================================================================================
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, 2003
----------------------
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
----- -----
Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No x
----- -----
As of May 15, 2003, 5,019,588 shares of the Registrant's Common Stock
were outstanding.
================================================================================
ARLINGTON HOSPITALITY, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2003
INDEX
PART I: Financial Information Page
----------------------------- ----
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 4
Consolidated Statements of Operations for the Three Months
Ended March 31, 2003 and 2002 6
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 7
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 26
Item 4 - Controls and Procedures 26
PART II: Other Information
--------------------------
Item 6 - Exhibits and Reports on Form 8-K 27
Signatures 27
Page 2
Part I: Financial Information
Item 1: Financial Statements
Page 3
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
==================================================================================================================
March 31, December 31,
2003 2002
--------------- --------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 4,345,504 $ 3,969,515
Accounts receivable, less allowance of $150,000
at March 31, 2003 and December 31, 2002 (including
approximately $650,000 and $166,000 from related parties) 2,387,653 2,064,463
Notes receivable, current portion 100,000 100,000
Prepaid expenses and other current assets 959,606 975,432
Refundable income taxes 2,179,948 1,574,776
Costs and estimated earnings in excess of billings on
uncompleted contracts 767,629 1,479,101
--------------- --------------
Total current assets 10,740,340 10,163,287
--------------- --------------
Investments in and advances to unconsolidated
hotel joint ventures 4,292,450 4,291,504
--------------- --------------
Property and equipment:
Land 12,901,351 13,418,378
Buildings 77,874,935 76,849,071
Furniture, fixtures and equipment 26,715,199 26,553,701
Construction in progress 2,067,692 6,447,039
Leasehold improvements 2,760,906 2,760,906
--------------- --------------
122,320,083 126,029,095
Less accumulated depreciation and amortization 27,361,713 26,417,755
--------------- --------------
94,958,370 99,611,340
--------------- --------------
Notes receivable, less current portion 927,708 782,083
Deferred income taxes 2,428,000 2,427,000
--------------- --------------
Other assets, net of accumulated amortization of
approximately $1,334,000 and $1,259,000 2,484,400 2,658,500
5,840,108 5,867,583
--------------- --------------
$ 115,831,268 $ 119,933,714
=============== ==============
(continued)
Page 4
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
==================================================================================================================
March 31, December 31,
2003 2002
--------------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
Current liabilities:
Accounts payable $ 2,928,478 $ 3,965,028
Bank line-of-credit 5,980,000 6,384,287
Accrued payroll and related expenses 871,916 827,353
Accrued real estate and other taxes 2,192,603 1,969,297
Other accrued expenses and current liabilities 1,651,431 1,974,350
Current portion of long-term debt 5,243,995 4,038,301
--------------- --------------
Total current liabilities 18,868,423 19,158,616
--------------- --------------
Long-term debt, net of current portion 69,352,642 72,203,688
--------------- --------------
Deferred income 11,302,028 10,867,418
--------------- --------------
Commitments and contingencies
Minority interests 294,313 333,888
--------------- --------------
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 5,019,588 shares at March 31,
2003, and 4,962,817 shares at December 31, 2002 25,098 24,814
Additional paid-in capital 13,310,559 13,184,564
Retained earnings 3,115,080 4,597,601
--------------- --------------
16,450,737 17,806,979
Less:
Stock subscriptions receivable (436,875) (436,875)
--------------- --------------
16,013,862 17,370,104
--------------- --------------
$ 115,831,268 $ 119,933,714
=============== ==============
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)
==================================================================================================================
2003 2002
--------------- --------------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 8,332,009 $ 9,159,927
Other hotels 1,890,968 2,256,553
Development and construction 1,479,978 1,803,750
Hotel sales and commissions 6,443,290 3,359,867
Management services 111,154 233,937
Employee leasing 517,407 852,361
Incentive and royalty sharing 205,655 109,564
Office building rental 177,228 161,670
--------------- --------------
19,157,689 17,937,629
--------------- --------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 7,359,119 7,285,328
Other hotels 2,372,159 2,889,300
Development and construction 1,604,727 1,997,567
Hotel sales and commissions 5,240,817 2,030,948
Management services 88,633 154,530
Employee leasing 506,122 820,637
Office building rental 1,552 16,823
--------------- --------------
17,173,129 15,195,133
--------------- --------------
1,984,560 2,742,496
Depreciation and amortization 1,352,623 1,323,689
Leasehold rents - hotels 1,334,977 1,481,812
Corporate general and administrative 455,331 387,159
Impairment provision 100,000 -
--------------- --------------
Operating loss (1,258,371) (450,164)
Other income (expense):
Interest expense (1,294,969) (1,423,674)
Interest income 119,959 123,830
Other income (expense) (2,270) 60,010
Equity in net income and (losses) from unconsolidated joint ventures (74,446) 86,968
Gain on sale of assets - 327,076
--------------- --------------
Loss before minority interests and income taxes (2,510,097) (1,275,954)
Minority interests in operations of consolidated
subsidiaries and partnerships 39,576 13,203
--------------- --------------
Loss before income tax (2,470,521) (1,262,751)
Income tax benefit 988,000 505,000
--------------- --------------
Net loss $ (1,482,521) $ (757,751)
=============== ==============
Net loss per share:
Basic $ (0.30) $ (0.15)
=============== ==============
Diluted $ (0.30) $ (0.15)
=============== ==============
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)
===================================================================================================================
2003 2002
--------------- --------------
Cash flows from operating activities:
Cash received from customers $ 20,313,497 $ 18,672,124
Cash paid to suppliers and employees (15,093,781) (14,801,544)
Interest received 106,502 225,545
Interest paid (1,300,742) (1,446,687)
Income taxes received (paid) 381,828 (118,999)
--------------- --------------
Net cash provided by operating activities 4,407,304 2,530,439
--------------- --------------
Cash flows from investing activities:
Distributions, and collections on advances,
from unconsolidated joint ventures 285,980 165,228
Purchase of property and equipment (1,796,169) (2,370,365)
Purchase of investments in, and advances
to, unconsolidated joint ventures (325,740) (979,212)
(Issuance) collections on notes receivable (145,625) 6,721
Proceeds from sale of assets - (6,700)
--------------- --------------
Net cash used in investing activities (1,981,554) (3,184,328)
--------------- --------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 3,070,961 1,741,110
Principal payments on long-term debt (4,716,314) (2,365,158)
Net (repayment) borrowings on the line of credit (404,287) (337,415)
Distributions to minority interest - (112,819)
Repurchase of common stock (121) -
--------------- --------------
Net cash used in financing activities (2,049,761) (1,074,282)
--------------- --------------
Net increase (decrease) in cash 375,989 (1,728,171)
Cash and cash equivalents, beginning of period 3,969,515 4,748,156
--------------- --------------
Cash and cash equivalents, end of period $ 4,345,504 $ 3,019,985
=============== ==============
(continued)
Page 7
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
==================================================================================================================
2003 2002
--------------- --------------
Reconciliation of net loss to net cash provided by operating
activities:
Net loss $ (1,482,521) $ (757,752)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 1,352,623 1,323,689
Equity in net (income) loss and interest income from unconsolidated
joint ventures and amortization of deferred income 33,524 (86,968)
Minority interests in net income of consolidated subsidiaries
and partnerships (39,576) (13,203)
Amortization of deferred gain (314,167) (254,390)
Deferred income taxes (1,000) 198,000
Issuance of common stock and options 126,400
Gain on sale of fixed assets - (327,076)
Proceeds from sale of hotels 6,443,290 2,915,630
Income from sale of hotels (1,202,473) (884,682)
Provision for impairment 100,000 -
Changes in assets and liabilities, net of effects of acquisition:
(Increase) decrease in accounts receivable (309,733) 224,460
Decrease in prepaid expenses and
other current assets 2,369 550,868
Increase in refundable income taxes (605,172) (821,999)
Decrease (increase) in costs and estimated earnings
in excess of billings 711,472 (253,317)
(Increase) decrease in other assets (70,201) 58,056
(Decrease) increase in accounts payable (1,036,550) 199,237
(Decrease) increase in accrued payroll and other accrued
expenses and current liabilities (49,277) 239,743
Decrease in accrued interest (5,773) (23,013)
Increase in deferred income 754,069 243,156
--------------- --------------
Net cash provided by operating activities $ 4,407,304 $ 2,530,439
=============== ==============
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, 2003
================================================================================
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, 2003 and December 31, 2002, and the results of its operations
and cash flows for the three months ended March 31, 2003 and 2002. The
results of operations for the three months ended March 31, 2003, 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 2002 Annual Report on Form 10-K.
