UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended September 30, 2003.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From _____________________ to __________________.
Commission file number: 001-31775
ASHFORD HOSPITALITY TRUST, INC.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 86-1062192
- -------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS employer identification number)
incorporation or organization)
14180 Dallas Parkway, 9th Floor 75254
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Dallas, Texas
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (972) 490-9600
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 No X
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 14, 2003
- -------------------------------------- -------------------------------------
Common Stock, $.01 par value per share 25,733,949
ASHFORD HOSPITALITY TRUST, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Consolidated and Combined Balance Sheets for the Company as of
September 30, 2003 (Unaudited) and for the Predecessor as of December
31, 2002 3
Consolidated and Combined Statements of Operations for the Company for
the period from August 28, 2003 through September 30, 2003, and for the
Predecessor for the period from July 1, 2003 through August 27, 2003
and for the three months ended September 30, 2002 (Unaudited) 4
Consolidated and Combined Statements of Operations for the Company for
the period from August 28, 2003 through September 30, 2003, and for the
Predecessor for the period from January 1, 2003 through August 27, 2003
and for the nine months ended September 30, 2002 (Unaudited) 5
Consolidated and Combined Statement of Owners' Equity for the Company
for the period from August 28, 2003 through September 30, 2003
(Unaudited) 6
Consolidated and Combined Statements of Cash Flows for the nine months
ended September 30, 2003 and 2002 (Unaudited) 7
Notes to Consolidated and Combined Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 18
ITEM 4. CONTROLS AND PROCEDURES 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 19
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 19
ITEM 5. OTHER INFORMATION 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
SIGNATURES 21
2
PART I: FINANCIAL INFORMATION (UNAUDITED)
ITEM 1: FINANCIAL STATEMENTS
ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR
CONSOLIDATED AND COMBINED BALANCE SHEETS
(UNAUDITED)
THE COMPANY THE PREDECESSOR
SEPTEMBER 30, DECEMBER 31,
2003 2002
------------- -------------
ASSETS
Investment in hotel properties, net $ 90,608,715 $ 85,246,801
Cash and cash equivalents 134,862,057 2,968,814
Restricted cash 442,860 3,353,554
Accounts receivable, net of allowance of
$21,742 and $9,368, respectively 1,497,210 1,226,152
Inventories 178,514 210,620
Deferred financing costs and other, net 908,445 1,278,832
Prepaid expenses 496,639 772,008
Other assets 2,962,798 44,572
Due from affiliates 211,969 315,093
------------- -------------
Total assets $ 232,169,207 $ 95,416,446
============= =============
LIABILITIES AND OWNERS' EQUITY
Mortgage notes payable $ 16,000,000 $ 82,126,150
Capital leases payable 494,862 621,351
Accounts payable 1,008,242 1,053,632
Accrued payroll expense 736,515 366,974
Accrued vacation expense 210,432 202,967
Accrued sales and occupancy taxes 301,382 293,804
Accrued real estate taxes 594,068 638,025
Accrued expenses 1,797,788 411,594
Accrued interest 160,000 301,388
Due to affiliates 216,000 89,607
------------- -------------
Total liabilities 21,519,289 86,105,492
Minority interest 37,939,033 --
Commitments and contingencies (see Note 9)
Preferred stock, $0.01 par value, 50,000,000 shares authorized,
none issued or outstanding -- --
Common stock, $0.01 par value, 200,000,000 shares authorized,
25,733,949 shares issued and outstanding 257,340 --
Additional paid-in capital 178,952,341 --
Unearned compensation (6,200,638) --
Accumulated deficit (298,158) --
Owners' equity -- 9,310,954
------------- -------------
Total owners' equity 172,710,885 9,310,954
------------- -------------
Total liabilities and owners' equity $ 232,169,207 $ 95,416,446
============= =============
See notes to consolidated and combined financial statements.
3
ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
THE COMPANY THE PREDECESSOR THE PREDECESSOR
PERIOD FROM PERIOD FROM THREE MONTHS ENDED
AUGUST 28, 2003 TO JULY 1, 2003 TO SEPTEMBER 30,
SEPTEMBER 30, 2003 AUGUST 27, 2003 2002
------------------ --------------- ------------------
REVENUE
Rooms $ 2,764,856 $ 5,098,062 $ 7,342,550
Food and beverage 463,125 832,795 1,330,238
Other 70,572 210,554 213,726
------------ ------------ ------------
Total hotel revenue 3,298,553 6,141,411 8,886,514
Asset management fees 110,591 -- --
------------ ------------ ------------
TOTAL REVENUE 3,409,144 6,141,411 8,886,514
EXPENSES
Hotel operating expenses
Rooms 632,740 1,145,377 1,650,993
Food and beverage 373,313 687,997 1,041,925
Other direct 76,130 127,968 145,846
Indirect 1,084,900 2,233,281 3,606,319
Management fees (see Note 8) 98,997 182,678 267,870
------------ ------------ ------------
Total hotel expenses 2,266,080 4,377,301 6,712,953
Property taxes, insurance, and other 248,900 375,423 592,882
Depreciation and amortization 328,052 723,445 1,261,115
Corporate general and administrative:
Stock-based compensation 228,215 -- --
Other corporate and administrative 717,076 -- --
------------ ------------ ------------
TOTAL OPERATING EXPENSES 3,788,323 5,476,169 8,566,950
------------ ------------ ------------
OPERATING INCOME (LOSS) (379,179) 665,242 319,564
------------ ------------ ------------
Interest income 100,487 5,951 23,617
Interest expense (85,049) (1,567,280) (1,624,916)
------------ ------------ ------------
LOSS BEFORE MINORITY INTEREST (363,741) (896,087) (1,281,735)
------------ ------------ ------------
Minority interest 65,583 -- --
------------ ------------ ------------
NET LOSS $ (298,158) $ (896,087) $ (1,281,735)
============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.01)
============
WEIGHTED AVERAGE BASIC AND DILUTED
SHARES OUTSTANDING 23,544,987
============
See notes to consolidated and combined financial statements.
4
ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
THE COMPANY THE PREDECESSOR THE PREDECESSOR
PERIOD FROM PERIOD FROM NINE MONTHS ENDED
AUGUST 28, 2003 TO JANUARY 1, 2003 TO SEPTEMBER 30,
SEPTEMBER 30, 2003 AUGUST 27, 2003 2002
------------------ ------------------ -----------------
REVENUE
Rooms $ 2,764,856 $ 19,688,349 $ 21,967,286
Food and beverage 463,125 3,629,807 4,272,022
Other 70,572 681,656 816,775
---------------- ---------------- ----------------
Total hotel revenue 3,298,553 23,999,812 27,056,083
Asset management fees 110,591 -- --
---------------- ---------------- ----------------
TOTAL REVENUE 3,409,144 23,999,812 27,056,083
EXPENSES
Hotel operating expenses
Rooms 632,740 4,511,632 4,858,354
Food and beverage 373,313 2,801,002 3,100,032
Other direct 76,130 498,085 468,949
Indirect 1,084,900 8,687,362 9,376,744
Management fees (see Note 8) 98,997 718,408 812,952
---------------- ---------------- ----------------
Total hotel expenses 2,266,080 17,216,489 18,617,031
Property taxes, insurance, and other 248,900 1,600,082 1,743,348
Depreciation and amortization 328,052 2,915,777 3,511,011
Corporate general and administrative:
Stock-based compensation 228,215 -- --
Other corporate and administrative 717,076 -- --
---------------- ---------------- ----------------
TOTAL OPERATING EXPENSES 3,788,323 21,732,348 23,871,390
---------------- ---------------- ----------------
OPERATING INCOME (LOSS) (379,179) 2,267,464 3,184,693
---------------- ---------------- ----------------
Interest income 100,487 22,800 40,996
Interest expense (85,049) (4,583,146) (4,691,901)
---------------- ---------------- ----------------
LOSS BEFORE MINORITY INTEREST (363,741) (2,292,882) (1,466,212)
---------------- ---------------- ----------------
Minority interest 65,583 -- --
---------------- ---------------- ----------------
NET LOSS $ (298,158) $ (2,292,882) $ (1,466,212)
================ ================ ================
BASIC AND DILUTED LOSS PER SHARE $ (0.01)
================
WEIGHTED AVERAGE BASIC AND DILUTED
SHARES OUTSTANDING 23,544,987
================
See notes to consolidated and combined financial statements.
