in order to conform with the 2002 presentation.
2. 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. Significant intercompany
accounts and transactions have been eliminated.
3. CRITICAL ACCOUNTING POLICIES:
-----------------------------
We define critical accounting policies as those accounting policies that
require our management to exercise their most difficult, subjective and
complex judgments. Our critical accounting policies are described in our
2001 Form 10-K.
4. EARNINGS (LOSS) 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 of 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. The
calculations of basic and diluted earnings (loss) per share are as
follows:
Three Months Ended March 31,
---------------------------
2002 2001
------------ ------------
Net loss $ (757,752) $ (620,118)
Impact of convertible partnership interests (27,023) (40,290)
------------ -----------
$ (784,775) $ (660,408)
============ ===========
Weighted average common shares outstanding 4,958,081 4,979,244
Dilutive effect of:
Convertible partnership interests 168,100 168,100
Stock options - -
------------ -----------
Dilutive common shares outstanding 5,126,181 5,147,344
============ ===========
Net loss per share - Basic $ (0.15) $ (0.12)
============ ===========
Net loss per share - Diluted $ (0.15) $ (0.13)
============ ===========
Page 9
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
================================================================================
5. INCOME TAXES:
-------------
Deferred income taxes are provided on the differences in the bases of the
Company's assets and liabilities determined for tax and financial
reporting purposes and relate principally to depreciation of property and
equipment and deferred income. A valuation allowance has not been recorded
to reduce the deferred tax assets, as the Company expects to realize all
components of the deferred tax asset in future periods.
The income tax benefit for the three months ended March 31, 2002 and 2001
was based on the Company's estimate of the effective tax rate expected to
be applicable for the full year. The Company expects the effective tax
rate to approximate the Federal and state statutory rates.
6. HOTEL LEASES:
-------------
The Company leases 26 hotels as of March 31, 2002 (including 23
sale/leaseback hotels - Note 8), the operations of which are included in
the Company's consolidated financial statements. All of these leases are
triple net and provide for monthly base rent payments ranging from $14,000
to $27,000. The Company leases one of these hotels from a partnership in
which the Company owns an equity interest of 16.33%. This lease also
provides for additional rent payments of approximately $74,000 per annum,
plus percentage rents computed on room revenues in excess of stipulated
amounts. The leases expire through March 2014.
Three of these leases provide for an option to purchase the hotel. The
purchase prices are based upon a fixed amount approximating the fair value
at the lease commencement, subject to increases in the CPI index.
Subsequent to March 31, 2002, the Company exercised its option to purchase
one of these leased hotels from the partnership in which the Company has
an ownership interest, as stated above, for $4.5 million. The aggregate
purchase price for the remaining two leased hotels was approximately
$7,000,000 as of March 31, 2002.
7. LIMITED PARTNERSHIP GUARANTEED DISTRIBUTIONS:
---------------------------------------------
The Company is a general partner in two partnerships where the Company had
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
the purchase of 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.
8. SALE/LEASEBACK OF HOTELS:
-------------------------
In 1998 and 1999, the Company completed the sale of 30 AmeriHost Inn
hotels to a Real Estate Investment Trust ("REIT") for $73 million. Upon
the sales to the REIT, the Company entered into agreements to lease back
the hotels for an initial term of ten years, with two five year renewal
options. The lease payments are fixed at 10% of the sale price for the
first three years. Thereafter, the lease payments are subject to a CPI
increase with a 2% annual maximum. The Company has deferred the gain on
the sale of these hotels pursuant to sale/leaseback accounting. The
deferred gain is being recognized on a straight-line basis over the
remaining term of the lease, as extended, as a reduction of leasehold rent
expense. In January 2001, the Company amended the master lease with the
REIT to provide for the sale of eight hotels by 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 an unrelated third party or to the Company by the
dates specified. As of March 31, 2002, the Company is obligated under the
terms of the amendment to either facilitate the sale to a third party, or
purchase from the REIT, one hotel prior to June 2, 2002, or the 0.25% rent
increase becomes effective.