Certain reclassifications have been made to the 2002 financial statements
in order to conform with the 2003 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
controlling ownership interest. Significant intercompany accounts and
transactions have been eliminated.
3. CRITICAL ACCOUNTING POLICIES:
-----------------------------
The Company's critical accounting policies are described in its 2002 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 for common
stock equivalents. Diluted EPS gives effect to all dilutive common stock
equivalents outstanding for the period. The Company excluded the dilutive
effect of stock options for both periods presented below, and excluded the
impact of convertible partnership interests for the three month period
ending March 31, 2003 since they had an anti-dilutive effect on the EPS
computations. The calculations of basic and diluted earnings (loss) per
share are as follows:
Three Months Ended March 31,
---------------------------------------
2003 2002
----------------- ----------------
Net loss $ (1,482,521) $ (757,752)
Impact of convertible partnership interests - (27,023)
----------------- ----------------
$ (1,482,521) $ (784,775)
================= ================
Weighted average common shares outstanding 5,005,395 4,958,081
Dilutive effect of convertible partnership interests - 168,100
----------------- ----------------
Dilutive common shares outstanding 5,005,395 5,126,181
================= ================
Net loss per share - Basic $ (0.30) $ (0.15)
================= ================
Net loss per share - Diluted $ (0.30) $ (0.15)
================= ================
Page 9
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
================================================================================
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, 2003 and 2002,
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 24 hotels as of March 31, 2003, including 22 hotels
leased from a REIT (Note 9), 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 leases expire through March 2014.
The two 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. The purchase option price for one of these
hotels was $4,000,000 and $3,030,000 for the other hotel, or an aggregate
of $7,030,000 as of March 31, 2003. One of these leases with the purchase
option price of $3,030,000 expires August 31, 2003, and the Company does
not intend to exercise its purchase option.
7. LIMITED PARTNERSHIP GUARANTEED DISTRIBUTIONS:
---------------------------------------------
The Company is the general partner in one partnership 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, in connection with
the approval of all joint venture partners regarding the sale of the
AmeriHost Inn brand and franchising rights, the Company finalized the
terms of an agreement to issue 125,000 new stock options to the partners,
including this same Director, in three existing joint ventures, canceling
60,000 existing stock options held by these partners, and to purchase
their remaining ownership interests in these three joint ventures at
specified prices. One of these acquisitions was completed in 2001, and one
was completed during the second quarter of 2002 using approximately
$800,000. The final acquisition for approximately $830,000 is scheduled to
be completed before August 31, 2003.
Page 10
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
================================================================================
8. INVESTMENTS:
------------
The Company, through wholly-owned subsidiaries, is a general partner or
managing member in 15 joint ventures as of March 31, 2003. As such, the
Company's subsidiaries are secondarily liable for the obligations and
liabilities of these joint ventures. As of March 31, 2003, these joint
ventures had $25.7 million outstanding under mortgage loan agreements.
Approximately $4.3 million of this amount has been included in the
Company's consolidated financial statements as of March 31, 2003, since it
is from joint ventures in which the Company has a majority or controlling
ownership interest, leaving approximately $21.4 million in off-balance
sheet mortgage debt with unconsolidated joint ventures. If the Company
subsequently obtains a majority or controlling ownership interest in a
joint venture, the joint venture's debt will be included in the Company's
consolidated financial statements. Of this $21.4 million of financing, the
Company also has provided approximately $11.7 million in guarantees to the
lenders. Other partners have also guaranteed portions of these financings.
One unconsolidated joint venture mortgage loan in the amount of
approximately $1.7 million at March 31, 2003, which is one of the loans
guaranteed by the Company, matures in 2003. The Company expects the joint
venture to sell this hotel, extend the loan, or refinance the loan prior
to its maturity. The remaining joint venture mortgage loans mature after
2004.
9. 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. As of March 31, 2003, the aggregate remaining unamortized
deferred gain was approximately $7.2 million.
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 eight hotels
are not sold to an unrelated third party or to the Company by the dates
specified. As of March 31, 2003, the first two scheduled rent increases
were not effective due to the sale of hotels by the REIT, however the
Company is obligated to either facilitate the sale to a third party, or
purchase from the REIT, one hotel prior to June 5, 2003, or the third
0.25% rent increase becomes effective. The Company intends to purchase
this hotel using cash of approximately $556,000 and mortgage financing
already committed by the REIT of approximately $1.7 million. However, the
Company is currently negotiating an extension of this purchase obligation.
There can be no assurance that such an extension will be obtained.
The REIT sold one of its hotels to an unrelated third party during the
three months ended March 31, 2002. Consequently, the Company 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.
Page 11
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
================================================================================
10. BUSINESS SEGMENTS:
------------------
The Company's business is primarily involved in seven 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, 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,
(5) employee leasing, consisting of the leasing of employees to various
hotels, (6) incentive and royalty sharing fees due from the owner of the
AmeriHost Inn brand, and (7) office building rental activities.