5
ASHFORD HOSPITALITY TRUST, INC.
CONSOLIDATED AND COMBINED STATEMENT OF OWNERS' EQUITY
FROM AUGUST 28, 2003 (INCEPTION) TO SEPTEMBER 30, 2003
(UNAUDITED)
Common Stock
------------------------- Additional
Number of $0.01 Paid-In Unearned Accumulated
Shares Par Value Capital Compensation Deficit Total
------------- --------- ------------- -------------- ------------ -------------
Formation Transactions on August 28, 2003:
Issuance of Shares in Connection with
Initial Public Offering 22,500,000 $ 225,000 $ 202,171,981 $ -- $ -- $ 202,396,981
Underwriters' Fees -- -- (16,925,000) -- -- (16,925,000)
Issuance of Restricted Shares to
Employees & Directors 675,300 6,753 6,070,947 (6,077,700) -- --
Issuance of Shares to Underwriters 65,024 650 (650) -- -- --
Issuance of Shares Sold to CEO & Chairman 500,000 5,000 4,180,000 -- -- 4,185,000
Contribution of Initial Properties -- -- 7,063,690 -- -- 7,063,690
Issuance of Shares for Initial Properties 216,634 2,167 (2,167) -- -- --
Establish Minority Interest in
Operating Partnership -- -- (38,004,615) -- -- (38,004,615)
------------- --------- ------------- ------------- ---------- -------------
Balance at August 28, 2003 23,956,958 $ 239,570 $ 164,554,186 $ (6,077,700) $ -- $ 158,716,056
Over-allotment Option Exercised:
Issuance of Shares 1,734,072 17,341 14,496,842 -- -- 14,514,183
Issuance of Restricted Shares to Employees 39,017 390 350,763 (351,153) -- --
Issuance of Shares to Underwriters 3,902 39 (39) -- -- --
Additional Offering Expenses -- -- (449,411) -- -- (449,411)
Amortization of Unearned Compensation -- -- -- 228,215 -- 228,215
Net Loss -- -- -- -- (298,158) (298,158)
------------- --------- ------------- ------------- ---------- -------------
Balance at September 30, 2003 25,733,949 $ 257,340 $ 178,952,341 $ (6,200,638) $ (298,158) $ 172,710,885
============= ========= ============= ============= ========== =============
See notes to consolidated and combined financial statements.
6
ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,591,040) $ (1,466,212)
Adjustments to reconcile net loss to net cash flow
provided by operations:
Depreciation and amortization 3,243,829 3,511,011
Amortization of deferred financing costs 369,573 355,636
Amortization of unearned compensation 228,215 --
Minority interest (65,583) --
Changes in assets and liabilities:
Accounts receivable and inventories (238,952) (286,378)
Prepaids, other assets, and due from affiliates (2,729,234) (491,442)
Restricted cash 2,910,694 (761,928)
Accounts payable, accrued expenses, and
due to affiliates 1,539,947 (401,871)
---------------- ----------------
Net cash flow provided by operating activities $ 2,667,449 $ 458,816
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements and additions to hotel properties, net (476,983) (1,113,037)
---------------- ----------------
Net cash flow used in investing activities $ (476,983) $ (1,113,037)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions paid to owners (1,850,750) (1,942,695)
Contributions received from owners 765,000 --
Net (payments) borrowings on mortgage notes payable (62,851,155) 918,204
Payment of deferred financing costs -- (356,922)
Proceeds received from initial public offering 202,396,981 --
Proceeds from sale of stock to CEO & Chairman 4,185,000 --
Cash paid upon the Company's formation (10,082,071) --
Proceeds received from over-allotment option 14,514,183 --
Payment of offering costs (17,374,411) --
---------------- ----------------
Net cash flow provided by (used in) financing activities $ 129,702,777 $ (1,381,413)
---------------- ----------------
Net change in cash and cash equivalents $ 131,893,243 $ (2,035,634)
---------------- ----------------
Cash and cash equivalents, beginning balance $ 2,968,814 $ 5,152,361
---------------- ----------------
Cash and cash equivalents, ending balance $ 134,862,057 $ 3,116,727
================ ================
See notes to consolidated and combined financial statements.
7
ASHFORD HOSPITALITY TRUST, INC. AND PREDECESSOR
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003 (UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Ashford Hospitality Trust, Inc. and subsidiaries (the "Company") is a
self-advised real estate investment trust ("REIT"), which commenced operations
on August 28, 2003 when it completed its initial public offering ("IPO") and
concurrently consummated certain other formation transactions, including the
acquisition of six hotels ("initial properties") and eight asset management and
consulting contracts, all previously owned by affiliates of Remington Hotel
Corporation (the "Predecessor").
The IPO consisted of the sale of 22,500,000 shares of common stock ("initial
shares"), which included 22,336,478 shares sold to the public at a price of $9
per share and 163,522 shares sold to affiliates at a price of $8.37 a share. The
IPO generated gross proceeds of approximately $202.4 million. However, the
aggregate proceeds to the Company, net of underwriters' discount and offering
costs, was approximately $185.6 million. In addition to the initial shares,
500,000 shares of common stock were sold to Messrs. Archie and Montgomery
Bennett, the Company's Chairman and Chief Executive Officer, respectively,
216,634 shares of common stock were conveyed to a limited partnership owned by
Messrs. Archie and Montgomery Bennett, 25,000 shares of restricted stock were
issued to Company directors, 65,024 shares of common stock were issued to the
underwriters, and 650,300 shares of restricted stock were issued to Company
executives and certain employees of the Company and its affiliates. In total,
23,956,958 shares of common stock were issued in connection with the Company's
formation. In addition, 5,657,917 units of limited partnership interest, valued
at $9 per unit, were issued to Company executives and certain employees of the
Company and its affiliates.
Concurrent with the Company's formation, the Company utilized its net proceeds
of $185.6 million to repay $65.7 million of mortgage indebtedness secured by the
initial properties and paid an additional $3.0 million in cash related to the
acquisition of one of the initial properties. Hence, the Company had
approximately $116.9 million in available cash immediately following its
formation.
On September 26, 2003, the Company issued an additional 1,734,072 shares of
common stock at a price of $9 per share, which generated additional net proceeds
of $14.5 million, as a result of the exercise of the underwriters'
over-allotment option. Concurrent with this, the Company issued an additional
39,017 shares of restricted stock to its executives and certain employees of the
Company and its affiliates and an additional 3,902 shares of common stock to its
underwriters.
For the Company to qualify as a REIT, it cannot operate hotels. Therefore, the
Company's operating partnership, which is owned 81.97% by the Company and 18.03%
by Company executives and certain employees of the Company and its affiliates,
leases its hotels to Ashford TRS Corporation ("Ashford TRS"), which is a
wholly-owned subsidiary of the operating partnership. Ashford TRS then engages
hotel management companies to operate the hotels under management contracts.
Ashford TRS will be treated as a taxable REIT subsidiary for federal income tax
purposes. Therefore, the Company's operating partnership and principal source of
funds will be dependent on Ashford TRS's ability to generate cash flow from the
operation of the hotels.
2. BASIS OF PRESENTATION
These consolidated and combined financial statements presented herein include
all of the accounts of the Company beginning with its commencement of operations
on August 28, 2003. Prior to that time, this report includes the combined
financial statements of the Predecessor.
These consolidated and combined financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America ("GAAP") for interim financial information and in accordance with the
rules and regulations of the Securities and Exchange Commission. Accordingly,
they do not include certain information and disclosures required by GAAP for
complete financial statements. However, in the opinion of management, all
adjustments, consisting of normal recurring adjustments and accruals, considered
necessary for a fair presentation have been included. In addition, the
operations of the hotels have historically been seasonal as three of the initial
properties maintain higher occupancy rates during the summer months. This
seasonality pattern can be expected to cause fluctuations in our quarterly lease
revenue under the percentage leases. Consequently, operating results for the
three and nine months ended September 30, 2003 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2003.