Page 10
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
================================================================================
8. SALE/LEASEBACK OF HOTELS (CONTINUED):
-------------------------------------
The REIT sold one of its hotels to an unrelated third party during the
three months ended March 31, 2002. Consequently, the Company has
terminated the lease with the REIT for this hotel and recognized a
commission from the sale of this hotel, which is classified as hotel sales
and commissions in the accompanying consolidated financial statements. The
unamortized deferred gain related to the initial sale of this hotel was
recognized upon termination of the respective lease.
9. BUSINESS SEGMENTS:
------------------
The Company's business is primarily involved in five segments: (1) hotel
operations, consisting of the operations of all hotels in which the
Company has a 100% or controlling ownership or leasehold interest, (2)
hotel development and construction, 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 , as of and for the three months ended March
31, 2002 and 2001, for each business segment, which is the information
utilized by the Company's decision makers in managing the business:
Revenues 2002 2001
-------- -------------- ---------------
Hotel operations $ 11,416,480 $ 12,041,001
Hotel development and construction 2,065,283 65,157
Hotel sales and commissions 3,207,897 5,764,695
Hotel management 233,937 229,808
Employee leasing 852,361 1,359,882
Other 161,670 -
------------- -------------
$ 17,937,628 $ 19,460,543
============= =============
Operating costs and expenses
----------------------------
Hotel operations $ 10,174,628 $ 10,360,339
Hotel development and construction 1,997,567 376,168
Hotel sales and commissions 2,030,948 3,717,468
Hotel management 154,530 192,457
Employee leasing 820,637 1,354,914
Other 16,823 -
------------- -------------
$ 15,195,133 $ 16,001,346
============= =============
Operating income (loss)
-----------------------
Hotel operations $ (1,491,030) $ (1,158,322)
Hotel development and construction 66,068 (317,404)
Hotel sales and commissions 1,176,950 2,047,227
Hotel management 65,897 22,951
Employee leasing 31,109 4,171
Other 108,281 -
Corporate (407,440) (630,259)
------------- -------------
$ (450,165) $ (31,636)
============= =============
Page 11
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
================================================================================
9. BUSINESS SEGMENTS (CONTINUED):
------------------------------
Identifiable assets 2002 2001
------------------- -------------- ---------------
Hotel operations $ 95,797,932 $ 93,186,444
Hotel development and construction 1,875,134 746,048
Hotel sales and commissions - -
Hotel management 188,047 (79,335)
Employee leasing 92,953 148,243
Other (primarily the office building) 6,644,703 -
Corporate 8,491,317 5,545,342
------------- -------------
$ 113,090,086 $ 99,546,742
============= =============
Capital expenditures
--------------------
Hotel operations $ 2,146,155 $ 1,928,072
Hotel development and construction - -
Hotel sales and commissions - -
Hotel management 3,308 12,959
Employee leasing - -
Other 220,902 -
Corporate - 33,887
------------- -------------
$ 2,370,365 $ 1,974,918
============= =============
Depreciation/Amortization
-------------------------
Hotel operations $ 1,251,070 $ 1,083,125
Hotel development and construction 1,648 6,393
Hotel sales and commissions - -
Hotel management 13,510 14,400
Employee leasing 614 797
Other 36,566 -
Corporate 20,281 16,631
------------- -------------
$ 1,323,689 $ 1,121,346
============= =============
10. LONG-LIVED ASSETS:
------------------
In October 2001, the Financial Accounting Standards Board issued FASB
Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("FAS 144"). FAS 144 addresses issues relating to the
implementation of FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed of ("FAS 121")
and develops a single accounting method under which long-lived assets that
are to be disposed of by sale are measured at the lower of book value or
fair value, less cost to sell. Additionally, FAS 144 expands the scope of
discontinued operations to include all components of an entity with
operations that 1) can be distinguished from the rest of the entity and 2)
will be eliminated from the ongoing operations of the entity in a
disposing transaction. Long-lived assets held for sale at December 31,
2001, continued to be accounted for in accordance with the provisions of
FAS 121.
Page 12
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2002
================================================================================
11. BANK LINE OF CREDIT:
---------------------
At December 31, 2001, the Company had a $7,500,000 bank operating
line-of-credit. 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 plus one-half of one percent, and matured
February 28, 2002. 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.
