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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
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________________ to ____________________
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 Identification No.)
incorporation or organization)
2355 S. ARLINGTON HEIGHTS ROAD, SUITE 400,
ARLINGTON HEIGHTS, ILLINOIS 60005
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(847) 228-5400
--------------
(Registrant's telephone number, including area code)
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 November 13, 2003, 5,019,788 shares of the registrant's common stock were
outstanding.
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ARLINGTON HOSPITALITY, INC.
FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
INDEX
Page
----
PART I: Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 4
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2003 and 2002 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2002 7
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3 - Quantitative and Qualitative Disclosures About Market Risk 36
Item 4 - Controls and Procedures 36
PART II: Other Information
Item 6 - Exhibits and Reports on Form 8-K 37
Signatures 37
Page 2
Part I: Financial Information
Item 1: Financial Statements
Page 3
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
------------ ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,079,236 $ 3,969,515
Accounts receivable, less allowance of $150,000
at September 30, 2003 and December 31, 2002 (including
approximately $273,000 and $166,000 from related parties) 2,390,547 2,064,463
Notes receivable, current portion -- 100,000
Prepaid expenses and other current assets 475,852 975,432
Refundable income taxes 1,009,480 1,574,776
Costs and estimated earnings in excess of billings on
uncompleted contracts 898,367 1,479,101
Assets held for sale - non-AmeriHost Inn hotels 11,921,652 --
Assets held for sale - AmeriHost Inn hotels 23,832,212 --
------------ ------------
Total current assets 44,607,346 10,163,287
------------ ------------
Investments in and advances to unconsolidated
hotel joint ventures 3,335,741 4,291,504
------------ ------------
Property and equipment:
Land 7,002,362 13,418,378
Buildings 39,277,983 76,849,071
Furniture, fixtures and equipment 15,232,786 26,553,701
Construction in progress 320,246 6,447,039
Leasehold improvements 2,396,309 2,760,906
------------ ------------
64,229,686 126,029,095
Less accumulated depreciation and amortization 16,313,014 26,417,755
------------ ------------
47,916,672 99,611,340
------------ ------------
Notes receivable, less current portion 1,017,875 782,083
Deferred income taxes 5,088,000 2,427,000
Other assets, net of accumulated amortization of
approximately $928,000 and $1,259,000 2,776,863 2,658,500
8,882,738 5,867,583
------------ ------------
$104,742,497 $119,933,714
============ ============
(continued)
Page 4
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2003 2002
------------- -------------
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,295,234 $ 3,965,028
Bank line-of-credit 2,250,000 6,384,287
Accrued payroll and related expenses 497,942 827,353
Accrued real estate and other taxes 2,363,238 1,969,297
Other accrued expenses and current liabilities 1,174,735 1,974,350
Current portion of long-term debt 2,997,471 4,038,301
Liabilities of assets held for sale - non-AmeriHost Inn hotels 10,974,939 --
Long-term debt of assets held for sale - AmeriHost Inn hotels 23,105,654 --
------------- -------------
Total current liabilities 45,659,213 19,158,616
------------- -------------
Long-term debt, net of current portion 33,657,471 72,203,688
------------- -------------
Deferred income 11,407,184 10,867,418
------------- -------------
Commitments and contingencies
Minority interests 296,449 333,888
------------- -------------
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 5,012,788 shares at September 30,
2003, and 4,962,817 shares at December 31, 2002 25,064 24,814
Additional paid-in capital 13,294,458 13,184,564
Retained earnings (deficit) 839,533 4,597,601
------------- -------------
14,159,055 17,806,979
Less:
Stock subscriptions receivable (436,875) (436,875)
------------- -------------
13,722,180 17,370,104
------------- -------------
$ 104,742,497 $ 119,933,714
============= =============
See notes to consolidated financial statements.
Page 5
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ------------------------------
2003 2002 2003 2002
------------- ------------- ------------ ------------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 11,718,099 $ 12,737,246 $ 31,254,120 $ 33,582,408
Other hotels 489,724 753,804 1,335,904 1,759,114
Development and construction 380,834 929,983 2,478,095 5,740,954
Hotel sales and commissions 10,040,670 -- 19,074,417 4,900,317
Management services 124,542 266,931 352,997 763,640
Employee leasing 605,993 929,164 1,664,675 2,649,339
Incentive and royalty sharing 264,945 130,623 694,594 386,992
Office building rental 180,941 153,254 537,164 471,242
------------ ------------ ------------ ------------
23,805,748 15,901,005 57,391,966 50,254,006
------------ ------------ ------------ ------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 8,027,206 8,271,494 23,424,628 23,675,045
Other hotels 644,396 521,634 1,531,884 1,606,078
Development and construction 591,467 944,824 2,727,944 5,568,717
Hotel sales and commissions 8,444,575 -- 15,779,006 3,528,680
Management services 65,918 165,628 205,677 504,455
Employee leasing 585,582 916,318 1,612,296 2,593,120
Office building rental 45,966 71,297 142,383 116,918
------------ ------------ ------------ ------------
18,405,110 10,891,195 45,423,818 37,593,013
------------ ------------ ------------ ------------
5,400,638 5,009,810 11,968,148 12,660,993
Depreciation and amortization 701,352 1,088,454 2,767,485 3,221,828
Leasehold rents - hotels 1,262,727 1,240,536 3,802,981 3,860,025
Corporate general and administrative 526,848 755,036 1,489,686 1,528,630
Impairment provision (Note 13) 143,496 -- 4,808,008 --
------------ ------------ ------------ ------------
Operating income (loss) 2,766,215 1,925,784 (900,012) 4,050,510
Other income (expense):
Interest expense (1,026,406) (1,234,343) (3,266,509) (3,761,282)
Interest income 109,565 151,538 350,446 409,760
Other income (170,171) 53,107 (128,150) 92,344
Gain on sale of assets (Notes 9, 16) 400,000 400,000 400,000 727,076
Equity in net income and (losses)
of affiliates (138,020) 61,697 (412,282) (59,886)
------------ ------------ ------------ ------------
Income (loss) before minority
interests and income taxes 1,941,183 1,357,783 (3,956,507) 1,458,522
Minority interests in (income) loss of
consolidated partnerships (47,241) (44,383) (128,933) (90,984)
------------ ------------ ------------ ------------
Income (loss) before income taxes 1,893,942 1,313,400 (4,085,440) 1,367,538
Income tax expense (benefit) 777,000 539,000 (1,615,000) 564,000
------------ ------------ ------------ ------------
Net income (loss) from continuing
Operations 1,116,942 774,400 (2,470,440) 803,538
Discontinued operations, net of
tax (Note 14) (34,704) (28,713) (1,287,628) (581,535)
------------ ------------ ------------ ------------
Net income (loss) $ 1,082,238 $ 745,687 $ (3,758,068) $ 222,003
============ ============ ============ ============
Net income (loss) per share (Note 4)
Basic $ 0.22 $ 0.15 $ (0.74) $ 0.04
Diluted $ 0.22 $ 0.14 $ (0.74) $ 0.04
See notes to consolidated financial statements.
Page 6
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
2003 2002
------------ ------------
Cash flows from operating activities:
Cash received from customers $ 59,342,885 $ 58,211,613
Cash paid to suppliers and employees (38,346,052) (44,903,006)
Interest received 352,049 446,142
Interest paid (3,844,774) (4,339,151)
Income taxes received (paid) 377,296 (232,152)
------------ ------------
Net cash provided by operating activities 17,881,404 9,183,446
------------ ------------
Cash flows from investing activities:
Distributions, and collections on advances,
from affiliates 555,782 954,088
Purchase of property and equipment (6,311,457) (14,054,498)
Purchase of investments in, and advances
to, minority owned affiliates (1,126,506) (1,418,212)
Acquisitions of partnership interests,
net of cash acquired (Note 7) (777,237) (796,786)
Net issuance of notes receivable (135,792) (18,279)
Proceeds from sale of assets 1,362,541 (6,700)
------------ ------------
Net cash used in investing activities (6,432,669) (15,340,387)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 6,888,098 9,660,858
Principal payments on long-term debt (14,104,039) (4,856,883)
Net repayments on line of credit (4,134,287) (812,415)
Distributions to minority interest (90,255) (203,074)
Issuance of common stock 223,908 (311)
Purchase of common stock (122,439) --
------------ ------------
Net cash (used in) provided by financing activities (11,339,014) 3,788,175
------------ ------------
Net increase (decrease) in cash 109,721 (2,368,766)
Cash and cash equivalents, beginning of year 3,969,515 4,748,156
------------ ------------
Cash and cash equivalents, end of period $ 4,079,236 $ 2,379,390
============ ============
(continued)
Page 7
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
- --------------------------------------------------------------------------------
2003 2002
------------ ------------
Reconciliation of net income (loss) to net cash provided by operating
activities:
Net income (loss) $ (3,758,068) $ 222,003
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 3,537,092 4,054,003
Equity in net (income) loss of affiliates and
amortization of deferred income 412,282 59,886
Interest from unconsolidated joint ventures (126,525) (62,910)
Minority interests in net income of subsidiaries 52,816 92,707
Amortization of deferred gain (989,033) (801,320)
Deferred income taxes (2,661,000) 1,143,000
Issuance of common stock and stock options 8,675 190
Gain on sale of property and equipment (331,083) (327,076)
Proceeds from sale of hotels 19,074,417 4,830,870
Income from sale of hotels (3,278,094) (927,401)
Provision from impairment 5,701,445 --
Changes in assets and liabilities, net of effects of acquisition:
(Increase) decrease in accounts receivable (442,189) 46,573
Decrease in prepaid expenses and
other current assets 474,614 579,255
Decrease (increase) in refundable income taxes 565,296 (1,201,152)
Decrease (increase) in costs and estimated earnings
in excess of billings 580,734 (108,684)
Increase in other assets (812,591) (177,903)
(Decrease) increase in accounts payable (1,500,185) 35,048
(Decrease) increase in accrued payroll and other accrued
expenses and current liabilities (433,800) 441,752
Decrease in accrued interest (5,773) (18,268)
Increase in deferred income 1,812,374 1,302,873
------------ ------------
Net cash provided by operating activities $ 17,881,404 $ 9,183,446
============ ============
See notes to consolidated financial statements.