These consolidated and combined financial statements should be read in
conjunction with the Predecessor's audited consolidated financial statements and
footnotes for the year ended December 31, 2002, included in the Company's
Post-Effective Amendment #1 to Form S-11 as filed with the Securities and
Exchange Commission on August 26, 2003. The accounting policies used in
preparing these consolidated and combined financial statements are consistent
with those described in such Form S-11. However, certain previously reported
amounts have been reclassified to conform to the current presentation.
In addition, at the time the Company filed its Post-Effective Amendment #1 to
Form S-11 and after consultation with the Company's auditors, Ernst & Young, the
unaudited pro forma balance sheet as of June 30, 2003, included in such Form
S-11, did not classify minority interest separately in accordance with EITF No.
94-2, but rather included such minority interest with additional paid-in
capital. Also, the unaudited pro forma statements of operations included in such
Form S-11 for the six months ended June 30, 2003 and year ended December 31,
2002, did not allocate a percentage of the Company's net loss to minority
interest. However, after recommendation by Ernst & Young and concurrence of the
Company, it has been determined that minority interest should be separately
categorized in the accompanying consolidated and combined financial statements.
For the period since the Company's
8
formation on August 28, 2003 through September 30, 2003, the impact of
allocating the appropriate percentage of the Company's net loss to minority
interest reduced dilutive loss per share by $0.0028.
3. SIGNIFICANT ACCOUNTING POLICIES SUMMARY
Principles of Consolidation - The accompanying consolidated and combined
financial statements reflect the total activity of the Company and its
wholly-owned subsidiaries or its Predecessor and are presented on a combined
basis as a result of common ownership and control. All significant intercompany
accounts and transactions among the combined entities have been eliminated in
the combined financial statements.
Revenue Recognition - Revenues include room, food, beverage, and other hotel
revenues such as long-distance telephone service, laundry, and space rentals.
Revenues are recognized as the related services are delivered.
Use of Estimates - The preparation of these consolidated and combined financial
statements in accordance with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Investment in Hotel Properties - Hotel properties are stated at the
Predecessor's historical cost, net of any impairment charges, plus an
approximate $8.1 million minority interest partial step-up recorded upon
formation of the Company on August 28, 2003. Hotel properties are depreciated
using the straight-line method over their estimated useful lives, which range
from 15 to 39 years for buildings and improvements and 3 to 5 years for
furniture, fixtures, and equipment. Improvements and additions which extend the
life of the property are capitalized. Hotel properties are reviewed for
impairment whenever events or changes in circumstances indicate the carrying
value of the hotel properties may not be recoverable. To date, no such
impairment charges have been recognized.
Income Taxes - As a REIT, the Company generally will not be subject to federal
corporate income tax on that portion of its net income (loss) that does not
relate to taxable REIT subsidiaries. However, Ashford TRS will be treated as a
taxable REIT subsidiary for federal income tax purposes. For the three and nine
months ended September 30, 2003, Ashford TRS is reporting a taxable loss that is
not material to the accompanying consolidated financial statements.
Earnings (Loss) Per Share - Basic earnings (loss) per share is calculated by
dividing net income (loss) available to common shareholders by the weighted
average common shares outstanding during the period. Dilutive earnings (loss)
per share reflects the potential dilution that could occur if securities or
other contracts to issue common shares were exercised or converted into common
shares, whereby such exercise or conversion would result in lower earnings
(loss) per share. At September 30, 2003, none of the aforementioned 714,317
restricted shares of common stock are vested. Since the Company is reporting a
net loss for both the three and nine month periods ended September 30, 2003, the
effects of the 714,317 restricted shares of common stock and the aforementioned
5,657,917 units of limited partnership interest are not dilutive for both the
three and nine month periods ended September 30, 2003. Therefore, basic and
dilutive earnings (loss) per share are the same for all periods presented.
Recent Accounting Pronouncements -
SFAS No. 146 - In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
supersedes previous accounting guidance, principally Emerging Issues Task Force
("EITF") Issue No. 94-3. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized. The adoption of SFAS No.
146 in the first quarter of 2003 did not have any immediate effect on the
Company's results of operations, financial position, or cash flows.
FIN No. 45 - In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN No.
45"). FIN No. 45 requires that a guarantor recognize a liability for certain
guarantees and enhance disclosures for such guarantees. The recognition
provisions of FIN No. 45 are applicable on a prospective basis for guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
No. 45 are effective for financial statements for periods ending after December
15, 2002. The adoption of FIN No. 45 did not have a material impact on the
Company's results of operations, financial position, or cash flows.
FIN No. 46 - In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46 requires existing unconsolidated variable interest entities, as
defined, to be consolidated by their primary beneficiaries if the variable
interest entities do not effectively disperse risks among parties involved. FIN
No. 46 is effective immediately for variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. FIN No. 46 applies to financial statements
for periods ending after December 15, 2003, related to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company is still assessing the impact of FIN No.
46.
SFAS No. 149 - In April 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments including certain derivative instruments embedded in other contracts
and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June
9
30, 2003 and for hedging relationships designated after June 30, 2003. The
adoption of SFAS No. 149 is not expected to have a material impact on the
Company's results of operations, financial position, or cash flows.
SFAS No. 150 - In May 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and requires
that those instruments be classified as liabilities in statements of financial
position. Previously, many of these financial instruments were classified as
equity. SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period after June 15, 2003. However, in October 2003, the
Financial Accounting Standards Board elected to indefinitely defer
implementation of certain standards of SFAS No. 150 relating to limited-life
subsidiaries. The adoption of SFAS No. 150 is not expected to have a material
impact on the Company's results of operations, financial position, or cash
flows.
4. INVESTMENT IN HOTEL PROPERTIES
Investment in Hotel Properties as of September 30, 2003 is as follows
(unaudited):
Land $ 16,650,298
Buildings and improvements 77,298,353
Furniture, fixtures, and equipment 15,749,900
-------------
Total cost 109,698,551
Accumulated depreciation (19,089,836)
-------------
Investment in hotel properties, net $ 90,608,715
=============
Upon formation of the Company on August 28, 2003, the Company recorded an
approximate $8.1 million minority interest partial step-up to the historical net
carrying values of its hotel properties resulting from the acquisition of
minority interest partners.
5. MORTGAGE NOTES PAYABLE
Mortgages notes payable as of September 30, 2003 represents a $16 million
variable-rate mortgage bearing interest at the greater of LIBOR plus 3.5% or
5.5%, which is secured by hotel property with a carrying value of approximately
$18.8 million. Interest payments are due monthly through maturity on December
31, 2006. Beginning January 1, 2005, monthly principal payments of $20,000 are
due as well. At September 30, 2003, LIBOR was approximately 1.29%.
In connection with the Company's formation, the Company used a portion of its
proceeds from its IPO to repay $65.7 million of mortgage indebtedness secured by
the initial properties.
6. EMPLOYEE STOCK GRANTS
Upon consummation of the IPO and subsequent exercise of the underwriters'
over-allotment, the Company issued a total of 714,317 shares of restricted stock
to its executives, directors, and certain employees of the Company and its
affiliates. Such shares vest over three years and are charged to compensation
expense on a straight-line basis based on the IPO price of $9 per share. For
both the three and nine month periods ended September 30, 2003, the Company
recognized compensation expense of approximately $228,000 related to these
shares.
7. MINORITY INTEREST
Minority interest in the operating partnership represents the limited partners'
actual proportionate share of the equity in the operating partnership. Net
income (loss) is allocated to minority interest based on the weighted average
limited partnership percentage ownership throughout the period. Upon formation
of the Company on August 28, 2003, and subsequent exercise of the underwriters'
over-allotment option on September 26, 2003, the Company issued 5,657,917 units
of limited partnership interest to affiliates, representing an 18.03% minority
interest ownership. Beginning August 28, 2004, each unit of limited partnership
interest may be redeemed for a) cash, at the option of the holder, or b) one
share of the Company's common stock, at the Company's election.
8. RELATED PARTY TRANSACTIONS
Under previous agreements with an affiliate, the Predecessor was obligated to
pay the affiliate management fees of 3%-4.5% of gross revenues, as defined by
the agreements, and to reimburse the affiliate for certain accounting and
administrative expenses. Under related management agreements, the Predecessor
was obligated to pay a fee equal to 8% of all invoiced third-party costs of the
expenditures necessary for replacement of furniture, fixtures, equipment, and
building repairs.