Page 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
GENERAL
The Company is engaged in the development and sale of AmeriHost Inn hotels, and
the ownership, operation and management of AmeriHost Inn hotels and other
mid-price hotels. 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 March 31, 2002,
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
five 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
March 31, 2002, two wholly-owned, one third party-owned, and one joint
venture-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 4.1% during the first quarter of
2002, compared to the first quarter of 2001, attributable to a 6.8% increase in
occupancy, partially offset by a decrease of $1.55 in average daily rate. These
results relate to the 63 AmeriHost Inn hotels that were operating for at least
thirteen full months during the three months ended March 31, 2002.
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 7.2% to $9.2 million
during the first quarter of 2002, from revenues of $9.9 million during the first
quarter of 2001, due primarily to the sale of hotels to franchisees. Revenues
from the development segment increased to $2.1 million during the first quarter
of 2002, from $65,157 during the first quarter of 2001, due to the increase in
hotel development activity for minority owned entities and third parties.
Revenues from hotel sales and commissions decreased 44.4% to $3.2 million during
the first quarter of 2002, from $5.8 million during the first quarter of 2001,
as a result of the sale of two AmeriHost Inn hotels during the first three
months of 2002, versus the sale of four AmeriHost Inn hotels during the first
three months of 2001. Revenues from hotel management and employee leasing
segments decreased by 31.7% in total during the first quarter of 2002, due
primarily to the sale or termination of hotels under management contracts and
the reduction in payroll costs. Revenues from Consolidated non-AmeriHost Inn
hotels increased 3.8% during the first quarter of 2002, compared to the first
quarter of 2001, as a result primarily of the acquisition of one non-AmeriHost
Inn hotel during December 2001. Total revenues decreased 7.8% to $17.9 million
during the first quarter of 2002, from $19.5 million during the first quarter of
2001, due primarily to the decrease from hotel sales and commissions, offset by
the increase in hotel development. The Company recorded a net loss of ($757,752)
during the first quarter of 2002, or ($0.15) per diluted share, compared to a
net loss of ($620,118) or ($0.13) per diluted share during the first quarter of
2001.
On September 30, 2000, the Company sold the AmeriHost Inn and AmeriHost Inn &
Suites brand names and franchising rights to Cendant Corporation. The agreement
with Cendant 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 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
Page 14
GAAP) as a measure of liquidity. Cash Flow, as defined, was $565,937 during the
first quarter of 2002, compared to $501,228 during the first quarter of 2001.
Excluding hotels under construction, the Company had an ownership interest in 76
hotels at March 31, 2002, versus 77 hotels at March 31, 2001. 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. Total Consolidated hotels remained
consistent, with 63 at both March 31, 2002 and March 31, 2001.
CRITICAL ACCOUNTING POLICIES
We define critical accounting policies as those accounting policies that require
our management to exercise their most difficult, subjective and complex
judgments. Our critical accounting policies are described in our 2001 Form 10-K.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2001
Revenues decreased 7.8% to $17.9 million during the three months ended March 31,
2002, from $19.5 million during the three months ended March 31, 2001. A
decrease in the revenues from the sale of Consolidated AmeriHost Inn hotels was
partially offset by an increase in hotel development activity.
Hotel operations revenue decreased 5.2% to $11.4 million during the three months
ended March 31, 2002, from $12.0 million during the three months ended March 31,
2001. Revenues from Consolidated AmeriHost Inn hotels decreased 7.2% to $9.2
million during the three months ended March 31, 2002, from $9.9 million during
the three months ended March 31, 2001. These decreases were attributable
primarily to the sale of seven Consolidated AmeriHost Inn hotels to franchisees
during the twelve months ended March 31, 2002, partially offset by the opening
of five newly constructed AmeriHost Inn hotels during the same period and the
acquisition of one non-AmeriHost Inn hotel. Same room revenues for the
Consolidated AmeriHost Inn hotels increased 2.7%. Revenue from Consolidated
other brand hotels increased 3.8% during the three month period, due primarily
to the acquisition of one non-AmeriHost Inn hotel during December 2001. The
hotel operations segment included the operations of 63 Consolidated hotels
(including 55 AmeriHost Inn hotels) comprising 4,595 rooms at March 31, 2002,
compared to 63 Consolidated hotels (including 57 AmeriHost Inn hotels)
comprising 4,449 rooms at March 31, 2001. The Company has experienced an
increase in competition in certain markets, primarily from newly constructed
hotels. As a result, there is increased downward pressure on occupancy levels
and average daily rates. The Company believes that as the number of AmeriHost
Inn hotels increases, the greater the benefits will be at all locations from
marketplace recognition and repeat business. In addition, the Company typically
builds new hotels in growing markets where it anticipates a certain level of
additional hotel development.