Page 8
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
1. BASIS OF PREPARATION:
The September 30, 2003 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 adjustments necessary to present fairly
the financial position of Arlington Hospitality, Inc. and subsidiaries as
of September 30, 2003 and December 31, 2002, and the results of its
operations for the three and nine months ended September 30, 2003 and 2002,
and cash flows for the nine months ended September 30, 2003 and 2002. The
results of operations for the three and nine months ended September 30,
2003, are not necessarily indicative of the results to be expected for the
full year. The accompanying consolidated financial statements should 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 is calculated by dividing the income (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period, without consideration of common stock
equivalents. Diluted earnings per share gives effect to all dilutive common
stock equivalents outstanding for the period. The Company excluded the
dilutive effect of stock options, and the impact of convertible partnership
interests for the nine-month period ending September 30, 2003, since they
had an anti-dilutive effect on the earnings per share computations. The
calculations of basic and diluted earnings (loss) per share are presented
below. The hotel impairment charges during 2003 relate to the
implementation of a plan for the disposition of certain hotels (Note 13).
Page 9
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
4. EARNINGS (LOSS) PER SHARE (CONTINUED):
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ----------- ------------
Net income (loss) from continuing
operations, before impairment $ 1,201,438 $ 774,400 $ 412,568 $ 803,538
Impairment provision, net of tax (84,496) -- (2,883,008) --
----------- ----------- ----------- -----------
Net income (loss) from continuing
operations $ 1,116,942 $ 774,400 $(2,470,440) $ 803,538
Discontinued operations (a) (34,704) (28,713) (1,287,628) (581,535)
----------- ----------- ----------- -----------
Net income (loss) $ 1,082,238 $ 745,687 $(3,758,068) $ 222,003
=========== =========== =========== ===========
Net income (loss) $ 1,082,238 $ 745,687 $(3,758,068) $ 222,003
Impact of convertible
partnership interests 11,543 9,248 -- (6,695)
----------- ----------- ----------- -----------
Net income available to
common shareholders - diluted $ 1,093,781 $ 754,935 $(3,758,068) $ 215,308
=========== =========== =========== ===========
Weighted average common
shares outstanding 5,013,413 4,958,056 5,011,441 4,958,072
Dilutive effect of:
Common stock equivalents 44,053 199,974 -- 69,847
Convertible partnership interests 56,650 84,975 -- 84,975
----------- ----------- ----------- -----------
Dilutive common shares outstanding 5,114,116 5,243,005 5,011,441 5,112,894
=========== =========== =========== ===========
Net income (loss) per share - Basic:
From continuing operations $ 0.23 $ 0.16 $ (0.48) $ 0.16
From discontinued operations (0.01) (0.01) (0.26) (0.12)
----------- ----------- ----------- -----------
$ 0.22 $ 0.15 $ (0.74) $ 0.04
=========== =========== =========== ===========
Net income (loss) per share - Diluted:
From continuing operations $ 0.23 $ 0.15 $ (0.48) $ 0.15
From discontinued operations (0.01) (0.01) (0.26) (0.11)
----------- ----------- ----------- -----------
$ 0.22 $ 0.14 $ (0.74) $ 0.04
=========== =========== ============ ===========
(a) Includes hotel impairment provisions related to non-AmeriHost Inn
hotels to be sold of approximately $18,000 and $535,000, net of tax,
during the three and nine months ended September 30, 2003,
respectively (Notes 13 and 14).
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 and nine months ended September 30,
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.
Page 10
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
6. HOTEL LEASES:
The Company leases 21 AmeriHost Inn hotels 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. In September 2003, the Company purchased an AmeriHost Inn hotel
from the REIT pursuant to an amendment to the master lease agreement (Note
9).
A joint venture in which the Company has a controlling ownership interest
leases one non-AmeriHost Inn hotel, the operations of which are included in
the Company's consolidated financial statements. This lease is triple net,
providing for rent payments of $20,000 per month, and expires May 31, 2010.
This lease provides for a purchase option price of $4,000,000, which
approximated the fair value at the lease commencement, subject to increases
in the consumer price index. The Company operated another non-AmeriHost Inn
hotel under a triple net lease, which was terminated on August 31, 2003 and
was not renewed by the Company. The Company has accrued approximately
$127,000 at September 30, 2003 in related lease termination fees.
7. LIMITED PARTNERSHIP BUYOUT AND GUARANTEED DISTRIBUTIONS:
On September 18, 2000, in connection with obtaining the approval of all of
our joint venture partners to sell the AmeriHost Inn brand and franchising
rights to Cendant Corporation, the Company entered into an agreement to
purchase the interests owned by the joint venture partners in the three
existing joint ventures at specified prices and to issue options to
purchase a total of 125,000 shares of the Company's common stock to the
partners of these ventures, canceling existing options to purchase 60,000
shares of the Company's common stock held by these partners. A director of
the Company, and parties related to him, were partners in each of these
three joint ventures.
The first acquisition of these interests was completed in 2001 at a cost to
the Company of approximately $800,000. The second was completed during the
second quarter of 2002 at a cost to the Company of approximately $800,000.
The final acquisition, with a specified purchase price of approximately
$830,000, was completed as of August 31, 2003. As a result of this last
transaction, the assets, liabilities, and results of operations of the
hotel owned by this joint venture were consolidated in the Company's
financial statements, including the subsequent sale of the hotel in
September 2003. The Company was the general partner in these three joint
ventures and had guaranteed minimum annual distributions to the limited
partners, including the director of the Company, and parties related to
him. Upon the consummation of the final joint venture acquisition, the
Company no longer has any joint ventures in which it has guaranteed a
minimum return to its limited partners. In addition, the Company no longer
has any joint ventures in which a director of the Company, or parties
related to him, is a partner.
The following is a summary of the acquisitions during the nine months ended
September 30, 2003 and 2002:
2003 2002
------------- -------------
Property and equipment acquired $ 2,006,246 2,279,309
Other assets acquired 15,358 38,400
Long-term debt assumed (1,142,941) (1,466,510)
Other liabilities assumed (101,426) (54,413)
------------- -------------
Cash paid, net of cash acquired $ 777,237 $ 796,786
============= =============
8. INVESTMENTS:
The Company, through wholly-owned subsidiaries, is a general partner or
managing member in 14 joint ventures as of September 30, 2003. The
Company's subsidiaries are secondarily liable for the obligations and
liabilities of these joint ventures. As of September 30, 2003, these joint
ventures had $27.9 million outstanding under mortgage loan agreements.
Approximately $6.3 million of this amount has been included in the
Company's consolidated financial statements as of September 30, 2003,
because it relates to joint ventures in which the Company has a majority or
controlling ownership interest, leaving approximately $21.6 million in
Page 11
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
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 $21.6 million of
financing, the Company also has provided approximately $17.0 million in
guarantees to the lenders. Other partners have also guaranteed $10.8
million of these financings. One unconsolidated joint venture mortgage loan
in the amount of approximately $1.7 million at September 30, 2003, which is
one of the loans guaranteed by the Company, matured on November 1, 2003,
however the lender has extended the maturity date of the loan to November
1, 2004. Unless the properties collateralizing the debt are sold, the
remaining joint venture mortgage loans mature after 2004.
The Company applies the provisions of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others," with respect to
mortgage loan guarantees for joint ventures in which the Company is a
partner. This interpretation elaborates on the disclosures required by the
guarantor and requires the guarantor to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken.
During the third quarter of 2003, the Company provided a guarantee related
to the mortgage debt of a joint venture in which it shares the
responsibility of the guarantee on a joint and several basis with its joint
venture partners. The guarantee is effective for the 20-year term of the
mortgage loan. The Company has recorded as an additional investment in this
joint venture, and a liability for its share of this guarantee, of
approximately $40,000, its estimated fair value, as of September 30, 2003.
Page 12
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
8. INVESTMENTS (CONTINUED):
In January 2003, Interpretation No. 46, "Consolidation of Variable Interest
Entities", was issued. The Company is required to adopt the requirements of
this Interpretation for interim periods beginning after December 15, 2003.
This Interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," and requires that the
Company present any variable interest entities in which it has a majority
variable interest on a consolidated basis in its financial statements. The
Company is continuing to assess the provisions of this Interpretation and
the impact to the Company of adopting this Interpretation. Therefore the
following amounts may change based upon additional analysis. Due to the
adoption of this Interpretation, the Company expects that it will begin to
present its investments in three joint ventures in which it has a majority
variable interest, as determined in accordance with the provisions of this
Interpretation, on a consolidated basis in its financial statements
beginning with the consolidated financial statements issued for the
quarterly period ended December 31, 2003. The consolidation of these joint
ventures is expected to add approximately $6.8 million in assets and $6.1
million in liabilities to the Company's consolidated balance sheet. As of
September 30, 2003, the Company had investments in, and advances to, these
joint ventures of approximately $608,000, which was presented as such under
the equity method of accounting in the accompanying consolidated financial
statements. The Company expects that it will continue to present all of its
other unconsolidated investments under the equity method.
9. SALE/LEASEBACK OF HOTELS:
In 1998 and 1999, the Company sold and leased back 30 AmeriHost Inn hotels
to a Real Estate Investment Trust ("REIT") for $73 million. The leases had
an initial term of ten years, with two five-year renewal options. The lease
payments were 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 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 term of the lease, including
the five year extension discussed below, as a reduction of leasehold rent
expense. As of September 30, 2003, the aggregate remaining unamortized
deferred gain was approximately $6.6 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 September 30, 2003, the first three scheduled rent
increases were not effective due to the sale of hotels by the REIT to the
Company. The third scheduled increase was avoided in September 2003, when
the Company purchased a hotel from the REIT, using cash of approximately
$556,000 and mortgage financing provided by the REIT of approximately $1.7
million. The unamortized deferred gain related to the initial sale of this
hotel to the REIT was recorded as a basis reduction to the hotel asset.