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, as of and for the three months ended March 31, 2003 and
2002, which is the information utilized by the Company's decision makers
in managing the business:
Revenues 2003 2002
-------- ------------ -------------
Hotel operations $ 10,222,977 $ 11,416,480
Hotel development and construction 1,479,978 1,803,750
Hotel sales and commissions 6,443,290 3,359,867
Hotel management 111,154 233,937
Employee leasing 517,407 852,361
Incentive and royalty sharing 205,655 109,564
Office building rental 177,228 161,670
------------ -------------
$ 19,157,689 $ 17,937,629
Operating costs and expenses
----------------------------
Hotel operations $ 9,731,277 $ 10,174,628
Hotel development and construction 1,604,727 1,997,567
Hotel sales and commissions 5,240,817 2,030,948
Hotel management 88,633 154,530
Employee leasing 506,122 820,637
Office building rental 1,552 16,823
------------ -------------
$ 17,173,128 $ 15,195,133
Operating income (loss)
-----------------------
Hotel operations $ (2,207,989) $ (1,491,030)
Hotel development and construction (125,864) (195,465)
Hotel sales and commissions 1,202,473 1,328,919
Hotel management 10,795 65,897
Employee leasing 10,716 31,109
Incentive and royalty sharing 205,655 109,564
Office building rental 135,120 108,281
Corporate (489,277) (407,440)
------------ -------------
$ (1,258,371) $ (450,165)
============ =============
Page 12
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
================================================================================
10. BUSINESS SEGMENTS (CONTINUED):
------------------------------
Identifiable assets 2003 2002
------------------- ------------ -------------
Hotel operations $100,950,155 $ 95,797,932
Hotel development and construction 2,140,883 1,875,134
Hotel sales and commissions - -
Hotel management 645,956 188,047
Employee leasing 515,243 92,953
Office building rental 6,461,708 6,644,703
Corporate 5,117,323 8,491,317
------------ -------------
$115,831,268 $ 113,090,086
============ =============
Capital expenditures
--------------------
Hotel operations $ 1,772,762 $ 2,146,155
Hotel development and construction 15,218 -
Hotel sales and commissions - -
Hotel management 6,658 3,308
Employee leasing - -
Office building rental 799 220,902
Corporate 732 -
------------ -------------
$ 1,796,169 $ 2,370,365
============ =============
Depreciation/Amortization
-------------------------
Hotel operations $ 1,264,712 $ 1,251,070
Hotel development and construction 1,114 1,648
Hotel sales and commissions - -
Hotel management 11,727 13,510
Employee leasing 569 614
Office building rental 40,556 36,566
Corporate 33,945 20,281
------------ -------------
$ 1,352,623 $ 1,323,689
============ =============
11. BANK LINE OF CREDIT:
--------------------
The Company had $5,980,000 and $6,384,287 outstanding on its bank
operating line-of-credit at March 31, 2003 and December 31, 2002,
respectively. The operating line-of-credit 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), with a
minimum rate of 5.5% per annum (effective rate as of March 31, 2003), and
was scheduled to mature April 30, 2003. Prior to maturity, the Company
renewed the line-of-credit agreement until April 30, 2004. The renewed
line-of-credit facility provides for a maximum amount available of $6.5
million with interest payable monthly at the rate of prime plus 2.5% per
annum (with a floor of 6.75%). The maximum commitment under the
line-of-credit will be reduced to $6.0 million on September 29, 2003, and
to $5.5 million on February 27, 2004. The Company will also be required to
maintain certain financial covenants, including minimum net income,
minimum tangible net worth, a maximum leverage ratio and a minimum debt
service coverage ratio.
Page 13
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
================================================================================
12. LONG-TERM DEBT:
---------------
Approximately $5.2 million is classified as current portion of long-term
debt, including two mortgages in the amount of approximately $2.8 million
which are due within the next twelve months. The Company expects these
loans to be repaid through the sale of the hotels or refinanced prior to
maturity. The Company is currently negotiating to sell one of these hotels
with an outstanding mortgage balance of $1.1 million as of March 31, 2003.
The remaining mortgage bears interest at the floating rate of prime minus
0.25% per annum. If necessary, the Company believes it can refinance this
mortgage at a similar interest rate.
The Company has secured a $20 million construction line of credit
facility, which provides for both construction financing as well as
long-term mortgage financing. The Company utilizes this facility primarily
for the construction of wholly-owned AmeriHost Inn properties, as approved
by the lender on a project-by-project basis. As of March 31, 2003,
approximately $9.1 million has been utilized for four hotel projects,
which is, or will be, converted to long-term financing. The Company has
until May 31, 2003, to utilize this facility for new construction projects
and is currently negotiating the renewal of this facility. Any new hotel
projects with the financing committed under this facility prior to its
expiration will automatically convert to the long-term financing when
construction is completed.
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, 2003.
13. SUPPLEMENTAL CASH FLOW DATA:
----------------------------
The following represents the supplemental schedule of noncash investing
and financing activities for the years ended March 31:
2003 2002
----------- -----------
Notes received in connection with the
sale of hotels $ 150,000 $ -
----------- -----------
Interest paid, net of interest capitalized $ 1,300,742 $ 1,446,687
----------- -----------
14. SALE OF HOTELS:
---------------
The Company sold two wholly owned AmeriHost Inn hotels during the three
months ended March 31, 2003. Net cash proceeds from the sale of these
hotels was approximately $6.4 million, which has been included in hotel
sales and commission revenue in the accompanying consolidated financial
statements. The net book value of these hotels at the time of their sales
was approximately $5.2 million, resulting in operating income from the
sale of these hotels of approximately $1.2 million. In addition,
approximately $4.1 in mortgage debt was paid off with proceeds from the
sale of these hotels. In addition, a joint venture in which the Company
has a minority ownership interest sold its hotel asset during the first
quarter of 2003. The Company accounts for this joint venture by the equity
method and has included its share of the gain from this sale in equity in
net income and (losses) of unconsolidated joint ventures in the
accompanying consolidated financial statements.