Upon formation of the Company on August 28, 2003, the Company is now obligated
to pay the affiliate a) monthly management fees equal to the greater of $10,000,
adjusted annually, or 3% of gross revenues as well as an annual incentive
management fee, if applicable, b) a development fee of 3% of project costs
associated with development, c) a project management fee of 4% of project costs,
reduced to 3% once project costs exceed 5% of gross revenues, and d) other
general fees at current market rates as approved by the Company's independent
directors.
10
Under these agreements, the Company or its Predecessor paid the following
amounts during the three and nine month periods ended September 30, 2003 and
2002 (unaudited):
COMPANY &
THE COMPANY THE PREDECESSOR THE PREDECESSOR PREDECESSOR THE PREDECESSOR
------------------ ---------------- ------------------ ----------------- -----------------
PERIOD FROM PERIOD FROM THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
AUGUST 28, 2003 TO JULY 1, 2003 TO SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
SEPTEMBER 30, 2003 AUGUST 27, 2003 2002 2003 2002
------------------ ---------------- ------------------ ----------------- -----------------
Management fees $ 98,997 $ 182,678 $ 267,870 $ 817,405 $ 812,952
Purchasing/project management fees 970 19,832 26,022 55,266 137,916
Development fees -- -- -- -- --
Special Limited Partner fees -- 122,995 148,844 506,307 498,128
Other fees 25,758 151,054 270,356 382,370 404,382
---------------- ---------------- ---------------- ---------------- ----------------
Total $ 125,725 $ 476,559 $ 713,092 $ 1,761,348 $ 1,853,378
================ ================ ================ ================ ================
Upon formation of the Company on August 28, 2003 and related redemption of the
Company's interest in its Special Limited Partner, payments to the Special
Limited Partner are no longer considered to be related party transactions.
9. COMMITMENTS AND CONTINGENCIES
Franchise Fees - Under the existing franchise agreements, the Company is
obligated to pay the franchisors royalty fees between 3% and 4% of gross room
revenue, and fees for marketing, reservations, and other related activities
aggregating between 2.75% and 3.75% of gross room revenue.
Restricted Cash - Under the existing mortgage loan agreement, the Company is
obligated to escrow payments for insurance and real estate taxes. In addition,
the Company is obligated to escrow 4% of gross revenue for capital improvements.
Management Fees - Under the existing management agreements, the Company is
obligated to pay a) monthly management fees equal to the greater of $10,000,
adjusted annually, or 3% of gross revenues as well as an annual incentive
management fee, if applicable, b) a development fee of 3% of project costs
associated with development, c) a project management fee of 4% of project costs,
reduced to 3% once project costs exceed 5% of gross revenues, and d) other
general fees at current market rates as approved by the Company's independent
directors.
The Company is currently subject to litigation arising in the normal course of
its business. In the opinion of management, none of these lawsuits or claims
against the Company, either individually or in the aggregate, is likely to have
a material adverse effect on the Company's business, results of operations, or
financial condition. In addition, the Company has adequate insurance in place to
cover such litigation.
10. SUPPLEMENTAL CASH FLOW INFORMATION
During both the nine month periods ended September 30, 2003 and 2002, interest
paid was approximately $4.3 million.
In connection with the Company's formation on August 28, 2003 and subsequent
exercise of the underwriters' over-allotment, the Company recorded non-cash
transactions as follows: a) an approximate $8.1 million minority interest
partial step-up to the historical net carrying values of its hotel properties
resulting from the acquisition of minority interest partners, b) an approximate
$3.3 million forgiveness of debt, c) an approximate $170,000 write-off of
deferred loan costs associated with the repaid mortgage loans, and d) the
issuance of 714,317 shares of restricted stock to Company executives, employees,
affiliates, and directors.
11. SUBSEQUENT EVENTS
On October 8, 2003, the Company acquired five hotel properties from FelCor
Lodging Limited Partnership for approximately $50 million in cash. The purchase
price was the result of an arms' length negotiation. Annualized revenues of the
acquired hotels are approximately $26 million. The Company used a portion of the
proceeds from its IPO as the source for funds for the acquisition of these
properties.
On October 16, 2003, the Company exercised its option to reassign its rights
under its eight asset management and consulting contracts back to an affiliate
until January 1, 2004 in order to meet REIT eligible-income thresholds in 2003.
As a result, the Company will forego related asset management fee income over
this period of approximately $250,000. However, the related guarantee of payment
associated with these fees will be extended for a like period.
On October 31, 2003, the Company announced that it will be acquiring four hotel
properties from Noble Investment Group for approximately $33.9 million in cash.
The purchase price was the result of an arms' length negotiation. Annualized
revenues of these four hotels are approximately $9.5 million. The Company plans
to use a portion of the proceeds from its IPO as the source for funds for the
acquisition of these properties. The acquisition is expected to close in late
November 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere herein. This report contains
forward-looking statements within the meaning of the federal securities laws.
Ashford Hospitality Trust, Inc. (the "Company" or "we" or "our") cautions
investors that any forward-looking statements presented herein, or which
management may
11
make orally or in writing from time to time, are based on management's beliefs
and assumptions at that time. Throughout this report, words such as
"anticipate," "believe," "expect," "intend," "may," "might," "plan," "estimate,"
"project," "should," "will," "result," and other similar expressions, which do
not relate solely to historical matters, are intended to identify
forward-looking statements. Such statements are subject to risks, uncertainties,
and assumptions and are not guarantees of future performance, which may be
affected by known and unknown risks, trends, uncertainties, and factors beyond
our control. Should one or more of these risks or uncertainties materialize, or
should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, or projected. We caution investors
that while forward-looking statements reflect our good faith beliefs at the time
they are made, such statements are not guarantees of future performance and are
impacted by actual events that occur after such statements are made. We
expressly disclaim any responsibility to update forward-looking statements,
whether as a result of new information, future events, or otherwise.
Accordingly, investors should use caution in relying on past forward-looking
statements, which are based on results and trends at the time they are made, to
anticipate future results or trends.
Some of the risks and uncertainties that may cause our actual results,
performance, or achievements to differ materially from those expressed or
implied by forward-looking statements include, among others, those discussed in
our Post-Effective Amendment #1 to Form S-11 as filed with the Securities and
Exchange Commission on August 26, 2003. These risks and uncertainties continue
to be relevant to our performance and financial condition. Moreover, we operate
in a very competitive and rapidly changing environment where new risk factors
emerge from time to time. It is not possible for management to predict all such
risk factors, nor can it assess the impact of all such risk factors on our
business or the extent to which any factor, or combination of factors, may cause
actual results to differ materially from those contained in any forward-looking
statements. Given these risks and uncertainties, investors should not place
undue reliance on forward-looking statements as a prediction of actual results.
OVERVIEW
We are a real estate investment trust ("REIT") that commenced operations upon
completion of our initial public offering ("IPO") and related formation
transactions on August 28, 2003. As of September 30, 2003, we owned six hotels,
four Embassy Suites and two Radisson Hotels, and eight asset management and
consulting contracts.
These consolidated and combined financial statements presented herein include
all of the accounts of the Company beginning with its commencement of operations
on August 28, 2003. Prior to that time, this report includes the combined
financial statements of certain affiliates of Remington Hotel Corporation (the
"Predecessor").
Results of operations are best explained by three key performance indicators:
occupancy, average daily rate ("ADR"), and net revenue per available room
("RevPAR"), which equals the occupancy percentage multiplied by ADR. Increases
in RevPar attributable to increases in occupancy are generally accompanied by
increases in most categories of variable operating costs. Increases in RevPar
attributable to increases in ADR are accompanied by increases in limited
categories of operating costs, such as management fees and franchise fees.