Upon its purchase, this hotel was classified as held for sale (Note 13),
and the difference in the total purchase price, net of the unamortized
deferred gain, and its fair market value was recorded as a leasehold
interest to be amortized over the remaining term of the remaining REIT
leases. If the Company does not either facilitate the sale to a third
party, or purchase from the REIT, one hotel at a price of approximately
$2.6 million prior to June 5, 2004, the fourth 0.25% rent increase becomes
effective. If the Company decides to purchase this hotel prior to June 4,
2004, it intends to fund the $2.6 million purchase price with a combination
of mortgage debt to be obtained and cash from operations or working
capital.
The REIT sold one of its hotels to an unrelated third party during the nine
months ended September 30, 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 of approximately
$327,000 was recognized upon termination of the applicable lease.
Page 13
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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 Cendant
Corporation, 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 nine months ended September 30, 2003
and 2002, which is the information utilized by the Company's decision
makers in managing the business:
Revenues 2003 2002
----------- -----------
Hotel operations $32,590,024 $35,341,522
Hotel development and construction 2,478,095 5,740,954
Hotel sales and commissions 19,074,417 4,900,317
Hotel management 352,997 763,640
Employee leasing 1,664,675 2,649,339
Incentive and royalty sharing 694,594 386,992
Office building rental 537,164 471,242
----------- -----------
$57,391,966 $50,254,006
=========== ===========
Operating costs and expenses
Hotel operations $24,956,512 $25,281,123
Hotel development and construction 2,727,944 5,568,717
Hotel sales and commissions 15,779,006 3,528,680
Hotel management 205,677 504,455
Employee leasing 1,612,296 2,593,120
Office building rental 142,383 116,918
----------- -----------
$45,423,818 $37,593,013
=========== ===========
Operating income
Hotel operations:
AmeriHost Inn hotels $ 1,836,236 $ 3,546,330
Other hotels (559,413) (288,134)
Impairment provision (4,808,008) --
Hotel development and construction (252,543) 167,890
Hotel sales and commissions 3,295,411 1,371,638
Hotel management 113,137 219,576
Employee leasing 50,679 54,467
Incentive and royalty sharing 694,594 386,991
Office building rental 273,110 236,253
Corporate (1,543,215) (1,644,501)
----------- -----------
$ (900,012) $ 4,050,510
=========== ===========
Page 14
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
10. BUSINESS SEGMENTS (CONTINUED):
Identifiable assets 2003 2002
------------- ------------
Hotel operations $ 88,564,733 $105,445,693
Hotel development and construction 2,119,425 2,034,119
Hotel management 648,770 241,122
Employee leasing 158,739 (228,958)
Office building rental 6,435,439 6,752,250
Corporate 6,835,391 6,569,114
------------- ------------
$ 104,742,497 $120,713,340
============= ============
Capital expenditures
Hotel operations, including new construction
of company owned hotels $ 6,246,432 $13,754,704
Hotel development and construction 503 --
Hotel management 14,292 9,811
Employee leasing -- --
Office building rental 48,373 273,605
Corporate 1,857 16,378
----------- -----------
$ 6,311,457 $14,054,498
=========== ===========
Depreciation/Amortization
Hotel operations $2,553,708 $2,942,179
Hotel development and construction 2,694 4,346
Hotel management 34,183 39,609
Employee leasing 1,700 1,752
Office building rental 121,671 118,071
Corporate 53,529 115,871
---------- ----------
$2,767,485 $3,221,828
========== ==========
11. BANK LINE OF CREDIT:
The Company had $2,250,000 and $6,384,287 outstanding on its bank operating
line-of-credit at September 30, 2003 and December 31, 2002, respectively.
The operating line of credit provides for a maximum amount available of
$6.0 million and is collateralized by substantially all the assets of the
Company, subject to first mortgages from other lenders on hotel assets,
bears interest at the rate of prime plus 2.5% per annum, with a minimum
rate of 6.75% per annum (effective rate as of September 30, 2003), and
matures April 30, 2004. The maximum commitment under the line-of-credit was
reduced from $6.5 million to $6.0 million on September 29, 2003, and will
be reduced to $5.5 million on February 27, 2004. The Company is also
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. The line-of-credit agreement was amended to
eliminate the non-cash financial impact of the plan for disposition of
hotels on the covenant calculations (Note 13).
Page 15
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
12. LONG-TERM DEBT:
The Company's plan to sell certain AmeriHost Inn hotel assets (Note 13) is
expected to result in the payoff of the related mortgage debt in the amount
of approximately $23.1 million, which has been classified in current
liabilities in the accompanying consolidated balance sheet as of September
30, 2003. This amount includes approximately $800,000 which is
contractually due within the next twelve months regardless of the plan for
hotel disposition. The Company's plan to sell certain non-AmeriHost Inn
hotel assets is expected to result in the payoff of the related mortgage
debt in the amount of approximately $10.4 million, which has been
classified in current liabilities in the accompanying consolidated balance
sheet as of September 30, 2003 (Note 14). This amount includes
approximately $1.4 million which is contractually due within the next
twelve months regardless of the plan for hotel disposition.
Approximately $3.0 million is classified as the Company's current portion
of long-term debt which is the principal amount due within the next twelve
months on mortgages which are not related to the assets held for sale,
including one hotel mortgage in the amount of approximately $1.6 million.
The Company expects this loan to be repaid through the sale of the hotel,
or refinanced prior to maturity. If refinanced or extended, the Company
believes that it can obtain substantially similar terms. The Company also
has a mortgage loan on the office building in which its headquarters is
located, and on October 1, 2003, the lender extended the maturity date to
January 1, 2006. The hotel mortgage loans bear interest at the floating
rates of prime minus 0.25% to prime plus 2.5% per annum, and the office
building loan bears interest at the floating rate of either prime minus
0.25% or LIBOR plus 2.25%, as chosen by the Company.
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. The loans under this facility bear
interest at the floating rate of LIBOR plus 2.25%. As of September 30,
2003, approximately $8.2 million has been drawn to finance three hotel
projects. These amounts have been, or will be, automatically converted to
long-term financing. The lender's commitment to utilize this facility for
new construction projects expired October 31, 2003, however the Company is
currently negotiating with this lender for an extended and enhanced
construction line of credit facility.
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 September 30, 2003.
13. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS:
The Company sold six wholly-owned AmeriHost Inn hotels during the nine
months ended September 30, 2003. Net sale proceeds from these hotels was
approximately $19.1 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 $15.8 million, resulting in operating income from the sale of
these hotels of approximately $3.3 million. In addition, approximately
$11.3 million in mortgage debt was paid off with proceeds from the sale of
these hotels.
Also, during the second quarter of 2003, a joint venture in which the
Company had a controlling ownership interest, and was therefore
consolidated in the Company's financial statements, sold its non-AmeriHost
Inn hotel. This sale resulted in the reduction of the joint venture's
mortgage debt of approximately $925,000, which was paid off with the
proceeds from the sale, and a pretax loss of approximately $86,000. An
impairment provision of $450,000 had been recorded for this hotel in 2002.
The bank that provided the mortgage debt to this joint venture, which was
paid off as a result of this sale, is owned by a director of the Company.
In addition, a joint venture in which the Company had 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 16
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
13. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS (CONTINUED):
Effective July 10, 2003, the Company implemented a plan to sell
approximately 25 - 30 hotel properties over the next two years. The
properties to be sold included 20-25 AmeriHost Inns and six non-AmeriHost
hotels that are wholly owned or in which the Company has an ownership
interest. The Company hired a national hotel brokerage firm to market most
of the properties and manage the sales process. These hotels were in
addition to five AmeriHost Inn properties under contract for sale at the
time, of which three were sold through September 30, 2003. The Company
expects this plan to reduce debt (Notes 11 and 12) and generate cash to
pursue development and other strategic objectives as well as accelerate the
economic benefits of the Company's transaction with Cendant Corporation,
the owner of the AmeriHost Inn franchise system. However, there can be no
assurances under the plan as to timing, terms of sale, or that any
additional sales will be consummated.
In connection with the implementation of the plan to sell hotels, and in
accordance with Statement of Financial Accounting Standard (SFAS) No. 144,
"Accounting for Long-Lived Assets," the Company recorded a $5.4 million
pre-tax, non-cash impairment charge as of June 30, 2003, related to 17 of
the hotels targeted for sale. Approximately $862,000 pre-tax of the
non-cash impairment charge relates to three consolidated non-AmeriHost Inn
hotels anticipated to be sold, and has been included in "discontinued
operations" (Note 14). The non-cash impairment charge represents an
adjustment to reduce the carrying value of certain hotel assets to the
estimated sales prices, net of estimated costs to sell. During the third
quarter of 2003, the Company recorded an additional approximately $175,000
of non-cash impairment charges, including approximately $31,000 which has
been included in "discontinued operations." These additional impairment
adjustments recorded in the third quarter of 2003 were related to three
hotels in which an impairment adjustment was recorded during the second
quarter of 2003. The additional impairment adjustments were based upon
offers or letters of intent received on certain hotels after the initial
implementation of the plan to sell hotels, which were considered to be an
updated estimate of the current market values.
SFAS 144 also requires long-lived assets to be sold to be classified as
"held for sale" in the period in which certain criteria are met, including
the probable sale of the asset within one year. Based on the implementation
of this plan for hotel dispositions, the hotel assets identified for sale,
which are being actively marketed and expected to be sold within a twelve
month period, have been classified as "held for sale" on the accompanying
consolidated balance sheet as of September 30, 2003. Hotels identified as
part of the plan of disposition which are not currently marketed, and are
not expected to be sold within the next twelve months, have not been
classified as "held for sale." The debt which is expected to be paid off
(Note 12) as a result of these hotel sales has been classified as current
liabilities in the accompanying consolidated financial statements. The
results of the operations of business components which have been disposed
of or classified as "held for sale" are to be reported as discontinued
operations if such operations and cash flow have been or will be eliminated
from the Company's ongoing operations. Accordingly, the disposition of
non-AmeriHost Inn hotels have been treated as discontinued operations (Note
14). However, the disposition of AmeriHost Inn hotels, although classified
as "held for sale" on the accompanying consolidated balance sheet, have not
been treated as discontinued operations due to the ongoing royalty fees to
be earned by the Company after their disposition.