Page 14
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2003
================================================================================
14. SALE OF HOTELS (CONTINUED):
---------------------------
Consistent with the 8-K filing dated March 18, 2003, the Company is
exploring a strategy of selling its non-AmeriHost Inn brand hotels along
with 25-35 AmeriHost Inn hotels. The Company has selected a national hotel
broker and is negotiating a written agreement for the broker to represent
the Company in the implementation of this strategy. Management has begun
to perform extensive financial and market analysis with the assistance of
the national broker, and, in certain cases, an outside consultant to
identify the AmeriHost Inn hotels to be marketed for sale. In addition, in
determining which hotels are to be marketed for sale, management will be
evaluating the impact on the Company's cash flow, operations and financial
position post sale, including any impact under Statement of Financial
Accounting Standard No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The results of this hotel analysis and of an
evaluation of the long-term effect on the Company may have a significant
affect on the quantity and timing of the hotels to be sold. If
implemented, the Company expects this strategy will reduce debt and
generate cash to pursue development and other strategic objectives as well
as increase the economic benefits of the Company's transaction with
Cendant. However, there can be no assurances that any sales will be
consummated or, if consummated, when and on what terms. The Company
expects to determine the feasibility and means to best implement its
strategy and identify which hotels to initially market for sale in the
next sixty days.
15. INCENTIVE AND ROYALTY FEES:
---------------------------
The franchisor of the AmeriHost Inn brand, a Cendant Corporation related
company ("Cendant"), has agreed to 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 also will be paid to the Company for new hotels that
the Company develops which are then sold to a buyer who executes a
franchise agreement with Cendant. This fee applies to the first 370 hotels
sold by the Company during the 15-year term of the agreement. To date, the
Company has collected the fee on 19 hotels. Since the potential for
reimbursement exists, 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 incentive and royalty sharing segment
revenue in the accompanying consolidated financial statements on a
straight-line basis over the 76-month period, as the contingencies on the
revenues are removed.
Page 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
GENERAL
The Company is engaged in the development and sale of AmeriHost Inn hotels, and
the ownership, operation and management of AmeriHost Inn hotels and other
mid-price hotels. As of March 31, 2003, the Company had 61 AmeriHost Inn hotels
open, of which 52 were wholly-owned or leased, one was majority-owned, and eight
were minority-owned. During the past 12 months, the Company built and opened
three AmeriHost Inn hotels in which the Company has an ownership interest and
completed construction of one AmeriHost Inn hotel which was built for an
unaffiliated third party. As of March 31, 2003, one wholly-owned AmeriHost Inn
hotel and one hotel in which the Company has a non-controlling minority
ownership interest were under construction. Same room revenues for all AmeriHost
Inn hotels owned and operated by the Company, including unconsolidated
minority-owned hotels, decreased approximately 1.4% during the first quarter of
2003, compared to the first quarter of 2002, attributable to a 0.4% decrease in
occupancy and by a decrease of $0.56 in average daily rate. These results relate
to the 60 AmeriHost Inn hotels that have been operating for at least 13 full
months during the three months ended March 31, 2003.
The table below sets forth information regarding the Company's hotels at March
31, 2003.
Open Under
Hotels Construction Total
--------------- ---------------- ---------------
Hotels Rooms Hotels Rooms Hotels Rooms
------ ----- ------ ----- ------ -----
Consolidated (1):
AmeriHost Inn hotels 53 3,398 1 84 54 3,482
Other brands 8 1,045 - - 8 1,045
------ ----- ------ ----- ------ -----
61 4,443 1 84 62 4,527
------ ----- ------ ----- ------ -----
Unconsolidated:
AmeriHost Inn hotels 8 538 1 96 9 634
Other brands 2 228 - - 2 228
------ ----- ------ ----- ------ -----
10 766 1 96 11 862
------ ----- ------ ----- ------ -----
Totals:
AmeriHost Inn hotels 61 3,936 2 180 63 4,116
Other brands 10 1,273 - - 10 1,273
------ ----- ------ ----- ------ -----
71 5,209 2 180 73 5,389
====== ===== ====== ===== ====== =====
(1) Consolidated hotels are those in which the Company has a 100% or
controlling ownership interest or a leasehold interest.
Revenues from hotel operations consist of the revenues from all consolidated
hotels. Consolidated hotels are those hotels in which the Company has a 100% or
controlling ownership or leasehold interest, and are consolidated in the
Company's financial statements. Unconsolidated hotels are those hotels in which
the Company has a minority or non-controlling ownership or leasehold interest,
and are accounted for by the equity method. Non-core hotels are those hotels
operated as independent of a franchise affiliation (one hotel as of March 31,
2003), or under a national franchise affiliation other than the AmeriHost Inn
brand, such as Days Inn, Ramada Inn, and Howard Johnson Express (nine hotels as
of March 31, 2003). Development and construction revenues consist of fees for
new construction and renovation activities performed by the Company for
unconsolidated 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 receives revenue from management and employee
leasing services provided to unconsolidated hotels and unrelated third parties.
Incentive and royalty sharing fees consist of the amortization of one-time
development incentive fees received upon the sale of an AmeriHost Inn hotel to a
third party who enters into an AmeriHost Inn franchise agreement, and the
Company's portion of the franchise royalty fees paid by all AmeriHost Inn hotels
to Cendant Corporation ("Cendant"), the franchisor and owner of the AmeriHost
Inn brand. Finally, the Company also owns the office building in which its
headquarters is located, and receives revenues as landlord from the third-party
tenants in the building.
Page 16
Total revenues increased 6.8% to $19.2 million during the first quarter of 2003,
from $17.9 million during the first quarter of 2002, due primarily to the
increase from hotel sales and commissions, offset by the decrease in hotel
operations, hotel development, hotel management and employee leasing. Revenues
from consolidated AmeriHost Inn hotels decreased 9.0% to $8.3 million during the
first quarter of 2003, from revenues of $9.2 million during the first quarter of
2002, due primarily to the sale of seven consolidated AmeriHost Inn hotels to
franchisees during the past 15 months. As of March 31, 2003, there were 53
consolidated AmeriHost Inn hotels versus 55 consolidated AmeriHost Inn hotels at
March 31, 2002. Revenues from the development segment decreased to $1.5 million
during the first quarter of 2003, from $1.8 million during the first quarter of
2002, due to the decrease in hotel development activity for unconsolidated
minority owned entities and third parties. Revenues from hotel sales and
commissions increased 91.8% to $6.4 million during the first quarter of 2003,
from $3.4 million during the first quarter of 2002, as a result of the sale of
two wholly-owned AmeriHost Inn hotels during the first three months of 2003,
versus the sale of one wholly-owned AmeriHost Inn hotel during the first three
months of 2002. The Company also received a commission from the sale of one
leased hotel during the first quarter of 2002. Revenues from hotel management
and employee leasing segments decreased by 42.1% in total during the first
quarter of 2003, due primarily to the sale or termination of hotels under
management contracts. Revenues from consolidated non-AmeriHost Inn hotels
decreased 16.2% during the first quarter of 2003, compared to the first quarter
of 2002, as a result primarily of the 1.6% decrease in same room revenue and the
elimination of food and beverage operations at two hotels. The Company recorded
a net loss of ($1.5) million during the first quarter of 2003, or ($0.30) per
diluted share, compared to a net loss of ($757,751) or ($0.15) per diluted share
during the first quarter of 2002.