Hotel development revenue increased to $2.1 million during the three months
ended March 31, 2002, from $65,157 during the three months ended March 31, 2001.
Hotel development revenues are directly related to the number of hotels being
developed and constructed for minority-owned entities or unrelated third
parties. The Company was constructing two hotels for minority-owned entities and
third parties during the first quarter of 2002, compared to none during the
three months ended March 31, 2001. However, the Company had several additional
projects in various stages of pre-construction development during both
three-month periods. In addition, Cendant pays 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. The Company received approximately $237,000 in development incentive
fees from the sale of AmeriHost Inn hotels during the first quarter of 2002, and
amortized $65,255 as hotel development revenue in the first quarter of 2002.
Cendant also pays 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 $36,994 in
royalty sharing payments during the first quarter of 2002. The Company records
this royalty sharing fee as hotel development segment revenue when the related
royalty fee is received.
Page 15
The Company recorded $3.2 million in hotel sales and commission revenue in
connection with the sale of AmeriHost Inn hotels during the first quarter of
2002, compared to $5.8 million during the first quarter of 2001. The Company and
the REIT which owns certain of the Company's leased hotels, closed on the sale
of two AmeriHost Inn hotels during the first quarter of 2002, compared to the
sale of four AmeriHost Inn hotels during the first quarter of 2001. The Company
intends to continue to build and sell AmeriHost Inn hotels in order to maximize
the value inherent in the Cendant transaction while enhancing net income and
cash flow.
Hotel management revenue increased 1.8% to $233,937 during the three months
ended March 31, 2002 from $229,808 during the three months ended March 31, 2001.
The number of hotels managed for third parties and minority-owned entities
decreased from 16 hotels, representing 1,318 rooms, at March 31, 2001 to 15
hotels, representing 1,212 rooms, at March 31, 2002. The decrease from the
elimination of management fees from a minority-owned hotel upon its
consolidation during the fourth quarter of 2001, was offset by the increase in
same room revenues, which is the basis for the management fee revenue.
Employee leasing revenue decreased 37.3% to $852,361 during the three months
ended March 31, 2002 from $1.4 million during the three months ended March 31,
2001, due primarily to the reduction in hotels managed for minority-owned
entities and unrelated third parties as described above, and a concerted effort
to decrease payroll costs which is the basis for the employee leasing revenue.
Other revenue, consisting of leasing revenue from the Company's office building
was $161,670 during the three months ended March 31, 2002. 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.
Total operating costs and expenses decreased 5.0% to $15.2 million during the
three months ended March 31, 2002, from $16.0 million during the three months
ended March 31, 2001, or 84.7% and 82.2% of total revenues during the three
months ended March 31, 2002 and 2001, respectively. Operating costs and expenses
in the hotel operations segment decreased 1.8% to $10.2 million from $10.4
million during the three months ended March 31, 2002 and 2001, respectively. A
decrease in operating costs associated with the fewer number of AmeriHost Inn
hotels included in this segment (55 hotels at March 31, 2002 versus 57 hotels at
March 31, 2001), and the decrease in energy costs during the first quarter of
2002 compared to 2001, were partially offset by the acquisition of one
non-AmeriHost Inn hotel and the consolidation of another non-AmeriHost Inn hotel
which was previously accounted for by the equity method. Total hotel operating
costs and expenses as a percentage of segment revenue increased to 89.1% during
the three months ended March 31, 2002, from 86.0% during the three months ended
March 31, 2001. Operating costs and expenses as a percentage of revenues from
the Consolidated AmeriHost Inn hotels decreased to 82.7% during the three months
ended March 31, 2002, from 83.0% during the three months ended March 31, 2001.