14. DISCONTINUED OPERATIONS:
The Company has reclassified its consolidated statements of operations for
the three and nine months ended September 30, 2003 and 2002, and its
consolidated balance sheet as of September 30, 2003, as a result of
implementing SFAS 144 to reflect discontinued operations of seven
consolidated non-AmeriHost Inn hotels sold during this period, or to be
sold pursuant to the plan for hotel dispositions (Note 13). The
non-AmeriHost Inn hotels held for sale are expected to be sold within the
next twelve months. This reclassification has no impact on the Company's
net income or net income per common share. Non-AmeriHost Inn hotels sold or
held for sale, which are owned by joint ventures and accounted for using
the equity method of accounting, are not presented as "discontinued
operations," nor are the sales of the AmeriHost Inn hotels due to the
Company's long-term royalty sharing agreement for all non-Company owned
AmeriHost Inn hotels. This agreement provides for a revenue stream from
Cendant Corporation, the owner of the AmeriHost Inn brand, after the
properties are sold to a new or existing AmeriHost Inn franchisee.
Condensed financial information of the results of operations for the hotels
presented as discontinued operations is as follows:
Page 17
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
14. DISCONTINUED OPERATIONS (CONTINUED):
Three Months Ended September 30, Nine months Ended September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Hotel Operations:
Revenue $ 1,839,565 $ 2,488,977 $ 5,138,333 $ 6,716,845
Costs and expenses 1,484,783 2,013,216 4,793,112 6,028,054
----------- ----------- ----------- -----------
354,782 475,761 345,221 688,791
Depreciation and amortization 96,439 235,719 769,607 832,176
Leasehold rents - hotels 43,233 64,850 172,933 264,013
Hotel impairment provision 31,368 -- 893,438 --
----------- ----------- ----------- -----------
Operating income (loss) 183,742 175,192 (1,490,757) (407,398)
Other income (expense):
Interest expense (171,059) (211,764) (572,491) (559,601)
Other income (expense) (70,387) (938) (72,263) (2,813)
Gain on sale of property -- -- (86,235) --
----------- ----------- ----------- -----------
Loss from discontinued
operations, before minority
interests and income taxes (57,704) (37,510) (2,221,746) (969,812)
Minority interests in (income) loss
of consolidated joint ventures -- (11,203) 76,118 (1,723)
----------- ----------- ----------- -----------
Loss from discontinued operations,
before income taxes (57,704) (48,713) (2,145,628) (971,535)
Income tax expense (benefit) (23,000) (20,000) (859,000) (390,000)
----------- ----------- ----------- -----------
Net loss from discontinued
operations $ (34,704) $ (28,713) $(1,286,628) $ (581,535)
=========== =========== =========== ===========
Page 18
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
14. DISCONTINUED OPERATIONS (CONTINUED):
The assets and liabilities of the one non-AmeriHost Inn hotel sold in 2003,
one leased non-AmeriHost Inn hotel which was terminated in the third
quarter of 2003, and five consolidated non-AmeriHost Inn hotels to be sold
pursuant to the plan for hotel disposition, and which are included in
discontinued operations, have been classified as held for sale and
liabilities related to assets held for sale in the accompanying
consolidated balance sheet as of September 30, 2003. Condensed balance
sheet information for these hotels is as follows:
September 30,
2003
------------
ASSETS
Current assets:
Cash and cash equivalents $ 376,652
Accounts receivable 125,281
Prepaid expenses and other current assets 29,157
------------
Total current assets 531,090
------------
Property and equipment 17,159,125
Less accumulated depreciation and amortization (5,601,758)
------------
11,557,367
------------
Other assets, net of accumulated amortization 209,847
------------
$ 12,298,304
============
LIABILITIES
Current liabilities:
Accounts payable $ 221,091
Accrued payroll and other expenses 345,453
Current portion of long-term debt 1,373,281
------------
Total current liabilities 1,939,825
Long-term debt, net of current portion 9,035,114
Minority interests --
------------
$ 10,974,939
============
15. SUPPLEMENTAL CASH FLOW DATA:
The following represents the supplemental schedule of noncash investing and
financing activities for the nine month periods ended September 30:
2003 2002
----------- -----------
Notes received in connection with the
sale of hotels $ 250,000
===========
Sale of assets:
Cost basis of assets sold $ 2,583,835 $ 32,578
Accumulated depreciation at sale (1,535,059) (7,147)
Deferred income -- (352,507)
Gain on sale 313,765 727,076
----------- -----------
Net cash proceeds $ 1,362,541 $ 400,000
Page 19
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
2003 2002
----------- -----------
Interest paid, net of interest capitalized $ 3,845,000 $ 4,339,000
=========== ===========
Liabilities assumed in connection with the acquisition
of hotel partnership interests $ 1,244,000 $ 1,521,000
=========== ===========
Reclassification of deferred gain against the
basis of acquired assets (Note 9) $ 263,000 $ 348,000
=========== ===========
Exchange of note receivable and accrued interest
for an investment in a hotel partnership $ 1,214,000
===========
Page 20
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
16. SALE OF AMERIHOST INN BRAND, INCENTIVE AND ROYALTY FEES:
The Company sold the AmeriHost Inn brand name and franchising rights to
Cendant Corporation ("Cendant") in 2000. Pursuant to the terms of the sale
agreement, in addition to the funds received upon closing, the Company was
due three annual installments of $400,000 each. The Company received each
of the $400,000 payments as scheduled, including the final installment
which was due on September 30, 2003. These payments have been classified as
gain on sale of assets in the accompanying consolidated financial
statements.
In connection with the sale of the brand, Cendant agreed to pay the Company
a development incentive fee each 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 24 hotels. Since
the Company may be required to reimburse Cendant, 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.
17. EMPLOYEE AND DIRECTOR COMPENSATION:
Prior to 2003, the Company applied APB No. 25, Accounting for Stock Issued
to Employees, and related interpretations, and the intrinsic method, in
accounting for options granted to employees. Accordingly, no compensation
costs were recognized for stock options granted, when the exercise price
was equal to the market value of the underlying stock on the date of grant.
During the second quarter of 2003, the Company adopted FASB Statement No.
123, "Accounting for Stock Based Compensation," as amended by FASB
Statement No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure" prospectively, with an effective date of January 1, 2003.
Under FASB Statement No. 123, the Company records the fair value of any
stock based award as compensation expense as of the date the award is
granted.
Non-employee Director Restricted Stock Plan
On August 13, 2003, the 1996 Non-Employee Director Stock Option Plan was
terminated. On October 29, 2003, the shareholders approved the Non-Employee
Director Restricted Stock Plan. This plan provides for the issuance of
restricted common stock to non-employee directors as part of their overall
compensation. A total of 200,000 restricted shares of common stock can be
issued under the plan. On November 10, 2003, the Company granted 40,500
shares of restricted common stock to the directors pursuant to the plan, of
which 75% vested immediately, as these shares related to services performed
during the first three quarters of 2003, and 25% will vest on December 31,
2003. The Company will expense approximately $156,000 in the fourth quarter
of 2003 in connection with these restricted stock grants.
Long-Term Incentive Plan
On October 29, 2003, the Company's 1996 Omnibus Incentive Stock Plan was
terminated and the shareholders approved a Long-Term Incentive Plan
("LTIP") for key employees. The LTIP provides for the issuance of stock
based awards to key employees as part of their overall compensation. A
total of 550,000 restricted shares of common stock, stock options, or other
stock based awards can be issued under the plan. No stock based awards have
been granted pursuant to this plan to date.
Employment Agreements
During the three months ended September 30, 2003, the Company entered into
employment agreements with two executives. The agreements expire in
December 2005, and provide for total annual base compensation of
approximately $303,000. The agreements also provide for performance bonuses
payable in a combination of cash and restricted common stock of the
Company, pursuant to the LTIP.
Page 21
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
During the first quarter of 2003, the Company entered into an employment
agreement with its Chief Executive Officer. The agreement expires on
December 31, 2005, and provides for total annual base compensation of
$300,000. The agreement also provides for performance bonuses tied to
company performance, and is payable in a combination of cash and restricted
common stock of the Company.
In connection with his employment agreement, during the first quarter of
2003, the Chief Executive Officer was granted a 30-day right to purchase up
to 75,000 shares of restricted common stock by February 6, 2004, at a price
which was the greater of the (i) $3.00 per share, (ii) the January 6, 2003
closing price of the Company's stock, or (iii) the closing price of the
stock immediately preceding a press release announcing the CEO's hiring. If
not exercised during the initial 30 days, the agreement also provided an
additional 30 days to exercise the right at a price which was the greater
of (i) the first option price, (ii) $3.25 per share, or (iii) the average
closing price of the 30 days prior to the date of exercise. The Chief
Executive Officer exercised a portion of the right and purchased 40,000
newly issued shares of common stock, subject to restrictions, for
approximately $126,000. The fair value of this right to purchase restricted
stock was nominal, and will be recorded as compensation expense pursuant to
the transition rules of FASB Statement No. 148.
An employment agreement with another executive executed in August 2003
contained a 30-day right to purchase up to 25,000 shares of restricted
common stock by September 18, 2003, at a price which was the greater of (i)
$3.18 per share, (ii) the August 18, 2003 closing price of the Company's
stock, or (iii) the closing price of the stock on the day immediately
preceding a press release announcing the executive's hiring. The agreement
was later amended to provide an additional 30-day option at a price which
was at the greater of (i) the first option price, (ii) $3.49 per share, or
(iii) the average closing price of the 30 days prior to the date of
exercise. As an incentive to the executive to exercise this right, the
agreement provided for a cash bonus of up to 10% of the total purchase
price of the stock purchased pursuant to this right, subject to a maximum
of $6,000, prorated for the number of shares purchased. The fair value of
these rights to purchase restricted stock was nominal, and was recorded as
compensation expense during the third quarter of 2003. This option expired
on October 18, 2003, without exercise.
18. RESTRUCTURING COSTS:
In conjunction with the implementation of the plan for hotel dispositions
(Note 13) and the anticipated reduction in hotel ownership, starting in
July 2003, the Company announced a plan to reduce its corporate and
regional operations staff by 13 people, or approximately 20 percent, over
the next six months. In addition, the Company's corporate office space
needs have been reduced. The Company owns the building that houses its
corporate offices, and plans to lease the vacated space.