On September 30, 2000, the Company sold the AmeriHost Inn brands and franchising
rights to Cendant. The agreement with Cendant provides for both short-term and
long-term incentives to the Company as the AmeriHost Inn brands are expanded,
including (i) for the 25-year term of the agreement, favorable royalty payment
terms on any AmeriHost Inn hotels owned/leased and operated by the Company,
including hotels owned through joint ventures with prior approval from Cendant,
(ii) for the 25-year term of the agreement, the sharing of royalties received by
Cendant from all AmeriHost Inn hotels in the franchise system (excluding those
owned/leased and operated by the Company), and (iii) for the 15-year term of the
agreement, a hotel development incentive fee each time an AmeriHost Inn hotel
owned/leased and operated by the Company is sold to an operator who becomes a
Cendant franchisee. The Company received $698,000 in development incentive fees
during the first quarter of 2003 which were deferred and are being amortized
over a 76-month period. Revenues from development incentive and royalty sharing
fees, including the amortization of deferred development incentive fees,
increased 87.7% to approximately $206,000 during the first quarter of 2003
compared to $110,000 during the first quarter of 2002.
Excluding hotels under construction, the Company had an ownership interest in 71
hotels at March 31, 2003, versus 76 hotels at March 31, 2002. Total consolidated
hotels decreased to 61 hotels at March 31, 2003, versus 63 hotels at March 31,
2002. The increased ownership from the development of AmeriHost Inn hotels for
the Company's own account and for joint ventures in which the Company has a
non-controlling minority ownership interest, and the acquisition of a
non-controlling ownership in a non-core hotel, was more than offset by the sale
of AmeriHost Inn hotels to Cendant franchisees and the sale of one non-AmeriHost
Inn hotel.
OPERATING RISKS
The Company's revenues and investments are nearly all in a single industry, the
lodging industry. As a result, the Company's operations and results have been,
and will be, adversely affected by one or more of the risks inherent in the
lodging industry. These risks, include, but are not limited to: competition and
seasonality (as described under "Seasonality" below); cyclical overbuilding; the
results and operations of franchisors utilized by the Company's hotels,
primarily Cendant; changing levels of demand for hotel rooms and related
services, as currently evidenced since the downturn in economic conditions and
the September 11, 2001 terrorist attacks; unexpected or ongoing increases in
hotel expenses, such as insurance, energy and the costs of wages and benefits;
demographic and other market changes which impact customer preferences; changes
in governmental regulations that impact the hotel's cost of doing business; the
inability to fully reduce hotel expenditures to cover hotel revenue shortfalls;
the recurring and extraordinary costs of necessary renovations and refurbishment
of hotels; and the impact of geopolitical events.
If the present economic and lodging industry slowdown or concerns over
geopolitical events worsens significantly, or continues for a protracted period
of time, declines in the occupancy levels or average daily rates of the
Company's hotels could have a material adverse effect on the Company's operating
results.
Page 17
CRITICAL ACCOUNTING POLICIES
The Company's critical accounting policies are described in its 2002 Form 10-K.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2002
Revenues increased 6.8% to $19.2 million during the three months ended March 31,
2003, from $17.9 million during the three months ended March 31, 2002. An
increase in the revenues from the sale of consolidated AmeriHost Inn hotels was
partially offset by a decrease in revenues from hotel operations, hotel
development, hotel management, and employee leasing activities.
Hotel operations revenue decreased 10.5% to $10.2 million during the three
months ended March 31, 2003, from $11.4 million during the three months ended
March 31, 2002. Revenues from consolidated AmeriHost Inn hotels decreased 9.0%
to $8.3 million during the three months ended March 31, 2003, from $9.2 million
during the three months ended March 31, 2002. These decreases were attributable
primarily to the sale of five consolidated AmeriHost Inn hotels to franchisees
during the twelve months ended March 31, 2003, partially offset by the opening
of two newly constructed AmeriHost Inn hotels, and the acquisition of one
AmeriHost Inn hotel from an existing joint venture during this same period. Same
room revenues for the consolidated AmeriHost Inn hotels decreased 2.1%. Revenue
from consolidated other brand hotels decreased 16.2% during the three-month
period, due primarily to the 1.6% decrease in same room revenue and the
elimination of food and beverage operations at two hotels. The hotel operations
segment included the operations of 61 consolidated hotels (including 53
AmeriHost Inn hotels) comprising 4,443 rooms at March 31, 2003, compared to 63
consolidated hotels (including 55 AmeriHost Inn hotels) comprising 4,595 rooms
at March 31, 2002. The Company typically builds new hotels in growing markets
where it anticipates a certain level of additional hotel development. 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 in certain markets. 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. As the revenue from AmeriHost Inn hotels not operated by the Company
increases, the Company's royalty sharing stream from Cendant is also enhanced.
The Company does not anticipate a significant improvement in the operations of
several of its non-core hotels, and intends to sell these assets when the terms
are considered appropriate. See "Liquidity and Capital Resources" below
regarding the Company's evaluation of a strategic plan to sell hotel assets.
Hotel development revenue decreased to $1.5 million during the three months
ended March 31, 2003, from $1.8 million during the three months ended March 31,
2002. 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 one hotel for a minority-owned entity
during the first quarter of 2003, compared to one hotel for a minority-owned
entity and another hotel for a third party during the three months ended March
31, 2002. However, the Company had several additional projects in various stages
of pre-construction development during both three-month periods.
The Company recorded $6.4 million in hotel sales and commission revenue in
connection with the sale of AmeriHost Inn hotels during the first quarter of
2003, compared to $3.4 million during the first quarter of 2002. The Company
closed on the sale of two wholly-owned AmeriHost Inn hotels during the first
quarter of 2003, compared to the sale of one wholly-owned AmeriHost Inn hotel
and the sale of one leased AmeriHost Inn hotel by the REIT during the first
quarter of 2002. The Company intends to continue to build and sell AmeriHost Inn
hotels in order to maximize the value inherent in the Cendant transaction while
enhancing net income and cash flow.
Hotel management revenue decreased 52.5% to $111,154 during the three months
ended March 31, 2003, from $233,937 during the three months ended March 31,
2002. The number of hotels managed for third parties and minority-owned entities
decreased from 13 hotels, representing 963 rooms, at March 31, 2002, to seven
hotels, representing 554 rooms, at March 31, 2003. The decrease included the
elimination of management fees from a minority-owned hotel upon its acquisition
and consolidation during the second quarter of 2002, and the sale of three
unconsolidated joint ventures during the twelve months ended March 31, 2003.