The following table illustrates the key performance indicators for our portfolio
for the three and nine months ended September 30, 2003 and 2002:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------- --------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Consolidated (six hotels)
Hotel revenues $ 9,439,964 $ 8,886,514 $ 27,298,365 $ 27,056,083
RevPar $ 78.12 $ 72.95 $ 75.18 $ 73.55
Occupancy 76.51% 70.18% 72.27% 67.00%
ADR $ 102.10 $ 103.94 $ 104.02 $ 109.78
Embassy Suites
Hotel revenues $ 6,088,595 $ 5,860,739 $ 18,790,691 $ 18,985,095
RevPar $ 86.26 $ 83.22 $ 89.56 $ 89.93
Occupancy 77.01% 72.63% 77.05% 75.33%
ADR $ 112.01 $ 114.58 $ 116.24 $ 119.39
Radisson Hotels
Hotel revenues $ 3,351,369 $ 3,025,775 $ 8,507,674 $ 8,070,988
RevPar $ 65.27 $ 56.73 $ 52.45 $ 47.67
Occupancy 75.73% 66.32% 64.73% 53.83%
ADR $ 86.18 $ 85.54 $ 81.03 $ 88.55
12
RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2003 and September 30, 2002
Revenue. Total revenue for the three months ended September 30, 2003 increased
approximately $664,000 or 7.47% from total revenue for the three months ended
September 30, 2002, primarily due to increased room revenues and asset
management fees offset slightly by decreased food and beverage revenues. Room
revenues increased due to an increase in RevPar to $78.12 for the three months
ended September 30, 2003 compared to $72.95 for the respective prior year
period, which consisted of a 9.02% increase in occupancy and a 1.77% decrease in
ADR.
Room revenues for the three months ended September 30, 2003 increased
approximately $520,000 or 7.09% compared to the same prior year period,
primarily due to the aforementioned increase in occupancy. Both the Las Vegas
Embassy Suites and Covington Radisson experienced increases in occupancy due to
an enhanced focus on weekend group sales. Occupancy also increased at the Dulles
Embassy Suites due to a recovery in that marketplace, which had suffered a
downturn following the September 11, 2001 terrorist events. These occupancy
increases were slightly offset by a decrease in occupancy at both the Dallas and
Austin Embassy Suites due to a downturn in the Texas economy, which is heavily
dependent on business in the high-tech and telecom sectors.
Food and beverage revenues for the three months ended September 30, 2003
decreased approximately $34,000 or 2.58% compared to the same prior year period.
Food and beverage revenues decreased at both the Dulles Embassy Suites and
Dallas Embassy Suites due to higher than usual banquet revenues experienced in
2002 that did not recur in 2003. In addition, food and beverage revenues were
down at the Dallas Embassy Suites due to the aforementioned decrease in
occupancy. Food and beverage revenues also decreased at the Covington Radisson
due to a shift in customer mix toward airline crews, who utilize food and
beverage facilities to a lesser extent than other business travelers.
Asset management fees increased to approximately $111,000 for the three months
ended September 30, 2003, compared to zero for the same prior year period due to
the eight asset management and consulting contracts acquired from an affiliate
upon formation of the Company on August 28, 2003.
Hotel Operating Expenses. Hotel operating expenses, which consist of rooms
expense, food and beverage expense, other direct expenses, indirect expenses,
and management fees, decreased approximately $70,000 or 1.04% for the three
months ended September 30, 2003 compared to the same prior year period,
primarily due to a decrease in indirect expenses somewhat offset by an increase
in room expense. Overall, hotel profit margin increased approximately $623,000
from approximately $2.2 million for the three months ended September 30, 2002 to
approximately $2.8 million for the three months ended September 30, 2003.
Room expense increased 7.70 % for the three months ended September 30, 2003
compared to the same prior year period primarily due to variable costs
associated with the aforementioned overall increase in occupancy as well as
increased payroll costs. Over the same comparative period, food and beverage
expense increased 1.86% due to rising food and payroll costs. However, indirect
expenses decreased approximately $288,000 or 7.99% for the three months ended
September 30, 2003 compared to the same prior year period. Indirect expenses
decreased due to:
o decreased sales and marketing expenses at the Dallas Embassy
Suites and Holtsville Radisson resulting from lower payroll costs
at these locations as well as cost-savings measures implemented
in Dallas;
o decreased repairs and maintenance expense at the Las Vegas
Embassy Suites, Covington Radisson, and Holtsville Radisson due
to improvement programs in effect in 2002 that did not recur in
2003;
o offset by increased general and administrative fees due to
increased payroll;
o offset by increased energy costs due the air conditioning system
running inefficiently during a portion of 2003 at the Austin
Embassy Suites, increased rates at the Dallas Embassy Suites, and
increased usage at the Holtsville Radisson.
Property taxes, insurance, and other. Property taxes, insurance, and other
increased approximately $31,000 or 5.30% for the three months ended September
30, 2003 compared to the same prior year period due to increased property tax
rates.
Depreciation and amortization. Depreciation and amortization decreased
approximately $210,000 or 16.6 2% for the three months ended September 30, 2003
compared to the same prior year period as a result of certain assets becoming
fully depreciated.
Corporate general and administrative. Corporate general and administrative
expense increased to approximately $945,000 for the three months ended September
30, 2003 compared to zero for the same prior year period as a result of expenses
associated with being a newly-formed, publicly-traded company, including
salaries, payroll taxes, benefits, insurance, stock-based compensation related
to employee stock grants, audit fees, and directors fees. For 2003, the total
includes approximately $228,000 of non-cash expenses associated with the
amortization of employee stock grants.
Operating Income. Operating income decreased approximately $34,000 from
operating income of approximately $320,000 for the three months ended September
30, 2002 to operating income of approximately $286,000 for the three months
ended September 30, 2003 as a result of the aforementioned operating results.
Interest Income. Interest income increased approximately $83,000 from
approximately $24,000 for the three months ended September 30, 2002 to
approximately $106,000 for the three months ended September 30, 2003 due to
interest earned on funds received from the Company's IPO.
Interest Expense. Interest expense remained virtually flat at approximately $1.6
million for both the three month periods ended September 30, 2003 and 2002. Upon
completion of the Company's initial public offering and related formation
transactions on August 28, 2003, the Company repaid the majority of its mortgage
notes payable. In 2003, nonrecurring costs of approximately
13
$124,000 related to exit fees incurred in connection with the repaid mortgage
notes offset the decrease in interest expense associated with the lower debt
balance. As of September 30, 2003, only a $16 million variable-rate mortgage,
bearing interest at the greater of LIBOR plus 3.5% or 5.5%.
Minority Interest. Minority interest increased to approximately $66,000 for the
three months ended September 30, 2003 compared to zero for the same prior year
period. Upon formation of the Company on August 28, 2003, minority interest in
the operating partnership was established to represent the limited partners'
actual proportionate share of the equity in the operating partnership. Net
income (loss) is allocated to minority interest based on the weighted average
limited partnership percentage ownership throughout the period.
The unaudited pro forma balance sheet as of June 30, 2003, included in the
Company's Post-Effective Amendment #1 to Form S-11, did not classify minority
interest separately in accordance with EITF No. 94-2, but rather included such
minority interest with additional paid-in capital. Also, the unaudited pro forma
statements of operations included in such Form S-11 for the six months ended
June 30, 2003 and year ended December 31, 2002, did not allocate a percentage of
the Company's net loss to minority interest.
Net Loss. Net loss decreased approximately $87,000, or 6.83%, from approximately
$1.3 million for three months ended September 30, 2002 to approximately $1.2
million for the three months ended September 30, 2003, as a result of the
aforementioned operating results.
Comparison of the Nine Months Ended September 30, 2003 and September 30, 2002
Revenue. Total revenue for the nine months ended September 30, 2003 increased
approximately $353,000 or 1.30% from total revenue for the nine months ended
September 30, 2002, primarily due to increased room revenues offset by decreased
food and beverage revenues and decreased other revenues. Room revenues increased
due to an increase in RevPar to $75.18 for the nine months ended September 30,
2003 compared to $73.55 for the respective prior year period, which consisted of
a 7.87% increase in occupancy and a 5.24% decrease in ADR.
Room revenues for the nine months ended September 30, 2003 increased
approximately $486,000 or 2.21% compared to the same prior year period,
primarily due to the aforementioned increase in occupancy offset somewhat by a
decrease in ADR. The Covington Radisson experienced an increase in occupancy due
to an enhanced focus on weekend group sales. Occupancy also increased at the
Dulles Embassy Suites due to a recovery in that marketplace, which had suffered
a downturn following the September 11, 2001 terrorist events. These occupancy
increases were offset by a decrease in occupancy and ADR at both the Dallas and
Austin Embassy Suites due to a downturn in the Texas economy, which is heavily
dependent on business in the high-tech and telecom sectors.