Operating costs and expenses as a percentage of revenues from the Other
Consolidated hotels increased to 115.0% during the three months ended March 31,
2002, from 100.0% during the three months ended March 31, 2001, due primarily to
the acquisition and consolidation of the two non-AmeriHost Inn hotels and the
associated operating costs therefrom.
Operating costs and expenses for the hotel development segment increased 431% to
$2.0 million during the three months ended March 31, 2002 from $376,168 during
the three months ended March 31, 2001, consistent with the increase in hotel
development revenues for the three months ended March 31, 2002. Operating costs
and expenses in the hotel development segment as a percentage of segment revenue
decreased during the three months ended March 31, 2002 due to the increase in
hotel construction activity.
Hotel management segment operating costs and expenses decreased 19.7% to
$154,530 during the three months ended March 31, 2002, from $192,457 during the
three months ended March 31, 2001. This decrease was due to the decrease in the
number of hotels managed for unconsolidated minority-owned hotels and
unaffiliated third parties. Employee leasing operating costs and expenses
decreased 39.4% to $820,637 during the three months ended March 31, 2002, from
$1.4 million during the three months ended March 31, 2001, which is consistent
with the 37.3% decrease in segment revenue for the three months ended March 31,
2002.
Page 16
Other operating costs and expenses of $16,823 during the three months ended
March 31, 2002, consisted of expenses related to the management of the Company's
office building. 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.
Depreciation and amortization expense increased 18.0% to $1.3 million during the
three months ended March 31, 2002, from $ 1.1 million during the three months
ended March 31, 2001. The increase attributable to the acquisition of the office
building, the opening of newly constructed hotels, and the acquisition or
consolidation of existing hotels was partially offset by the sale of hotels
during the last twelve months.
Leasehold rents - hotels decreased 15.6% to $1.5 million during the three months
ended March 31, 2002, from $1.8 million during the three months ended March 31,
2001. This decrease was due primarily to the sale of four leased AmeriHost Inn
hotels during 2001, and the sale of another leased AmeriHost Inn hotel during
the first three months of 2002.
Corporate general and administrative expense decreased 36.9% to $387,159 during
the three months ended March 31, 2002, from $613,628 during the three months
ended March 31, 2001, which can be attributed primarily to the expense related
to stock options issued to consultants and transitional accounting fees incurred
during the first quarter of 2001.
The Company had an operating loss of ($450,165) during the three months ended
March 31, 2002, compared to an operating loss of ($31,636) during the three
months ended March 31, 2001. The following discussion of operating income (loss)
by segment is exclusive of any corporate general and administrative expense.
Operating loss from Consolidated AmeriHost Inn hotels decreased to ($581,129)
during the three months ended March 31, 2002, from ($671,448) during the three
months ended March 31, 2001. This decrease in operating loss was due to the
higher operating costs and expenses as explained above in the first quarter of
2001 as compared to the first quarter of 2002. Operating income from the hotel
development segment increased to operating income of $66,068 during the three
months ended March 31, 2002, from an operating loss of ($317,404) during the
three months ended March 31, 2001. The increase in hotel development operating
income was due to the increase in hotels developed and constructed for third
parties and minority-owned entities during the first quarter of 2002. Operating
income from hotel sales and commissions decreased to $1.2 million during the
first quarter of 2002, from $2.0 million during the first quarter of 2001. This
decrease was due to the sale of two AmeriHost Inn hotels during the first
quarter of 2002, versus the sale of four AmeriHost Inn hotels during the first
quarter of 2001. The hotel management segment operating income increased 187% to
$65,897 during the three months ended March 31, 2002, from $22,951 during the
three months ended March 31, 2001. This increase was due primarily to the
reduction of hotel management operating expenses. Employee leasing operating
income increased to $31,109 during the three months ended March 31, 2002, from
$4,171 during the three months ended March 31, 2001, due to the reduction in
employee leasing operating expenses. Other operating income of $108,281 during
the three months ended March 31, 2002 was attributable to the acquisition of the
office building in which the Company's headquarters is located.