Page 18
Employee leasing revenue decreased 39.3% to $517,407 during the three months
ended March 31, 2003, from $852,361 during the three months ended March 31,
2002, due primarily to the reduction in hotels managed for minority-owned
entities and unrelated third parties as described above.
Development incentive and royalty sharing revenue increased to approximately
$206,000 during the three months ended March 31, 2003, compared to approximately
$110,000 during the three months ended March 31, 2002, as a result of the
Company's sale of additional AmeriHost Inn hotels and the increase in the number
of non-Company owned AmeriHost Inn hotels franchised with Cendant. The Company
received $698,000 during the three months ended March 31, 2003, and $237,000
during the three months ended March 31, 2002, in development incentive fees from
the sale of AmeriHost Inn hotels, with approximately $141,000 and $77,000
recognized during the three months ended March 31, 2003 and 2002, respectively,
from the amortization of this deferred income. In addition, the Company recorded
approximately $65,000 and $33,000 in royalty sharing fees during the three
months ended March 31, 2003 and 2002, respectively.
Office building rental and other revenue, consisting primarily of leasing
activities from the Company's office building in 2003 and 2002, increased to
approximately $177,000 during the three months ended March 31, 2003, from
approximately $162,000 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 contained approximately 50,000 rentable square feet when
acquired, and has been subsequently increased to approximately 56,000 rentable
square feet through various building improvements. 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 increased 13.0% to $17.2 million during the
three months ended March 31, 2003, from $15.2 million during the three months
ended March 31, 2002, or 89.6% and 84.7% of total revenues during the three
months ended March 31, 2003 and 2002, respectively. Operating costs and expenses
in the hotel operations segment decreased 4.4% to $9.7 million from $10.2
million during the three months ended March 31, 2003 and 2002, respectively. A
decrease in operating costs associated with the fewer number of AmeriHost Inn
hotels included in this segment (53 hotels at March 31, 2003 versus 55 hotels at
March 31, 2002), was partially offset by increases in operating costs. Total
hotel operating costs and expenses as a percentage of segment revenue increased
to 95.2% during the three months ended March 31, 2003, from 89.1% during the
three months ended March 31, 2002. Operating costs and expenses as a percentage
of revenues from the consolidated AmeriHost Inn hotels increased to 88.3% during
the three months ended March 31, 2003, from 79.5% during the three months ended
March 31, 2002. Operating costs and expenses as a percentage of revenues from
the other consolidated hotels decreased to 125.4% during the three months ended
March 31, 2003, from 128.0% during the three months ended March 31, 2002. The
increases in cost as a percentage of revenue were due primarily to significant
increases in several hotel operating costs including energy and insurance.
Operating costs and expenses for the hotel development segment decreased 19.7%
to $1.6 million during the three months ended March 31, 2003 from $2.0 million
during the three months ended March 31, 2002, consistent with the decrease in
hotel development revenues for the three months ended March 31, 2003. Operating
costs and expenses in the hotel development segment as a percentage of segment
revenue decreased during the three months ended March 31, 2003, due to the
decrease in hotel construction activity and the preconstruction development
activity from one hotel project during the first quarter of 2003.
Hotel management segment operating costs and expenses decreased 42.6% to $88,633
during the three months ended March 31, 2003, from $154,530 during the three
months ended March 31, 2002. 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 38.3% to
$506,122 during the three months ended March 31, 2003, from $820,637 during the
three months ended March 31, 2002, which is consistent with the 39.3% decrease
in segment revenue for the three months ended March 31, 2003.
Office building rental and other operating costs and expenses consisted
primarily of expenses related to the management of the Company's office building
in 2003 and 2002. Certain of the office building costs have been allocated to
the Company's other operating segments. Office building rental and other
operating expenses were $1,552 during the three months ended March 31, 2003, and
$16,823 during the three months ended March 31, 2002.
Page 19
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 2.2% to $1.4 million during the
three months ended March 31, 2003, from $ 1.3 million during the three months
ended March 31, 2002. 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 9.9% to approximately $1.3 million during the
three months ended March 31, 2003, from $1.5 million during the three months
ended March 31, 2002. This decrease was due primarily to the sale of one leased
AmeriHost Inn hotel during the first three months of 2002, and the exercise of
lease purchase options on two hotels during 2002.
Corporate general and administrative expense increased 17.6% to $455,331 during
the three months ended March 31, 2003, from $387,159 during the three months
ended March 31, 2002, which can be attributed primarily to an increase in
professional fees.
The Company had an operating loss of ($1.3) million during the three months
ended March 31, 2003, compared to an operating loss of ($450,165) during the
three months ended March 31, 2002. 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 increased to
($1.2) million during the three months ended March 31, 2003, from ($581,129)
during the three months ended March 31, 2002. This increase in operating loss
was due to the decrease in revenues and higher operating costs and expenses
during the first quarter of 2003 compared to the first quarter of 2002 and
impairment provisions of $100,000 during the first quarter of 2003. Operating
loss from the hotel development segment decreased to ($125,864) during the three
months ended March 31, 2003, from an operating loss of ($195,465) during the
three months ended March 31, 2002. The decrease in hotel development operating
loss was due to the increase in pre-construction hotels development fees from
hotels developed and constructed for unconsolidated minority-owned entities
during the first quarter of 2003. Operating income from hotel sales and
commissions remained relatively flat at approximately $1.2 million during the
first quarter of 2003 and $1.3 million during the first quarter of 2002. The
differences in sale prices and net book values of the two AmeriHost Inn hotels
during the first quarter of 2003, were comparable to the one wholly-owned
AmeriHost Inn hotel sold during the first quarter of 2002, and the commission
earned from the sale of a leased hotel. The hotel management segment operating
income decreased $55,102 to $10,795 during the three months ended March 31,
2003, from $65,897 during the three months ended March 31, 2002. This decrease
was due primarily to the reduction of hotels managed for unconsolidated minority
owned entities. Employee leasing operating income decreased to $10,716 during
the three months ended March 31, 2003, from $31,109 during the three months
ended March 31, 2002, due to the reduction in employee leasing revenues.
Operating income from incentive and royalty sharing increased to $205,655 during
the first quarter of 2003, from $109,564 during the first quarter of 2002,
attributable to the sale of additional AmeriHost Inn hotels and the increase in
the number of AmeriHost Inn hotels which pay royalty fees to Cendant. Office
building rental operating income increased to $135,120 during the three months
ended March 31, 2003, from $108,281 during the three months ended March 31,
2003, and was attributable primarily to additional tenants and operational
efficiencies.
Interest expense decreased slightly to approximately $1.3 million during the
three months ended March 31, 2003, from $1.4 million during the three months
ended March 31, 2002. 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, and the decrease from lower interest on floating rate debt, 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, and interest computed on the Company's equity
investment.