Food and beverage revenues for the nine months ended September 30, 2003
decreased approximately $179,000 or 4.19% compared to the same prior year
period. Food and beverage revenues decreased at both the Dulles Embassy Suites
and Dallas Embassy Suites due to higher than usual banquet revenues experienced
in 2002 that did not recur in 2003. In addition, food and beverage revenues were
down at the Dallas Embassy Suites due to the aforementioned decrease in
occupancy. Food and beverage revenues also decreased at the Covington Radisson
due to a shift in customer mix toward airline crews, who utilize food and
beverage facilities to a lesser extent than other business travelers.
Other revenues for the nine months ended September 30, 2003 decreased
approximately $65,000 or 7.90% compared to the same prior year period, primarily
due to a decrease in telephone revenues as customers shifted from in-room phones
to cellular phones.
Asset management fees increased to approximately $111,000 for the nine months
ended September 30, 2003, compared to zero for the same prior year period due to
the eight asset management and consulting contracts acquired from an affiliate
upon formation of the Company on August 28, 2003.
Hotel Operating Expenses. Hotel operating expenses, which consist of rooms
expense, food and beverage expense, other direct expenses, indirect expenses,
and management fees, increased approximately $866,000 or 4.65% for the nine
months ended September 30, 2003 compared to the same prior year period,
primarily due to increases in room expense, food and beverage expense, and
indirect expense.
Room expense increased approximately 5.89 % for the nine months ended September
30, 2003 compared to the same prior year period primarily due to variable costs
associated with the aforementioned overall increase in occupancy as well as
increased payroll costs. Over the same comparative period, food and beverage
expense increased 2.40% due to rising food and payroll costs. Indirect expenses
increased approximately $396,000 or 4.22% for the nine months ended September
30, 2003 compared to the same prior year period. Indirect expenses increased due
to:
o increased repairs and maintenance expense at the Dallas Embassy
Suites and Austin Embassy Suites due to improvements in 2003 that
did not occur in 2002, partially offset by decreased repairs and
maintenance expense at the Las Vegas Embassy Suites, Covington
Radisson, and Holtsville Radisson due to improvement programs in
effect in 2002 that did not recur in 2003;
o increased energy costs due the air conditioning system running
inefficiently during a portion of 2003 at the Austin Embassy
Suites, increased usage at the Covington Radisson due to
increased occupancy, and a colder 2003 winter at the Holtsville
Radisson;
o increased general and administrative fees due to increased
payroll in 2003;
o increased ownership expenses due to higher than usual
professional and legal fees in 2003.
14
Property taxes, insurance, and other. Property taxes, insurance, and other
increased approximately $106,000 or 6.06% for the nine months ended September
30, 2003 compared to the same prior year period due to increased insurance
premiums following the terrorist events of September 11, 2001 and increased
property tax rates.
Depreciation and amortization. Depreciation and amortization decreased
approximately $267,000 or 7.61% for the nine months ended September 30, 2003
compared to the same prior year period as a result of certain assets becoming
fully depreciated.
Corporate general and administrative. Corporate general and administrative
expense increased to approximately $945,000 for the nine months ended September
30, 2003 compared to zero for the same prior year period as a result of expenses
associated with being a newly-formed, publicly-traded company, including
salaries, payroll taxes, benefits, insurance, stock-based compensation related
to employee stock grants, audit fees, and directors fees. For 2003, the total
includes approximately $228,000 of non-cash expenses associated with the
amortization of employee stock grants.
Operating Income. Operating income decreased approximately $1.3 million from
operating income of approximately $3.2 million for the nine months ended
September 30, 2002 to operating income of approximately $1.9 million for the
nine months ended September 30, 2003 as a result of the aforementioned operating
results.
Interest Income. Interest income increased approximately $82,000 from
approximately $41,000 for the nine months ended September 30, 2002 to
approximately $123,000 for the nine months ended September 30, 2003 due to
interest earned on funds received from the Company's IPO.
Interest Expense. Interest expense remained virtually flat at approximately $4.7
million for both the nine month periods ended September 30, 2003 and 2002. Upon
completion of the Company's initial public offering and related formation
transactions on August 28, 2003, the Company repaid the majority of its mortgage
notes payable. In 2003, nonrecurring costs of approximately $124,000 related to
exit fees incurred in connection with the repaid mortgage notes offset the
decrease in interest expense associated with the lower debt balance. As of
September 30, 2003, only a $16 million variable-rate mortgage, bearing interest
at the greater of LIBOR plus 3.5% or 5.5%, remained outstanding.
Minority Interest. Minority interest increased to approximately $66,000 for the
nine months ended September 30, 2003 compared to zero for the same prior year
period. Upon formation of the Company on August 28, 2003, minority interest in
the operating partnership was established to represent the limited partners'
actual proportionate share of the equity in the operating partnership. Net
income (loss) is allocated to minority interest based on the weighted average
limited partnership percentage ownership throughout the period.
The unaudited pro forma balance sheet as of June 30, 2003, included in the
Company's Post-Effective Amendment #1 to Form S-11, did not classify minority
interest separately in accordance with EITF No. 94-2, but rather included such
minority interest with additional paid-in capital. Also, the unaudited pro forma
statements of operations included in such Form S-11 for the six months ended
June 30, 2003 and year ended December 31, 2002, did not allocate a percentage of
the Company's net loss to minority interest.
Net Loss. Net loss was approximately $2.6 million for the nine months ended
September 30, 2003 and approximately $1.5 million for the nine months ended
September 30, 2002, which represents a net loss increase of approximately $1.1
million or 76.72% as a result of the aforementioned operating results.
Funds From Operations
The White Paper on Funds From Operations ("FFO") approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in April 2002 defines FFO as net income (loss) computed in accordance
with generally accepted accounting principles ("GAAP"), excluding gains (or
losses) from sales of properties and extraordinary items as defined by GAAP,
plus depreciation and amortization of real estate assets, and net of adjustments
for the portion of these items related to unconsolidated entities and joint
ventures. NAREIT developed FFO as a relative measure of performance of an equity
REIT to recognize that income-producing real estate historically has not
depreciated on the basis determined by GAAP.
We compute FFO in accordance with our interpretation of standards established by
NAREIT, which may not be comparable to FFO reported by other REITs that do not
define the term in accordance with the current NAREIT definition or that
interpret the NAREIT definition differently than us. FFO does not represent cash
generated from operating activities as determined by GAAP and should not be
considered as an alternative to a) GAAP net income (loss) as an indication of
our financial performance or b) GAAP cash flows from operating activities as a
measure of our liquidity, nor is it indicative of funds available to fund our
cash needs, including our ability to make cash distributions.
We believe that to facilitate a clear understanding of our historical operating
results, FFO should be considered along with our net income (loss) and cash
flows reported in the consolidated financial statements.
15
The following table reconciles net loss to FFO for the three and nine months
ended September 30, 2003 and 2002:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net loss $(1,194,245) $(1,281,735) $(2,591,040) $(1,466,212)
Depreciation and amortization 1,051,497 1,261,115 3,243,829 3,511,011
Minority interest (65,583) -- (65,583) --
----------- ----------- ----------- -----------
Gross FFO (208,331) (20,620) 587,206 2,044,799
Less FFO related to minority interest (6,435) -- (6,435) --
----------- ----------- ----------- -----------
FFO $ (201,896) $ (20,620) $ 593,641 $ 2,044,799
=========== =========== =========== ===========
The decrease in FFO for the three and nine month periods ended September 30,
2003 compared to the respective 2002 periods primarily relates to approximately
$945,000 of corporate general and administrative expenses that we incurred
subsequent to our IPO and related formation transactions on August 28, 2003,
which includes approximately $228,000 of non-cash stock-based compensation. No
such costs were incurred prior to that time.
LIQUIDITY AND CAPITAL RESOURCES
Our principal source of funds to meet our cash requirements, including
distributions to stockholders, will be our share of the operating partnership's
cash flow. The operating partnership's principal sources of revenue will
ultimately include (i) cash flow from hotel operations, (ii) interest income
from mortgages we own, and (iii) rental income from third parties in
sale-leaseback transactions. To date, however, all cash flow has been generated
from hotel operations and management fees related to the eight asset management
and consulting contracts with an affiliate.