The Company follows Financial Accounting Standards Board Statement No. 146
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"). SFAS 146 requires that the costs associated with exit or disposal
activity, including restructuring costs, be recognized and measured at fair
value when the liability is incurred. The Company estimates incurring total
non-recurring restructuring charges of approximately $140,000 through
January 2004, which include severance benefits, insurance benefits,
outplacement services, legal and office reconfiguration costs. Through
September 30, 2003, the Company has incurred approximately $73,000 in such
expenses, which has been recorded as operating expense in the accompanying
consolidated financial statements.
19. SUBSEQUENT EVENTS:
Subsequent to September 30, 2003, the Company sold two wholly owned
AmeriHost Inn hotels at a gain, including one of the five under contract at
the time the plan for hotel disposition was implemented (Note 13) and the
first AmeriHost Inn sold under the plan, and used approximately $2.9
million of proceeds from these sales to pay off the related mortgage debt.
In addition, a joint venture in which the Company had a controlling
ownership interest sold its non-AmeriHost Inn hotel at a slight gain and
used approximately $1.3 million to pay off the related mortgage debt. These
sale transactions will be reported in the Company's fourth quarter 2003
statement of operations.
Page 22
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
- --------------------------------------------------------------------------------
Subsequent to September 30, 2003, one wholly owned AmeriHost Inn hotel
which had been included in the plan for disposition (Note 13) was removed
from the hotels actively marketed for sale to allow more time for the hotel
to stabilize in its market, and will therefore be reclassified to an
operating asset during the fourth quarter of 2003. Depreciation which would
have been recorded during the third quarter on this asset will be recorded
in the fourth quarter of 2003 upon the decision to remove this hotel from
the plan for disposition.
On October 29, 2003, the shareholders approved a "reverse/forward stock
split," which provides for a 1-for-100 reverse stock split, followed
immediately by a redemption of the outstanding fractional shares by the
Company and an automatic 100-for-1 stock split. The effective date of the
transaction is expected to be November 28, 2003, however the Company's
Board of Directors can abandon the proposed transaction prior to this date.
The price used for the redemption will be the average closing stock price
of the 30-days prior to the effective date.
Page 23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly Report on Form 10-Q contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
Forward-looking statements are statements that are not historical, including
statements regarding management's intentions, beliefs, expectations,
representations, plans or predictions of the future, and are typically
identified by words such as "believe," "expect," "anticipate," "intend,"
"estimate," "may," "will," "should," and "could." There are numerous risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking statements. For a discussion of these factors,
see "Factors Affecting Future Performance" below.
OVERVIEW
We are engaged in developing and selling AmeriHost Inn hotels, and the owning,
operating and managing of AmeriHost Inn hotels and other mid-price, primarily
limited-service, hotels. As of September 30, 2003, we had 59 AmeriHost Inn
hotels open, of which 50 were wholly-owned or leased, one was majority-owned,
and eight were minority-owned. During the past 12 months, we built and opened
four AmeriHost Inn hotels in which we have an ownership interest. Several
additional hotels are in various stages of development, including one AmeriHost
Inn hotel which recently commenced construction. Cendant Corporation ("Cendant")
is the owner and franchisor of the AmeriHost Inn brand. Consequently, we are a
franchisee of Cendant, and the buyers of our AmeriHost Inn hotels become
franchisees of Cendant when they continue to operate the hotels as AmeriHost Inn
hotels. Same room revenues for all AmeriHost Inn hotels we owned and operated,
including unconsolidated minority-owned hotels, are presented below. These
results relate to all the AmeriHost Inn hotels that have been operating for at
least 13 full months during the periods presented.
Page 24
Three Months Nine months Twelve Months
Ended Ended Ended
September 30 September 30 September 30
------------ ------------ -------------
Occupancy - 2003 64.3% 58.3% 57.0%
Occupancy - 2002 64.3% 58.5% 57.3%
Increase (decrease) 0.0% (0.3%) (0.5%)
Average Daily Rate - 2003 $58.91 $57.34 $57.12
Average Daily Rate - 2002 $58.89 $57.56 $57.21
Increase (decrease) 0.0% (0.4%) (0.2%)
Revenue per Available Room - 2003 $37.91 $33.46 $32.56
Revenue per Available Room - 2002 $37.86 $33.67 $32.78
Increase (decrease) 0.0% (0.7%) (0.8%)
Occupancy and average daily rate fluctuate as a result of the changes in demand
for, and supply of, hotel rooms in each of our local markets. Revenue per
Available Room ("RevPAR") is a productivity measure, computed as a combination
of occupancy and average daily rate. In addition, similar to general business
and leisure travel patterns, our hotels are seasonal in nature whereby hotel
revenues are higher in the second and third calendar quarters, compared to the
first and fourth quarters.
SUMMARY OF HOTELS. The table below sets forth information regarding our hotels
at September 30, 2003.
Open Under
Hotels Construction Total
--------------- --------------- ---------------
Hotels Rooms Hotels Rooms Hotels Rooms
------ ----- ------ ----- ------ -----
Consolidated (1):
AmeriHost Inn hotels 51 3,282 -- -- 51 3,282
Other brands 6 796 -- -- 6 796
----- ----- ----- ----- ----- -----
57 4,078 -- -- 57 4,078
----- ----- ----- ----- ----- -----
Unconsolidated:
AmeriHost Inn hotels 8 574 1 79 9 653
Other brands 2 228 -- -- 2 228
----- ----- ----- ----- ----- -----
10 802 1 79 11 881
----- ----- ----- ----- ----- -----
Totals:
AmeriHost Inn hotels 59 3,856 1 79 60 3,935
Other brands 8 1,024 -- -- 8 1,024
----- ----- ----- ----- ----- -----
67 4,880 1 79 68 4,959
===== ===== ===== ===== ===== =====
(1) Consolidated hotels are those in which we have a 100% or controlling
ownership interest or a leasehold interest.
Excluding hotels under development, we had an ownership interest in 67 hotels at
September 30, 2003, versus 76 hotels at September 30, 2002. Total consolidated
hotels decreased to 57 hotels at September 30, 2003, versus 63 hotels at
September 30, 2002. The increase in newly constructed AmeriHost Inn hotels for
our own account and for joint ventures in which we have a non-controlling
minority ownership interest, was more than offset by the sale of both AmeriHost
Inn and non-AmeriHost Inn hotels. We also have several additional new AmeriHost
Inn hotel projects in various stages of development.
SOURCES OF REVENUE. Revenues from hotel operations consist of the revenues from
all consolidated hotels. Consolidated hotels are those hotels in which we have a
100% or controlling ownership or leasehold interest, and are consolidated in our
financial statements. Unconsolidated hotels are those hotels in which we have a
minority or non-controlling ownership or leasehold interest. These hotels are
accounted for by the equity method. Non-core hotels are those hotels operated as
independent of a franchise affiliation, or under a national franchise
affiliation other than the AmeriHost Inn brand, such as Days Inn, Ramada Inn,
and Howard Johnson Express. Development and construction revenues consist of
fees for new construction and renovation activities we perform for
unconsolidated hotels and unrelated third parties. We record commissions and
revenue from the sale of our consolidated AmeriHost Inn hotels, based upon the
net sale price, as these sales are considered part of our ongoing operations of
building and selling hotels, and therefore expanding the AmeriHost Inn brand. We
receive revenue
Page 25
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 our portion of the franchise royalty fees paid by all
non-Arlington Hospitality owned AmeriHost Inn hotels to Cendant Corporation, the
owner of the AmeriHost Inn brand. Finally, we also own the office building in
which our headquarters is located, and receive revenues as a landlord from the
third-party tenants in the building.
SUMMARY OF THIRD QUARTER AND YEAR-TO-DATE RESULTS. Total revenues increased
49.7% and 14.2% for the three and nine months ended September 30, 2003,
respectively, primarily due to increases in hotel sales and commissions and
incentive and royalty sharing. Total revenues from Consolidated AmeriHost Inn
hotels decreased during the three and nine months ended September 30, 2003, due
primarily to the sale of hotels and a 1.5% and 1.2% decrease in same room
revenue for these hotels for the three and nine months ended September 30, 2003,
respectively. Revenues from the development segment decreased during the three
and nine months ended September 30, 2003, due to the decrease in hotel
development activity for minority-owned and third party entities. Revenues from
hotel sales and commissions increased during the three and nine months ended
September 30, 2003, as a result of the sale of six AmeriHost Inn hotels during
the first nine months of 2003, including three in the third quarter, at prices
higher than the three AmeriHost Inn hotels, including one leased hotel, which
were sold during the first nine months of 2002. Revenues from hotel management
and employee leasing segments decreased during both the three and nine month
periods ended September 30, 2003, compared to the same periods in 2002, due
primarily to the reduction of hotels under management contracts. We recorded net
income of $1.1 million for the third quarter of 2003, compared to net income of
$746,000 during the third quarter of 2002. We recorded a net loss of ($3.8)
million for the nine months ended September 30, 2003, compared to net income of
approximately $222,000 for the nine months ended September 30, 2002. These
results include non-cash hotel impairment provisions in 2003 and discontinued
operations related to non-AmeriHost Inn hotels which have been recorded in
connection with the implementation of the plan for hotel disposition and hotel
development repositioning as discussed below. The results for the three and nine
months periods are summarized as follows:
Three Months Ended September 30, Nine months Ended September 30,
------------------------------- -------------------------------
2003 2002 2003 2002
------------- ----------- ------------ ------------
Net income (loss) from continuing
operations, before impairment $ 1,201,438 $ 774,400 $ 412,568 $ 803,538
Impairment provision, net of tax (84,496) -- (2,883,008) --
----------- ----------- ----------- -----------
Net income (loss) from continuing
operations $ 1,116,942 $ 774,400 $(2,470,440) $ 803,538
Discontinued operations (34,704) (28,713) (1,287,628) (581,535)
----------- ----------- ----------- -----------
Net income (loss) $ 1,082,238 $ 745,687 $(3,758,068) $ 222,003
=========== =========== =========== ===========
Net income (loss) per share - Diluted:
From continuing operations $ 0.23 $ 0.15 $ (0.48) $ 0.15
From discontinued operations (0.01) (0.01) (0.26) (0.11)
----------- ----------- ----------- -----------
$ 0.22 $ 0.14 $ (0.74) $ 0.04
=========== =========== =========== ===========
CENDANT AGREEMENT. On September 30, 2000, we sold the AmeriHost Inn brand and
franchising rights to Cendant. In connection with this sale we entered into
agreements with Cendant that provide for both short-term and long-term incentive
payments to us as the AmeriHost Inn brands are expanded, including:
o for the 25-year term of a royalty-sharing agreement, favorable royalty
payment terms on any AmeriHost Inn hotels we own or lease and operate,
including hotels owned through joint ventures with prior approval from
Cendant;
o for the 25-year term of the royalty-sharing agreement, the sharing of
royalties received by Cendant from all AmeriHost Inn hotels in the
franchise system excluding those we own or lease and operate; and
Page 26
o for the 15-year term of a development agreement, a hotel development
incentive fee each time an AmeriHost Inn hotel we own/lease and
operate is sold to an operator who becomes a Cendant franchisee.