The Company's share of equity in income (loss) of affiliates was ($74,446)
during the three months ended March 31, 2003, compared to $86,968 during the
three months ended March 31, 2002. The fluctuation in equity of affiliates
during the three months ended March 31, 2003, compared to the three months ended
March 31, 2002, was primarily due to the recognition of the Company's increased
share of net operating losses from certain joint ventures during
Page 20
the 2003 period in excess of the Company's stated ownership percentage versus
its share recognized in these joint ventures in the 2002 period. Distributions
from affiliates were $4,739 during the three months ended March 31, 2003,
compared to $6,085 during the three months ended March 31, 2002.
The Company recorded gains from the sale of assets of $327,076 during the three
months ended March 31, 2002, which was comprised primarily of the unamortized
deferred gain remaining from the original sale of the hotel to the REIT, which
was recognized upon the consummation of the sale of this hotel by the REIT to an
unrelated third party 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 recorded income tax benefit of $988,000 during the first quarter of
2003, compared to $505,000 during the first quarter of 2002, which are directly
related to the pre-tax losses incurred during the first quarters of 2003 and
2002, respectively.
The Company reported a net loss of ($1.5) million during the first quarter of
2003, compared to a net loss of ($757,751) during the first quarter of 2002,
primarily due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has seven main sources of cash from operating activities: (i)
revenues from hotel operations; (ii) fees from development, construction and
renovation projects, (iii) revenues from the sale of hotel assets; (iv) fees
from management contracts, (v) fees from employee leasing services, (vi) hotel
development incentive fees and royalty sharing pursuant to the Cendant
transaction, and (vii) rental income from the ownership of an office building.
Approximately 10% of the Company's hotel operations revenues is not received at
checkout and is generated through other businesses and contracts (such as direct
billings to local companies using the hotel and third party hotel room brokers),
which 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. 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. Management fee revenues typically are received
by the Company within five working days of 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 development incentive fee from Cendant is typically received
within 20 days of the simultaneous closing of the Company's sale of an AmeriHost
Inn hotel and the execution by the buyer of a franchise agreement with Cendant,
including all proper documentation. Royalty sharing payments from Cendant are
received quarterly, based on the actual royalty payments received by Cendant
from all AmeriHost Inn hotel franchisees, except for those operated by the
Company. Office space rents are typically received monthly in advance, around
the first of each month.
During the first three months of 2003, the Company received cash from operations
of $4.4 million, compared to cash received from operations of $2.5 million
during the first three months of 2002, or an increase in cash provided by
operations of $1.9 million. The increase in cash flow from operations during the
first three months of 2003, when compared to 2002, can be primarily attributed
to the sale of two wholly-owned hotels in 2003, versus the sale of one
wholly-owned hotel and one leased hotel in 2002, and the increase in hotel
development for a minority-owned hotel during 2003.
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. The Board of Directors has authorized the
Company to buy back, at any time and without notice, up to 1,000,000 shares of
its own common stock under certain conditions. Under this authorization, to date
the Company has repurchased 26,240 shares.
Pursuant to an amendment to the master lease agreement with a 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
Page 21
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
at predetermined prices. If the Company does not complete the purchase of the
hotel within the specified time period, then the Company's rent payment on all
of the 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). During 2002, the Company purchased the REIT's second choice, using
approximately $680,000 in cash, plus mortgage financing already committed from
an affiliate of the REIT, and facilitated the sale of one hotel by the REIT. The
Company must facilitate the sale or purchase of the REIT's third choice by June
5, 2003. The Company believes a sale of this hotel is not likely in the near
future, and thus it intends to purchase this hotel by this date using cash of
approximately $556,000 and mortgage financing already committed by an affiliate
of the REIT of approximately $1.7 million. The Company is currently negotiating
an extension of this purchase commitment. There can be no assurance that such an
extension will be obtained.
On September 18, 2000, in connection with the approval of all joint venture
partners regarding the sale of the AmeriHost Inn brand and franchising rights to
Cendant, the Company finalized the terms of an agreement to issue 125,000 new
stock options to the partners in three existing joint ventures, canceling 60,000
existing stock options held by these partners, and to purchase their remaining
ownership interests in these three joint ventures at specified prices. One of
the partners in these three joint ventures is a director of the Company. One of
these acquisitions was completed in 2001, and one was completed during the
second quarter of 2002 using approximately $797,000. The final acquisition for
approximately $830,000 is scheduled to be completed before August 31, 2003.
During the first three months of 2003, the Company used $2.0 million in
investing activities compared to using $3.2 million during the first three
months of 2002. During the first three months of 2003, the Company used $1.8
million to purchase property and equipment for consolidated AmeriHost Inn hotels
and used $39,761 for investments in and advances to affiliates, net of
distributions and collections on advances from affiliates. 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.
Cash used in financing activities was $2.0 million during the first three months
of 2003, compared to cash used in financing activities of $1.1 million during
the first three months of 2002. In 2003, the contributing factors were principal
repayments of $4.7 million, including the repayment of mortgages in connection
with the sale of a hotel, offset by $3.1 million in proceeds from the mortgage
financing of consolidated hotels and $404,287 in net repayments on the line of
credit. In 2002, the primary factors were principal repayments of $2.4 million,
including the repayment of mortgages in connection with the sale of hotels,
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.
The Company has secured a $20 million construction line of credit facility,
which provides for both construction financing as well as long-term mortgage
financing. The Company utilizes this facility primarily for the construction of
wholly-owned AmeriHost Inn properties, as approved by the lender on a
project-by-project basis. As of March 31, 2003, approximately $9.1 million has
been utilized for four hotel projects, which is, or will be, converted to
long-term financing. The Company has until May 31, 2003, to utilize this
facility for new projects and is currently negotiating the renewal this
facility. Any new hotel projects with financing committed under this facility
prior to its expiration will automatically convert to the long-term financing
when construction is completed.
The Company, through wholly-owned subsidiaries, is a general partner or managing
member in 15 joint ventures as of March 31, 2003. As such, the Company is
secondarily liable for the obligations and liabilities of these joint ventures.
As of March 31, 2003, these joint ventures had $25.7 million outstanding under
mortgage loan agreements. Approximately $4.3 million of this amount has been
included in the Company's consolidated financial statements as of March 31,
2003, since it is from joint ventures in which the Company has a majority or
controlling ownership interest, leaving approximately $21.4 million in
off-balance sheet mortgage debt with unconsolidated joint ventures. If the
Company subsequently obtains a majority or controlling ownership interest in a
joint venture,
Page 22
the joint venture's debt will be included in the Company's consolidated
financial statements. Of this $21.4 million of financing, the Company also has
provided approximately $11.7 million in guarantees to the lenders. Other
partners have also guaranteed portions of the financings. One unconsolidated
joint venture mortgage loan in the amount of approximately $1.7 million at March
31, 2003, which is one of the loans guaranteed by the Company, matures in 2003.