Cash flow from hotel operations is subject to all operating risks common to the
hotel industry, including:
o Competition for guests from other hotels;
o Adverse effects of general and local economic conditions;
o Dependence on demand from business and leisure travelers, which may
fluctuate and be seasonal;
o Increases in energy costs, airline fares, and other expenses related
to travel, which may deter traveling;
o Increases in operating costs related to inflation and other factors,
including wages, benefits, insurance, and energy;
o Overbuilding in the hotel industry, especially in particular markets;
and
o Actual or threatened acts of terrorism and actions taken against
terrorists, which often cause public concern about travel safety.
Upon consummation of the IPO and related formation transactions, we had
approximately $116.9 million in cash to invest in lodging-related assets and for
general corporate purposes. We also had $16.0 million of outstanding mortgage
debt related to one of the hotels. Shortly thereafter, we generated additional
net proceeds of $14.5 million related to the underwriters' exercise of their
over-allotment option. As of September 30, 2003, we had $134.9 million of cash
remaining, which represents a small increase primarily due to cash flows from
operations offset by general expenditures and working capital needs since our
formation.
On October 8, 2003, the Company acquired five hotel properties from FelCor
Lodging Limited Partnership for $50 million in cash. The purchase price was the
result of an arms' length negotiation. The Company used a portion of the
proceeds from its IPO as the source for funds for the acquisition of these
properties. The Company has earmarked an additional $8.2 million in capital
improvements for these properties, which will be financed through IPO proceeds
as well.
On October 16, 2003, the Company exercised its option to reassign its rights
under its eight asset management and consulting contracts back to an affiliate
until January 1, 2004 in order to meet REIT eligible-income thresholds in 2003.
As a result, the Company will forego related asset management fees income over
this period of approximately $250,000. However, the related guarantee of payment
associated with these fees will be extended for a like period.
On October 31, 2003, the Company announced that it will be acquiring four hotel
properties from Noble Investment Group for approximately $33.9 million in cash.
The purchase price was the result of an arms' length negotiation. The Company
plans to use a portion of the proceeds from its IPO as the source for funds for
the acquisition of these properties. The acquisition is expected to close in
late November 2003.
In general, we are focused exclusively on investing in the hospitality industry
across all segments, including direct hotel investments, first mortgages,
mezzanine loans, and sale-leaseback transactions. We intend to acquire and, in
the appropriate market conditions, develop additional hotels and provide
structured financings to owners of lodging properties. We may incur indebtedness
to fund any such acquisitions, developments, or financings. We may also incur
indebtedness to meet distribution requirements imposed on REITs under the
Internal Revenue Code to the extent that working capital and cash flow from our
investments are insufficient to make the required distributions.
16
We are currently in negotiations with certain financial institutions to obtain a
secured credit facility for approximately $60 million. We are also negotiated a
$36 million mortgage note, at an interest rate of LIBOR plus 3.25% with a 4.75%
floor. This mortgage note is expected to close within 30 days, will mature four
years from that date, and will be collateralized by five hotel properties.
However, no assurances can be given that we will obtain such financings or, if
we do, what the amount and terms will be. Our failure to obtain future financing
under favorable terms could adversely impact our ability to execute on our
business strategy.
We will acquire or develop additional hotels and invest in structured financings
only as suitable opportunities arise, and we will not undertake such investments
unless adequate sources of financing are available. Funds for future
hotel-related investments are expected to be derived, in whole or in part, from
future borrowings under a credit facility or other borrowings or from the
proceeds of additional issuances of common stock or other securities. However,
other than the aforementioned acquisitions, we have no formal commitment or
understanding to invest in additional assets, and there can be no assurance that
we will successfully make additional investments.
Our existing hotels are located in developed areas that contain competing hotel
properties. The future occupancy, ADR, and RevPAR of any individual hotel could
be materially and adversely affected by an increase in the number or quality of
the competitive hotel properties in its market area. Competition could also
affect the quality and quantity of future investment opportunities. In addition,
the downturn in the national economy, the aftermath of the terrorist attacks
against the United States, and the impact of the war in Iraq have had a negative
impact on our operating cash flows.
INFLATION
Initially, we will be relying entirely on the performance of the initial
properties and the ability of the properties' managers to increase revenues to
keep pace with inflation. Hotel operators can generally increase room rates
rather quickly, but competitive pressures may limit their ability to raise rates
faster than inflation. Our general and administrative costs, such as real estate
and personal property taxes, property and casualty insurance, and utilities, are
subject to inflation as well.
SEASONALITY
The initial properties' operations historically have been seasonal as three of
the initial properties maintain higher occupancy rates during the summer months.
This seasonality pattern can be expected to cause fluctuations in our quarterly
lease revenue under the percentage leases. We anticipate that our cash flow from
the operation of the properties will be sufficient to enable us to make
quarterly distributions to maintain our REIT status. To the extent that cash
flow from operations is insufficient during any quarter due to temporary or
seasonal fluctuations in lease revenue, we expect to utilize other cash on hand
or borrowings to make required distributions. However, we cannot make any
assurances that we will make distributions in the future.
CRITICAL ACCOUNTING POLICIES
The critical accounting policies which we believe are the most significant to
fully understand and evaluate our reported financial results are described
below:
Revenue Recognition - Revenues include room, food, beverage, and other hotel
revenues such as long-distance telephone service, laundry, and space rentals.
Revenues are recognized as the related services are delivered. Ongoing credit
evaluations are performed and an allowance for potential credit losses is
provided against the portion of accounts receivable that is estimated to be
uncollectible.
Investment in Hotel Properties - Hotel properties are stated at cost, net of any
impairment charges, and are depreciated using the straight-line method over
their estimated useful lives, which range from 15 to 39 years for buildings and
improvements and 3 to 5 years for furniture, fixtures, and equipment.
Improvements and additions which extend the life of the property are
capitalized. Hotel properties are reviewed for impairment whenever events or
changes in circumstances indicate the carrying value of the hotel properties may
not be recoverable. To date, no such impairment charges have been recognized.
Recent Accounting Pronouncements -
SFAS No. 146 - In June 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
supersedes previous accounting guidance, principally Emerging Issues Task Force
("EITF") Issue No. 94-3. SFAS No. 146 requires that the liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. Under EITF No. 94-3, a liability for an exit cost was recognized at
the date of a company's commitment to an exit plan. SFAS No. 146 also
establishes that the liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing of recognizing future
restructuring costs as well as the amount recognized. The adoption of SFAS No.
146 in the first quarter of 2003 did not have any immediate effect on the
Company's results of operations, financial position, or cash flows.
FIN No. 45 - In November 2002, the Financial Accounting Standards Board issued
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN No.
45"). FIN No. 45 requires that a guarantor recognize a liability for certain
guarantees and enhance disclosures for such guarantees. The recognition
provisions of FIN No. 45 are applicable on a prospective basis for guarantees
issued or modified after December 31, 2002. The disclosure requirements of FIN
No. 45 are effective for financial statements for periods ending after December
15, 2002. The adoption of FIN No. 45 did not have a material impact on the
Company's results of operations, financial position, or cash flows.
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FIN No. 46 - In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN No.
46"). FIN No. 46 requires existing unconsolidated variable interest entities, as
defined, to be consolidated by their primary beneficiaries if the variable
interest entities do not effectively disperse risks among parties involved. FIN
No. 46 is effective immediately for variable interest entities created after
January 31, 2003, and to variable interest entities in which an enterprise
obtains an interest after that date. FIN No. 46 applies to financial statements
for periods ending after December 15, 2003, related to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company is still assessing the impact of FIN No.
46.
SFAS No. 149 - In April 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments including certain derivative instruments embedded in other contracts
and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 is
not expected to have a material impact on the Company's results of operations,
financial position, or cash flows.
SFAS No. 150 - In May 2003, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS No. 150"). SFAS No. 150 clarifies the accounting for certain financial
instruments with characteristics of both liabilities and equity and requires
that those instruments be classified as liabilities in statements of financial
position. Previously, many of these financial instruments were classified as
equity. SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003 and is otherwise effective at the beginning of the
first interim period after June 15, 2003. However, in October 2003, the
Financial Accounting Standards Board elected to indefinitely defer
implementation of certain standards of SFAS No. 150 relating to limited-life
subsidiaries. The adoption of SFAS No. 150 is not expected to have a material
impact on the Company's results of operations, financial position, or cash
flows.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The analysis below presents the sensitivity of the market value of our financial
instruments to selected changes in market interest rates.