Interest expense remained relatively unchanged at $1.4 million during the three
months ended March 31, 2002 and 2001. The decrease attributable to sale of
AmeriHost Inn hotels, whereby the Company does not incur any interest expense on
sold hotels after the sale dates, the decrease from lower interest on floating
rate debt, and the reduction of fixed interest rates pursuant to loan
modifications executed in 2001, was offset by the mortgage financing of newly
constructed or acquired Consolidated hotels. The Company capitalizes interest
expense incurred during the pre-opening construction period of a Consolidated
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's share of equity in income (loss) of affiliates increased to
$86,968 during the three months ended March 31, 2002, from ($112,773) during the
three months ended March 31, 2001. The fluctuation in equity of affiliates
during the three months ended March 31, 2002, compared to the three months ended
March 31, 2001, was primarily due to the recognition of the Company's share of
the operations in excess of the Company's ownership interest, as a result of its
position as general partner. Distributions from affiliates were $6,085 during
the three months ended March 31, 2002, compared to $7,884 during the three
months ended March 31, 2001.
Page 17
The Company recorded gains from the sale of assets of $327,076 during the three
months ended March 31, 2002, versus $315,238 during the three months ended March
31, 2001. These gains were comprised primarily of the unamortized deferred gains
remaining from the original sale of these hotels to the REIT, which were
recognized upon the consummation of the sales of these hotels by the REIT to
unrelated third parties and the simultaneous termination of the Company's leases
with the REIT. One hotel was sold by the REIT during the first quarter of 2002,
and two hotels were sold by the REIT during the first quarter of 2001. The
Company expects to continue recognizing the unamortized deferred gain from the
future sale of REIT owned hotels.
The Company recorded income tax benefit of $505,000 during the first quarter of
2002, compared to $422,000 during the first quarter of 2001, which are directly
related to the pre-tax losses incurred during the first quarter of 2002 and
2001, respectively.
The Company reported a net loss of ($757,752) during the first quarter of 2002,
compared to a net loss of ($620,118) during the first quarter of 2001, 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 hotel development incentive fees and royalty
sharing pursuant to the Cendant transaction, (iii) revenues from the sale of
hotel assets; (iv) fees from management contracts; and (v) fees from employee
leasing services. Cash from hotel operations is typically received at the time
the guest checks out of the hotel. Approximately 10% of the Company's hotel
operations revenues is generated through other businesses and contracts and is
usually paid within 30 to 45 days from billing. Fees from development,
construction and renovation projects are typically received within 15 to 45 days
from billing. Due to the procedures in place for processing its construction
draws, the Company typically does not pay its contractors until the Company
receives its draw from the equity or lending source. Management fee revenues
typically are received by the Company within five working days from the end of
each month. Cash from the Company's employee leasing segment typically is
received as of or prior to the pay date. The Company typically receives an
earnest money deposit from the buyer of a hotel when a sales contract is
executed. 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 the first three months of 2002, the Company received cash from operations
of $2.5 million, compared to cash received from operations of $3.8 million
during the first three months of 2001, or a decrease in cash provided by
operations of $1.3 million. The decrease in cash flow from operations during the
first three months of 2002, when compared to 2001, can be primarily attributed
to the sale of two hotels in 2002, versus the sale of four hotels in 2001,
partially offset by the increase in hotel development for an unrelated third
party and a minority-owned hotel during 2002.
The Company invests cash in three principal areas: (i) the purchase of property
and equipment through the construction and renovation of Consolidated hotels;
(ii) the purchase of equity interests in hotels; and (iii) the making of loans
to affiliated and non-affiliated hotels for the purpose of construction,
renovation and working capital. 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 from the REIT 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 their corresponding choice at this time. If
the Company and the REIT are not successful in selling the REIT's choice, 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 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
Page 18
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.