We received approximately $721,000 and $1,641,000 in development incentive fees
during the third quarter and first nine months of 2003, respectively, which were
deferred and are being amortized over a 76-month period.
HOTEL DISPOSITION PLAN AND RESTRUCTURING
Effective July 10, 2003, we adopted a strategic plan to sell approximately 25 to
30 hotel properties over the next two years. The properties to be sold include
20 to 25 AmeriHost Inns and six non-AmeriHost hotels that are wholly or
partially-owned or in which we have an ownership interest. These hotels were in
addition to any properties then under contract for sale, and the five hotels
sold during the first six months of 2003.
The sale of the hotels is expected to:
o reduce outstanding debt;
o increase operating cash flow;
o accelerate the generation and realization of sales and royalty-sharing
fees related to our agreements with Cendant;
o provide capital for future hotel development; and
o provide capital to repurchase common stock at attractive prices.
We believe that the hotels to be sold as part of the strategic plan, plus the
hotels under contract for sale at the time the plan was adopted, will generate
net cash of approximately $11.3 million to $14.5 million, after the repayment of
the related mortgage debt secured by the individual properties. See "Factors
Affecting Future Performance" discussed below. In addition, we believe that the
sales will improve operating cash flow by approximately $1.6 million, pre-tax,
annually. Upon successful completion of the sale of the properties in the plan
and the properties then under contract, we expect to own or lease 30 to 35
AmeriHost Inn hotels and two non-AmeriHost Inn hotels, excluding any new hotels
we develop. Actual sales prices may be materially less than what we expect.
There is no assurance, for example, that we will generate the expected proceeds
associated with the strategic plan for hotel disposition.
By selling the hotels, we hope to redeploy the net cash into activities that
will earn higher returns than we were earning on these hotels, such as hotel
development for third parties and joint ventures. By the end of 2005, we would
like our joint venture development activity to grow to an annual rate of 10 to
15 joint venture hotels. Developing hotels through joint ventures requires less
capital from the Company, compared to a wholly owned project, allowing us to
build more hotels. In addition, the Company intends to develop larger hotels,
which is expected to create operational efficiencies, and increase the cash flow
from the Cendant agreements through larger development incentive fees and
greater royalty sharing payments.
In accordance with Statement of Financial Accounting Standard (SFAS) No. 144,
"Accounting for Long-Lived Assets," we recorded a $5.4 million pre-tax, non-cash
impairment charge in the second quarter of 2003, related to 17 of the hotels
targeted for sale, comprised of approximately $4.6 million pre-tax related to 14
AmeriHost Inn hotels and approximately $862,000 pre-tax related to three of the
other branded hotels. During the third quarter of 2003, an additional $175,000
pre-tax, non-cash impairment charge was recorded in connection with the
strategic plan, comprised of approximately $84,000 pre-tax related to one
AmeriHost Inn hotel and approximately $91,000 pre-tax related to two other
branded hotel. The additional impairment charges recorded in the third quarter
of 2003, which were related to three hotels in which an impairment charge was
recorded during the second quarter of 2003, were the result of the progression
of the sale process on these hotels. In total, we expect to record an overall
book gain, net of the non-cash impairment charges, from all hotels under
contract at the time the plan for hotel disposition was implemented and those
slated to be sold pursuant to the plan, ranging from approximately $1.1 million
to $4.3 million, pre-tax. The hotels expected to be sold at a gain will be
reported as of the date the sale transactions close for each of these hotels.
There can be no assurance that the anticipated sales will be consummated on
terms satisfactory to us. The anticipated results from these sales could differ
materially from the final amounts included in our quarterly and annual financial
statements when they are issued. Our line-of-credit agreement contains certain
financial covenants related to tangible net worth, debt to equity ratio and cash
flow to debt service ratio. Our lender
Page 27
has agreed to exclude the impact of the non-cash impairment charges from these
covenant calculations through the third quarter of 2003. The year end 2003
results will be reviewed in connection with a renewal of the line-of-credit, if
any, with this lender.
We have reported, as discontinued operations, the results for the two
non-AmeriHost Inn hotels sold or disposed of during the periods presented and
the five consolidated non-AmeriHost Inn properties currently marketed for sale,
including one which was sold subsequent to September 30, 2003. We have
reclassified our consolidated statements of operations for the three and nine
months ended September 30, 2003 and 2002, and our consolidated balance sheet as
of September 30, 2003, as a result of implementing SFAS 144 to reflect
discontinued operations of consolidated non-AmeriHost Inn hotels sold during
this period, or to be sold pursuant to the disposition plan. This
reclassification has no impact on our net income or net income per common share.
Operations of non-AmeriHost Inn hotels held for sale which are owned by joint
ventures, and which are accounted for using the equity method of accounting, are
not treated as "discontinued operations" under the provisions of SFAS 144. The
sale of AmeriHost Inn hotels are not treated as discontinued operations since we
have a long-term royalty sharing agreement for all AmeriHost Inn hotels which
provides for a revenue stream after the properties are sold to a new or existing
AmeriHost Inn franchisee. The non-cash impairment charge of approximately
$893,000 pre-tax, including approximately $31,000 recorded in the third quarter
of 2003, related to two of the consolidated non-AmeriHost Inn hotels to be sold,
has also been included in "discontinued operations" on the accompanying
consolidated statement of operations. The remaining three non-AmeriHost Inn
hotels to be sold pursuant to this plan are expected to be sold at a total gain
of approximately $426,000. However, these anticipated gains will be recorded in
the consolidated financial statements only as the sale of each of these hotels
is consummated. There can be no assurance that the sale of these hotels will be
consummated on terms as anticipated.
In conjunction with the implementation of our hotel disposition plan and the
anticipated reduction in hotel ownership, we have implemented a restructuring
under which we will reduce our corporate and regional operations staff by 13
people, or approximately 20%. This move is expected to result in annual savings
of approximately $580,000 in labor and related costs. We expect these savings to
be partially offset by the addition of personnel in the hotel development and
financial areas, as described below. In addition, as part of the restructuring:
o we have not replaced several corporate positions which had been
vacated as a result of normal attrition during the last six months,
saving us approximately $165,000 annually in payroll and related
costs;
o we have not filled several positions which had been budgeted for in
2003; and
o our corporate office space needs will be reduced, which will allow us
to lease the vacated space.
The reduction in staff in connection with the restructuring, coupled with the
hiring of additional personnel described below, is designed to change the
composition of our staff to reflect our future direction, which we believe will
better position us for growth. We expect to incur non-recurring restructuring
charges of approximately $140,000 through the first quarter of 2004. These
charges reflect costs of items such as severance benefits, insurance benefits,
outplacement services, legal services and office reconfiguration. Approximately
$73,000 in such restructuring costs were incurred during the third quarter of
2003 and recorded as operating expenses in the accompanying consolidated
financial statements.
Concurrently with the restructuring, we are increasing our business and hotel
development team to assist in expanding new hotel development, primarily through
joint ventures, and to identify other business opportunities. We have enhanced
and replaced the roles of two executive hotel development and construction
positions vacated earlier in 2003, and have added one individual in the market
analysis area, with one additional position to be added in the finance area.
These new and enhanced positions are expected to bring additional depth and
knowledge in hotel development, acquisitions and capital markets.
Page 28
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2002
The following tables set forth our selected operations data for the three month
periods ended September 30, 2003 and 2002. This data should be read in
conjunction with our financial statements in Item 1 on this Form 10-Q.
Three Months Ended Three Months Ended
September 30, 2003 September 30, 2002 %
---------------------- ------------------------- ---------
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
--------- -------- --------- --------- ---------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 11,718 49.2% $ 12,737 80.1% (8.0%)
Other hotels 490 2.1% 754 4.7% (35.0%)
Development and construction 381 1.6% 930 5.8% (59.0%)
Hotel sales and commissions 10,041 42.2% -- 0.0% --
Management services 124 0.5% 267 1.7% (53.3%)
Employee leasing 606 2.5% 929 5.8% (34.8%)
Incentive and royalty sharing 265 1.1% 131 0.8% 102.8%
Office building rental 181 0.8% 153 1.0% 18.1%
--------- -------- --------- --------- ---------
23,806 100.0% 15,901 100.0% 49.7%
--------- -------- --------- --------- ---------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 8,027 33.7% 8,271 52.0% (3.0%)
Other hotels 644 2.7% 522 3.3% 23.5%
Development and construction 591 2.5% 945 5.9% (37.4%)
Hotel sales and commissions 8,445 35.5% -- -- --
Management services 66 0.3% 166 1.0% (60.2%)
Employee leasing 586 2.5% 916 5.8% (36.1%)
Office building rental 46 0.2% 71 0.4% 31.2%
--------- -------- --------- --------- ---------
18,405 77.4% 10,891 68.5% 69.4%
--------- -------- --------- --------- ---------
5,400 22.6% 5,010 31.5% 6.9%
Depreciation and amortization 701 2.9% 1,088 6.8% (35.6%)
Leasehold rents - hotels 1,263 5.3% 1,241 7.8% 1.8%
Corporate general & administrative 527 2.2% 755 4.7% (30.2%)
Impairment provision 143 0.6% -- -- --
--------- -------- --------- --------- ---------
Operating income (loss) $ 2,766 11.6% $ 1,926 12.1% 41.2%
========= ======== ========= ========= =========
Operating Income by Segment:
Hotel operations:
AmeriHost Inn hotels $ 1,910 8.0% $ 2,386 15.0% (19.9%)
Other hotels (276) (1.2%) 85 0.5% (424.1%)
Non-cash impairment provision (143) (0.6%) -- -- --
Development and construction (211) (0.9%) (16) (0.1%) (1,206.0%)
Hotel sales and commissions 1,596 6.7% -- -- --
Management services 47 0.2% 88 0.6% (46.2%)
Employee leasing 20 0.1% 12 0.1% 61.7%
Incentive and royalty sharing 265 1.1% 131 0.8% 102.8%
Office building rental 94 0.4% 42 0.3% 12.9%
Corporate general & administrative (536) (2.3%) (802) (5.0%) (33.1%)
--------- -------- --------- --------- ---------
Operating income (loss) $ 2,766 11.6% $ 1,926 12.1% 41.2%
========= ======== ========= ========= =========
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the
sale of six Consolidated AmeriHost Inn hotels to Cendant franchisees, whereby
the operations of these hotels were included in our hotel operations segment
during the third quarter of 2002; however such hotels were not included during
all or part of the
Page 29
2003 third quarter. In addition, revenues from Consolidated AmeriHost Inn hotels
also decreased due to a 1.5% decrease in same room revenues for these hotels.