As of September 30, 2003, we had a $16 million variable-rate mortgage bearing
interest at the greater of LIBOR plus 3.5% or 5.5%. A 1% change in interest
rates would impact interest expense on an annualized basis by $160,000. We had
no other outstanding debt as of September 30, 2003.
The above amounts were determined based on the impact of hypothetical interest
rates on our borrowing cost, and assume no changes in our capital structure. As
the information presented above includes only those exposures that exist as of
September 30, 2003, it does not consider those exposures or positions which
could arise after that date. Hence, the information represented herein 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 the period, the hedging strategies at the time, and the related interest
rates.
ITEM 4: CONTROLS AND PROCEDURES
Our management, with the participation of our Chief Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures as of the end of the period covered
by this report have been designed and are functioning effectively to provide
reasonable assurance that the information required to be disclosed by us in
reports filed under the Securities Exchange Act of 1934 is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms. We believe that a controls system, no matter how well designed and
operated, cannot provide absolute assurance that the objectives of the controls
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected. Management is required to apply judgment in evaluating the
cost-benefit relationship of possible controls and procedures.
There have been no changes in our internal controls over financial reporting
during our most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial
reporting.
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
We are currently subject to litigation arising in the normal course of its
business. In the opinion of management, none of these lawsuits or claims against
the Company, either individually or in the aggregate, is likely to have a
material adverse effect on our business, results of operations, or financial
condition. In addition, we currently have adequate insurance in place to cover
such litigation.
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company began operations August 28, 2003 when it completed its initial
public offering ("IPO") and concurrently consummated certain other formation
transactions, including the acquisition of six hotels ("initial properties") and
eight asset management and
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consulting contracts, all previously owned by affiliates of Remington Hotel
Corporation. These transactions are discussed in the Company's Post-Effective
Amendment #1 to Form S-11 (file number 001-31775) as filed with the Securities
and Exchange Commission on August 26, 2003. The primary underwriters in the IPO
were Friedman, Billings, Ramsey & Co., Inc., Legg Mason Wood Walker,
Incorporated, and Credit Lyonnais Securities (USA) Inc.
The IPO consisted of the sale of 22,500,000 shares of common stock ("initial
shares"), which included 22,336,478 shares sold to the public at a price of $9
per share and 163,522 shares sold to affiliates at a price of $8.37 a share. The
IPO generated gross proceeds of approximately $202.4 million. However, the
aggregate proceeds to the Company, net of underwriters' discount and offering
costs, was approximately $185.6 million. In addition to the initial shares,
500,000 shares of common stock were sold to Messrs. Archie and Montgomery
Bennett, the Company's Chairman and Chief Executive Officer, respectively,
216,634 shares of common stock were conveyed to a limited partnership owned by
Messrs. Archie and Montgomery Bennett, 25,000 shares of restricted stock were
issued to Company directors, 65,024 shares of common stock were issued to the
underwriters, and 650,300 shares of restricted stock were issued to Company
executives and certain employees of the Company and its affiliates. In total,
23,956,958 shares of common stock were issued in connection with the Company's
formation. In addition, 5,657,917 units of limited partnership interest were
issued to Company executives and certain employees of the Company and its
affiliates.
Concurrent with the Company's formation, the Company utilized its net proceeds
of $185.6 million to repay $65.7 million of mortgage indebtedness secured by the
initial properties and paid an additional $3.0 million in cash related to the
acquisition of one of the initial properties. Hence, the Company had
approximately $116.9 million in available cash immediately following its
formation.
On September 26, 2003, the Company issued an additional 1,734,072 shares of
common stock at a price of $9 per share, which generated additional net proceeds
of $14.5 million, as a result of the exercise of the underwriters'
over-allotment option. Concurrent with this, the Company issued an additional
39,017 shares of restricted stock to its executives and certain employees of the
Company and its affiliates and an additional 3,902 shares of common stock to its
underwriters.
As of September 30, 2003, the Company had $134.9 million of cash remaining,
which represents a small increase primarily due to cash flows from operations
offset by general expenditures and working capital needs since its formation.
On October 8, 2003, the Company acquired five hotel properties from FelCor
Lodging Limited Partnership for $50 million in cash. The Company used a portion
of the proceeds from its IPO as the source for funds for the acquisition of
these properties. The Company has earmarked an additional $8.2 million in
capital improvements for these properties, which will be financed through IPO
proceeds as well.
On October 31, 2003, the Company announced that it will be acquiring four hotel
properties from Noble Investment Group for approximately $33.9 million in cash.
The Company plans to use a portion of the proceeds from its IPO as the source
for funds for the acquisition of these properties. The acquisition is expected
to close in late November 2003.
In general, the Company is focused exclusively on investing in the hospitality
industry across all segments, including direct hotel investments, first
mortgages, mezzanine loans, and sale-leaseback transactions.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5: OTHER INFORMATION
None.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS
10.1 Amended and Restated Agreement of Limited Partnership of
Ashford Hospitality Limited Partnership, dated August 29,
2003.
10.2 Amended and Restated Exhibit A to Agreement of Limited
Partnership of Ashford Hospitality Limited Partnership, dated
September 26, 2003
10.3 Amendment No. 1 to Amended and Restated Agreement of Limited
Partnership of Ashford Hospitality Limited Partnership, dated
October 16, 2003.
10.4 Assignment and Assumption of Contract and Contract Rights
between Ashford Hospitality Limited Partnership and Ashford
Financial Corporation, dated October 7, 2003.
31.1 Certification of Chief Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended
31.2 Certification of Chief Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended
31.3 Certification of Chief Accounting Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended
32.1 Certification of Chief Executive Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended
(In accordance with SEC Release 33-8212, this exhibit is being
furnished, and is not being filed as part of this report or as
a separate disclosure document, and is not being incorporated
by reference into any Securities Act of 1933 registration
statement.)
32.2 Certification of Chief Financial Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended
(In accordance with SEC Release 33-8212, this exhibit is being
furnished, and is not being filed as part of this report or as
a separate disclosure document, and is not being incorporated
by reference into any Securities Act of 1933 registration
statement.)
32.3 Certification of Chief Accounting Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended
(In accordance with SEC Release 33-8212, this exhibit is being
furnished, and is not being filed as part of this report or as
a separate disclosure document, and is not being incorporated
by reference into any Securities Act of 1933 registration
statement.)
REPORTS ON FORM 8-K
On September 23, 2003, we filed a Form 8-K that included information reported
under Items 2 and 7 related to our impending acquisition of five hotel
properties owned by FelCor Lodging Limited Partnership on October 8, 2003.
On September 29, 2003, we filed a Form 8-K that included information reported
under Item 5 related to our underwriters exercising their over-allotment option
related to our initial public offering.
On October 9, 2003, we filed a Form 8-K to furnish our press release announcing
the acquisition of five hotel properties owned by FelCor Lodging Limited
Partnership on October 8, 2003.
On October 31, 2003, we filed a Form 8-K that included information reported
under Items 2 and 7 related to our impending acquisition of four hotel
properties owned by Noble Investment Group, which is expected to close in late
November 2003.
On November 6, 2003, we filed a Form 8-K that included information reported
under Items 7 and 12 to furnish our earnings release for the quarter ended
September 30, 2003.
On November 12, 2003, we filed a Form 8-K/A that included information reported
under Items 2 and 7 related to our acquisition of five hotel properties owned by
FelCor Lodging Limited Partnership on October 8, 2003.
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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.
Dated: November 14, 2003 By: /s/ MONTGOMERY J. BENNETT
----------------------------------
Montgomery J. Bennett
Chief Executive Officer
(Principal Executive Officer)
Dated: November 14, 2003 By: /s/ DAVID J. KIMICHIK
----------------------------------
David J. Kimichik
Chief Financial Officer
(Principal Financial Officer)
Dated: November 14, 2003 By: /s/ MARK L. NUNNELEY
----------------------------------
Mark L. Nunneley
Chief Accounting Officer
(Principal Accounting Officer)
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