During the first three months of 2002, the Company used $3.2 million in
investing activities compared to using $3.6 million during the first three
months of 2001. During the first three months of 2002, the Company used $2.4
million to purchase property and equipment for Consolidated AmeriHost Inn hotels
and used $813,984 for investments in and advances to affiliates, net of
distributions and collections on advances from affiliates. During the first
three months of 2001, the Company bought out a partner's interest in one joint
venture for $795,384, used $2.0 million to purchase property and equipment for
Consolidated AmeriHost Inn hotels, and used $825,980 for investments in and
advances to affiliates, net of distributions and collections on advances from
affiliates.
Cash used in financing activities was $1.1 million during the first three months
of 2002 compared to cash provided by financing activities of $659,783 during the
first three months of 2001. In 2002, the contributing factors were principal
repayments of $2.4 million, including the repayment of mortgages in connection
with the sale of a hotel, offset by $1.7 million in proceeds from the mortgage
financing of Consolidated hotels and $337,415 in net repayments on the line of
credit. In 2001, the primary factors were principal repayments of $3.9 million,
including the repayment of mortgages in connection with the sale of hotels,
offset by $4.4 million in proceeds from the line of credit.
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 March 31, 2002, these
joint ventures had $32.7 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 March 31, 2002 since it is from joint
ventures in which the Company has a majority or controlling ownership interest,
leaving approximately $25.1 million in off balance sheet mortgage debt with
unconsolidated joint ventures. Of this amount, the Company has also provided
approximately $15.5 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 March 31, 2002 mature in 2002.
The lender for one of these mortgage loans in the amount of $1.5 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 March 31, 2002 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 $7.6 million at March 31, 2002, 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.
These financial covenants are typically measured annually, based upon the
Company's fiscal year end. The Company is not aware of any covenant violations
as of March 31, 2002.
Page 19
At March 31, 2002, the Company had $6.5 million outstanding under its operating
line-of-credit. The 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, 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 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.
As a result of the terrorist attacks of September 11, 2001, insurance companies
are limiting coverage for losses arising out of acts of terrorism in their
renewed "all-risk" policies. The Company believes it is covered for terrorist
act losses in its current policy, which expires in September 2002. When the
Company renews its policy in 2002, it is expected that this coverage may no
longer automatically be included in the "all-risk" basic policy. The Company may
be compelled to pay additional undeterminable costs to insurance the Company's
investment properties from losses from this type of act.
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.
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.
Page 20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations. The Company has some cash
flow exposure on its long-term debt obligations to changes in market interest
rates. The Company primarily enters into long-term debt obligations in
connection with the development and financing of hotels. The Company maintains a
mix of fixed and floating debt to mitigate its exposure to interest rate
fluctuations.
The Company's management believes that fluctuations in interest rates in the
near term would not materially affect the Company's consolidated operating
results, financial position or cash flows as the Company has limited risks
related to interest rate fluctuations.
The table below provides information about financial instruments that are
sensitive to changes in interest rates, for each interest rate sensitive asset
or liability as of March 31, 2002. The carrying amounts reflected approximate
the estimated fair values. As the table incorporates only those exposures that
existed as of March 31, 2002, it does not consider those exposures or positions
which could arise after that date. Moreover, the information presented therein
is merely an estimate and has limited predictive value. As a result, the
ultimate realized gain or loss with respect to interest rate fluctuations will
depend on the exposures that arise during future periods, hedging strategies and
prevailing interest rates at the time.
Average Nominal
Carrying Value Interest Rate
-------------- --------------
Operating line of credit - variable rate $ 6,456,287 5.50%
Mortgage debt - fixed rate $ 28,763,450 7.33%
Mortgage debt - variable rate $ 42,811,423 5.23%
Page 21
PART II: Other Information
Item 6. Exhibits and Reports on Form 8-K:
- -------
(a) Reports on Form 8-K:
There were no reports on Form 8-K filed during this period covered by this
report.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARLINGTON HOSPITALITY, INC.
---------------------------
Registrant
Date: May 10, 2002
By: /s/ James B. Dale
------------------------------
James B. Dale
Chief Financial Officer
Page 22