The Company expects the joint venture may sell this hotel, extend the loan, or
refinance the loan 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 advances bear interest at rates ranging
from prime to 10% per annum and are due upon demand. The advances were $2.8
million at March 31, 2003, 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, 2003.
At March 31, 2003, the Company had $6.0 million outstanding under its operating
line-of-credit, which matured April 30, 2003. Prior to its maturity, the Company
renewed the line-of-credit with the lender through April 30, 2004. The renewed
line-of-credit is collateralized by substantially all the assets of the Company,
subject to first mortgages from other lenders on hotel assets, and has a maximum
available of $6.5 million, reducing to $6.0 million on September 29, 2003, and
to $5.5 million on February 27, 2004. The renewed line-of-credit provides for
interest at the rate of prime, plus 2.5%, with a floor of 6.75%. The credit line
also provides for the maintenance of certain financial covenants, including
minimum tangible net worth, a maximum leverage ratio, a minimum debt service
coverage ratio, and a minimum net income covenant for 2003.
The Company intends to pursue longer term financing options with other lenders
that would better match the Company's business plan of developing, building and
selling AmeriHost Inn hotels. However, there can be no assurance that the
Company will obtain an alternative credit facility of longer duration under
terms and conditions that the Company deems satisfactory.
Consistent with the 8-K filing dated March 18, 2003, the Company is exploring a
strategy of selling its non-AmeriHost Inn brand hotels along with 25-35
AmeriHost Inn hotels over the next two years. The Company has selected a
national hotel broker and is negotiating a written agreement for the broker to
represent the Company in the implementation of this strategy. Management has
begun to perform extensive financial and market analysis with the assistance of
the national broker, and, in certain cases, an outside consultant to identify
the AmeriHost Inn hotels to be marketed for sale. In addition, in determining
which hotels are to be marketed for sale, management will be evaluating the
impact on the Company's cash flow, operations and financial position post sale,
including any impact under Statement of Financial Accounting Standard No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." The results of
this hotel analysis and of an evaluation of the long-term effect on the Company
may have a significant affect on the quantity and timing of the hotels to be
sold. If implemented, the Company expects this strategy will reduce debt and
generate cash to pursue development and other strategic objectives as well as
increase the economic benefits of the Company's transaction with Cendant.
However, there can be no assurances that any sales will be consummated or, if
consummated, when and on what terms. The Company expects to determine the
feasibility and means to best implement its strategy and identify which hotels
to initially market for sale in the next sixty days.
Page 23
The following table summarizes the contractual obligations of the Company,
including off-balance sheet mortgage loan guarantees provided for certain joint
ventures:
Payments due by period
----------------------
Less than 1 - 3 3 - 5 More than
Total 1 year years years 5 years
------------- ------------- ------------- ------------- -------------
Long-term debt - consolidated $ 74,596,637 $ 5,243,995 $ 12,975,226 $ 16,655,962 $ 39,721,454
Long-term debt - unconsolidated
joint ventures 21,402,596 2,508,582 2,496,301 2,148,847 14,248,866
Line of credit 5,980,000 5,980,000 - - -
Operating leases - consolidated 66,610,363 5,935,592 11,938,435 12,394,517 36,341,819
Operating leases - unconsolidated - - - - -
Purchase obligations:
Joint venture buyout 829,800 829,800 - - -
Lease buyout 2,225,000 2,225,000 - - -
Construction contracts 2,172,921 2,172,921 - - -
Other long-term liabilities - - - - -
------------- ------------- ------------- ------------- -------------
Total $ 173,817,317 $ 24,895,890 $ 27,409,962 $ 31,199,326 $ 90,312,139
============= ============= ============= ============= =============
The Company expects cash from operations, including proceeds from the sale of
hotels, to be sufficient to pay all operating and interest expenses in 2003, as
well as commitments to purchase hotel assets; provided that current financing
facilities remain in place.
FINANCING RISKS
The availability of financing on reasonable terms is critical to the ability of
the Company to develop hotels, maintain its operations and sell hotels. The
Company's results and prospects may be materially affected by the availability
and conditions of development and mortgage financing and lines-of-credit for the
Company and for potential purchasers and franchisees of the Company's hotels.
The requirements of lenders may be influenced by economic and geopolitical
conditions, as well as the Company's business. Changes in the availability or
terms of financing could have a material adverse effect on the company.
SEASONALITY AND OTHER RISKS
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 primarily midwest
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. Quarterly earnings also may be
adversely affected by events beyond the Company's control, such as extreme
weather conditions, economic factors, securities and geopolitical concerns 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. Also, since the Company's
management fees are based upon a percentage of the hotel's total gross revenues,
the Company is further susceptible to seasonal variations.
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
Page 24
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 25
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, 2003. As the table incorporates only those
exposures that existed as of March 31, 2003, 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 $ 5,980,000 5.5%
Mortgage debt - fixed rate $ 27,066,206 7.45%
Mortgage debt - variable rate $ 47,530,431 5.94%
ITEM 4. CONTROLS AND PROCEDURES
- ------
Our chief executive officer and our chief financial officer have concluded,
based on their evaluation within 90 days before the filing date of this
quarterly report, that the Company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c))
are effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in our internal controls or in other
factors that could significantly affect our disclosure controls and procedures
subsequent to the date of the previously mentioned evaluation.
Page 26
PART II: Other Information
Item 6. Exhibits and Reports on Form 8-K:
- ------
(a) The following exhibits are included in this Report on Form 10-Q
filed May 15, 2003:
Exhibit No. Description
----------- -----------
10.14 Amended and Restated Loan and Security Agreement
with LaSalle Bank, NA
99.1 Certification of CEO and CFO
(b) Reports on Form 8-K. The following reports on Form 8-K were
filed during this period covered by this report:
Date filed Description
---------- -----------
March 18, 2003 Presentation given at the Roth Capital Partners
Growth Stock Conference
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/ Jerry H. Herman
-----------------------------
Jerry H. Herman
Chief Executive Officer
By: /s/ James B. Dale
-----------------------------
James B. Dale
Chief Financial Officer
Chief Accounting Officer
Date: May 15, 2003
Page 27
CERTIFICATIONS
--------------
I, Jerry H. Herman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arlington
Hospitality, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Jerry H, Herman
------------------------
Jerry H. Herman
Chief Executive Officer
Page 28
CERTIFICATIONS
--------------
I, James B. Dale, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arlington
Hospitality, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ James B. Dale
---------------------------
James B. Dale
Chief Financial Officer
Chief Accounting Officer
Page 29