The decrease in Consolidated AmeriHost Inn revenue was partially offset by the
opening of two newly constructed AmeriHost Inn hotels. We opened another wholly
owned AmeriHost Inn hotel during the first quarter of 2003, however sold the
property within 30 days after its opening. The hotel operations segment included
the operations of 51 AmeriHost Inn hotels and six non-AmeriHost Inn hotel
comprising 4,078 rooms at September 30, 2003, compared to 55 AmeriHost Inn
hotels and eight non-AmeriHost Inn hotel comprising 4,595 rooms at September 30,
2002. Our hotel revenues have been impacted by general economic and industry
conditions, and 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. We believe that as the number of
AmeriHost Inn hotels increases, the greater the benefits will be at all
locations from marketplace recognition and repeat business. In addition, we
typically build new hotels in growing markets where we anticipate a certain
level of additional hotel development.
Hotel development revenues are directly related to the number of hotels being
developed and constructed for minority-owned entities or unrelated third
parties, and the timing of the construction period. We were constructing one
hotel for a minority-owned entity during the three months ended September 30,
2003, compared to one minority-owned hotel and one unrelated third party hotel
during the three months ended September 30, 2002. However, we also had several
additional projects in various stages of pre-construction development during
both three-month periods.
We closed on the sale of three wholly owned AmeriHost Inn hotels during the
three months ended September 30, 2003, compared to none during the three months
ended September 30, 2002. We intend to continue to build and sell AmeriHost Inn
hotels in order to maximize the value inherent in the agreement with Cendant
while enhancing net income and cash flow. Three hotels have been sold subsequent
to September 30, 2003, including two wholly owned AmeriHost Inn hotels and one
Consolidated non-AmeriHost Inn hotel. One wholly owned AmeriHost Inn hotel is
currently under contract to sell, with additional hotels anticipated to be sold
pursuant to the plan of disposition discussed above.
Hotel management revenue decreased, due primarily to the decrease in the number
of hotels managed for third parties and minority-owned entities, which was 10
hotels, representing 802 rooms, at September 30, 2003, versus 13 hotels,
representing 1,034 rooms, at September 30, 2002.
Employee leasing revenue decreased, due primarily to the reduction in rooms
managed for minority-owned entities and unrelated third parties as described
above, a concerted effort to decrease hotel employee payroll costs which is the
basis for the employee leasing revenue, and the pass through of workers
compensation insurance cost as revenue in 2002 versus a reimbursable cost in
2003.
Cendant pays us a development incentive fee each time we sell one of our
existing AmeriHost Inn hotels to a buyer who executes an AmeriHost Inn franchise
agreement with Cendant. The development incentive fees are typically paid by
Cendant within 20 days from the sale of an AmeriHost Inn hotel owned by us to an
unrelated AmeriHost Inn franchisee. For financial statement purposes, these fees
are deferred and recognized as revenue over a 76-month period from the date of
sale. Cendant also pays us a portion of all royalty fees Cendant receives from
all of its AmeriHost Inn franchisees. Generally, Cendant receives royalty fees
from each of their franchisees based upon a percentage of guest room revenue,
ranging from 4% to 5%. In turn, Cendant pays us a portion of this fee as
stipulated in our agreement with Cendant. Royalty sharing fees are typically
paid by Cendant to us on a monthly basis. These royalty sharing revenues are
generally recorded when the related royalty fee is earned. Development incentive
and royalty sharing revenue increased as a result of the sale of additional
AmeriHost Inn hotels and the increase in the number of non-Company owned
AmeriHost Inn hotels franchised by Cendant. We received approximately $721,000
and $220,000 during the three months ended September 30, 2003 and 2002,
respectively, in development incentive fees from the sale of AmeriHost Inn
hotels. Approximately $171,000 and $95,000 was recognized during the three
months ended September 30, 2003 and 2002, respectively, from the amortization of
this deferred income. We also recorded approximately $94,000 and $36,000 in
royalty sharing revenue during the third quarter of 2003 and 2002, respectively.
Office building rental consisting of leasing activities at our office building,
increased due primarily to the annual increases as stipulated in the various
lease agreements with the tenants. The building contains approximately 54,000
rentable square feet. We occupy approximately 15,500 square feet, as reduced by
the restructuring activities discussed above, allowing us to make available for
lease a greater portion of the building to unrelated third parties. During the
third quarter of 2003, we hired a national real estate leasing broker to assist
us in obtaining additional
Page 30
tenants. Most of the remaining space is leased to unrelated third parties
pursuant to long-term lease agreements. Including our space, the building is
approximately 74% occupied.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased,
primarily due to an increase in operating costs and expenses from hotel sales
and commissions, as described below. A decrease in operating costs in the hotel
operations segment was due primarily to the fewer number of hotels included in
this segment -- 57 hotels at September 30, 2003, as compared to 63 hotels at
September 30, 2002. Operating costs and expenses as a percentage of revenues for
the Consolidated AmeriHost Inn hotels increased due to several hotels operating
during their initial stabilization period when revenues are typically lower and
significant start-up costs are incurred, as well as increases primarily in the
costs of insurance, general and administrative, real estate taxes and ongoing
maintenance.
Operating costs and expenses for the hotel development segment decreased,
consistent with the decrease in hotel development revenues for the three months
ended September 30, 2003, compared to the three months ended September 30, 2002.
Operating costs and expenses in the hotel development segment as a percentage of
segment revenue increased during the three month period ended September 30, 2003
due to the level of hotel construction activity from third parties and
minority-owned entities, which has a higher ratio of costs to revenue.
Hotel management segment operating costs and expenses decreased primarily due to
the decrease in the number of hotel rooms operated and managed for unrelated
third parties and minority-owned entities. Employee leasing operating costs and
expenses decreased during the three months ended September 30, 2003, compared to
the three months ended September 30, 2002, consistent with the decrease in
segment revenue for the three months ended September 30, 2003.
Office building rental operating costs and expenses consist primarily of
expenses related to the management of our office building. Some of the office
building costs have been allocated to the other operating segments.
Depreciation and amortization expense decreased, primarily due to the sale of
consolidated AmeriHost Inn hotels during the last twelve months, offset by the
opening of newly constructed hotels, and the acquisition or consolidation of
existing hotels. We stopped taking depreciation deductions on all of the hotel
properties held for sale as of July 1, 2003 as required by Generally Accepted
Accounting Principals, offset by the opening of newly constructed hotels, and
the acquisition or consolidation of existing hotels.
Leasehold rents - hotels increased slightly during the third quarter of 2003
compared to the third quarter of 2002, as the annual rent increased as provided
for by the existing leases. The increase was partially offset by the purchase of
one leased AmeriHost Inn hotel and the termination of a non-AmeriHost Inn hotel
lease upon its expiration during the third quarter of 2003.
Corporate general and administrative expense decreased during the third quarter
of 2003 compared to the third quarter of 2002 due primarily to non-recurring
management transition expenses incurred during 2002, offset by increases in
professional fees and director expenses. Director expenses include director fees
which were revised in 2003 to be competitive with other public companies of a
similar size and increases in travel costs.
The hotel impairment provision was recorded in connection with our plan for the
disposition of certain hotel assets which are marketed for sale as discussed
above. The amount represents an adjustment for certain hotel assets to decrease
the carrying value of the assets to the anticipated market value, net of closing
costs. The impairment adjustment includes $84,000 pre-tax related to one
AmeriHost Inn hotels to be sold and $59,000 related to an unconsolidated joint
venture, which have been included in operating income. An additional $31,000
pre-tax related to one non-AmeriHost Inn hotel to be sold has been included in
"discontinued operations" in the accompanying consolidated statements of
operations.
OPERATING INCOME BY SEGMENT. The following discussion of operating income by
segment excludes corporate general and administrative expense and the non-cash
hotel impairment charges. Operating income from Consolidated AmeriHost Inn
hotels decreased due to a decrease in same room revenues, certain new hotels
operating during their ramping up stage when revenues are typically lower, and
increases in certain expenses, including insurance, general and administrative
expenses, real estate taxes, and maintenance. Operating loss from the hotel
development segment increased due to the decrease in hotels developed and
constructed for third parties and minority-owned entities during the third
quarter of 2003, compared with the third quarter of 2002. Operating income from
hotel sales and commissions increased due to the sale of three AmeriHost Inn
hotels at a significant
Page 31
profit during the third quarter of 2003, versus none during the third quarter of
2002. The decrease in hotel management segment operating income during the third
quarter of 2003, was due primarily to a reduction in the number of hotels
managed. Employee leasing operating income increased slightly, due primarily to
the decrease in employee leasing operating expenses. Incentive and royalty
sharing operating income increased due to the greater number of AmeriHost Inn
franchisees who pay royalty fees to Cendant. Office building rental operating
income increased, attributable to the annual rental increases pursuant to
certain of the lease agreements with the tenants.
INTEREST EXPENSE. The decrease in interest expense during the third quarter of
2003 compared to 2002 was attributable to the sale of AmeriHost Inn hotels and
the use of proceeds to repay the related mortgage debt, thus reducing our
overall debt, and the decrease from lower interest on floating rate debt. The
decrease in interest expense was offset by the mortgage financing of newly
constructed or acquired consolidated hotels. Interest expense does not include
interest incurred on hotels under development and construction. We capitalize
interest incurred during the pre-opening construction period of a consolidated
hotel project, as part of the total development cost. The amount capitalized
includes both interest charges from a direct construction loan, plus interest
computed at our incremental borrowing rate on the total costs incurred to date
in excess of the construction loan funding.
GAIN ON SALE OF ASSETS. Pursuant to the terms of the agreement for the sale of
the AmeriHost Inn brand name and franchising rights to Cendant Corporation in
2000, the Company was due three annual installments of $400,000 each. The
Company received each of the $400,000 payments as scheduled, including the final
installment which was due on September 30, 2003. These payments have been
classified as gain on sale of assets in the consolidated financial statements.
CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during the
third quarter of 2003, compared to 2002, was primarily attributable to the write
down to fair value of property in a hotel partnership by $59,000 during the
third quarter of 2003, and the recognition of our share of the operations in
excess of our stated ownership interest as a result of our position as general
partner. Distributions from affiliates were $458 during both the three months
ended September 30, 2003, and the three months ended September 30, 2002.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003, COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2002
The following tables set forth our selected operations data for the nine month
periods ended September 30, 2003 and 2002. This data should be read in
conjunction with our financial statements in Item 1 on this Form 10-Q.
Nine months Ended Nine months Ended
September 30, 2003 September 30, 2002
----------------------- ------------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
--------- -------- --------- -------- --------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 31,254 54.5% $ 33,582 66.8% (6.9%)
Other hotels 1,336 2.3% 1,759 3.5% (24.1%)
Development and construction 2,478 4.3% 5,741 11.4% (56.8%)
Hotel sales and commissions 19,074 33.2% 4,900 9.8% 289.2%
Management services 353 0.6% 764 1.5% (53.8%)
Employee leasing 1,665 2.9% 2,649 5.3% (37.2%)
Incentive and royalty sharing 695 1.2% 387 0.8% 79.5%
Office building rental 537 0.9% 471 0.9% 14.0%
-------- ----- -------- ----- -------
57,392 100.0% 50,254 100.0% 14.2%
-------- ----- -------- ----- -------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 23,425 40.8% 23,675 47.1% (1.1%)
Other hotels 1,532 2.7% 1,606 3.2% (4.6%)
Development and construction 2,728 4.8% 5,569 11.1% (51.0%)
Hotel sales and commissions 15,779 27.5% 3,529 7.0% 347.2%
Management services 206 0.4% 504 1.0% (59.2%)
Employee leasing 1,612 2.8% 2,593 5.2% (37.8%)
Page 32
Nine months Ended Nine months Ended
September 30, 2003 September 30, 2002
----------------------- ------------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
--------- -------- --------- -------- --------
Office building rental 142 0.2% 117 0.2% 62.5%
-------- ----- -------- ----- -------
45,424 79.1% 37,593 74.8% 21.0%
-------- ----- -------- ----- -------
11,968 20.9% 12,661 25.2% (5.8%)
Depreciation and amortization 2,767 4.8% 3,222 6.4% (14.1%)
Leasehold rents - hotels 3,803 6.6% 3,860 7.7% (1.5%)
Corporate general & administrative 1,490 2.6% 1,529 3.0% (2.5%)
Impairment provision 4,808 8.4% -- -- --
-------- ----- -------- ----- -------
Operating income (loss) $ (900) (1.5%) $ 4,051 8.1% (123.4%)
======== ===== ======== ===== =======
Page 33
Nine months Ended Nine months Ended
September 30, 2003 September 30, 2002
----------------------- ------------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
--------- -------- --------- -------- --------
Operating Income (Loss) by Segment:
Hotel operations:
AmeriHost Inn hotels $ 1,836 3.2% $ 3,546 7.1% (48.2%)
Other hotels (559) (1.0%) (288) (0.6%) (94.2%)
Non-cash impairment provision (4,808) (8.4%) -- -- --
Development and construction (253) (0.4%) 168 0.3% (250.4%)
Hotel sales and commissions 3,295 5.7% 1,372 2.7% 140.3%
Management services 113 0.2% 220 0.4% (48.5%)
Employee leasing 51 0.1% 54 0.1% (7.0%)
Incentive and royalty sharing 695 1.2% 387 0.8% 79.5%
Office building rental 274 0.5% 236 0.5% (4.5%)
Corporate general & administrative (1,544) (2.7%) (1,645) (3.3%) (6.2%)
-------- ----- -------- ----- -------
Operating income (loss) $ (900) (1.5%) $ 4,051 8.1% (123.4%)
======== ===== ======== ===== =======
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the
sale of nine Consolidated AmeriHost Inn hotels to Cendant franchisees, whereby
the operations of these hotels were included in our hotel operations segment
during all or part of the nine months ended September 30, 2002; however such
hotels were not included during all or part of the 2003 nine month period. In
addition, same room revenues for these Consolidated AmeriHost Inn hotels
decreased 1.2%. The decrease in revenues from Consolidated AmeriHost Inn hotels
was partially offset by the opening of three newly constructed AmeriHost Inn
hotels. Our hotel revenues have been impacted by general economic and industry
conditions, and 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. We believe that as the number of
AmeriHost Inn hotels increases, the greater the benefits will be at all
locations from marketplace recognition and repeat business. In addition, we
typically build new hotels in growing markets where we anticipate a certain
level of additional hotel development.
Hotel development revenues are directly related to the number of hotels being
developed and constructed for minority-owned entities or unrelated third
parties, and the timing of the construction period. We were constructing two
hotels for minority-owned entities during the nine months ended September 30,
2003, compared to two minority-owned hotels and one unrelated third party hotel
during the nine months ended September 30, 2002. However, we also had several
additional projects in various stages of pre-construction development during
both nine-month periods in 2002 and 2003.
We closed on the sale of six wholly owned AmeriHost Inn hotels during the nine
months ended September 30, 2003, and two wholly owned AmeriHost Inn hotels
during the nine months ended September 30, 2002. In addition, we facilitated the
sale of one AmeriHost Inn hotel leased to us by the REIT during the first nine
months of 2002.
Year to date, we have sold eight wholly owned AmeriHost Inn hotels generating
net hotel revenues of approximately $22.8 million. We intend to continue to
build and sell AmeriHost Inn hotels in order to maximize the value inherent in
the agreement with Cendant while enhancing net income and cash flow.
Hotel management revenue decreased, due primarily to the decrease in the number
of hotels managed for third parties and minority-owned entities.
Employee leasing revenue decreased, due primarily to the reduction in rooms
managed for minority-owned entities and unrelated third parties as described
above, a concerted effort to decrease hotel employee payroll costs which is the
basis for the employee leasing revenue, and the pass through of workers
compensation insurance cost as revenue in 2002 versus a cost reimbursement in
2003.
Development incentive and royalty sharing revenue increased as a result of the
sale of additional AmeriHost Inn hotels and the increase in the number of
non-Company owned AmeriHost Inn hotels franchised with Cendant. We received
approximately $1,641,000 and $991,000 during the nine months ended September 30,
2003 and 2002, respectively, in development incentive fees from the sale of
AmeriHost Inn hotels. Approximately $471,000 and $263,000 was recognized during
the nine months ended September 30, 2003 and 2002, respectively, from the
amortization of this deferred income. We also recorded approximately $224,000
and $124,000 in royalty sharing revenue during the first nine months of 2003 and
2002, respectively.
Page 34
Office building rental consisting of leasing activities from our office
building, increased due to the annual increases as stipulated in the various
lease agreements with the tenants, and the leasing of additional office space
during the nine months ended September 30, 2003 versus the nine months ended
September 30, 2002. We occupy approximately 22% of the rentable square feet, as
reduced as part of the restructuring activities discussed above. Most of the
remaining space is leased to unrelated third parties pursuant to long-term lease
agreements, and we have hired a national real estate broker to assist us in
leasing the rest of the available space.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased,
primarily due to an increase in operating costs and expenses from hotel sales
and commissions as described below. A decrease in operating costs in the hotel
operations segment was due primarily to the fewer number of hotels included in
this segment -- 57 hotels at September 30, 2003, as compared to 63 hotels at
September 30, 2002. Operating costs and expenses as a percentage of revenues for
the consolidated AmeriHost Inn hotels increased due to several hotels operating
during their initial stabilization period when revenues are typically lower and
significant start-up costs are incurred, as well as increases primarily in the
costs of insurance, real estate taxes, energy, general and administrative, and
ongoing maintenance.
Operating costs and expenses for the hotel development segment decreased,
consistent with the decrease in hotel development revenues for the nine months
ended September 30, 2003, compared to the nine months ended September 30, 2002.
Operating costs and expenses in the hotel development segment as a percentage of
segment revenue increased during the nine month period ended September 30, 2003
due to the level of hotel construction activity from third parties and
minority-owned entities, which has a higher ratio of operating costs to
revenues.
Hotel management segment operating costs and expenses decreased primarily due to
the decrease in the number of hotel rooms operated and managed for unrelated
third parties and minority-owned entities. Employee leasing operating costs and
expenses decreased during the nine months ended September 30, 2002, compared to
the nine months ended September 30, 2002, consistent with the decrease in
segment revenue for the nine months ended September 30, 2003.
Office building rental operating costs and expenses consisted primarily of
expenses related to the management of our office building. Certain of the office
building costs have been allocated to the other operating segments.
Depreciation and amortization expense decreased, primarily due to the sale of
consolidated AmeriHost Inn hotels during the last twelve months, offset by the
opening of newly constructed hotels, and the acquisition or consolidation of
existing hotels. We stopped taking depreciation deductions on hotel assets held
for sale as of July 1, 2003, Leasehold rents - hotels decreased slightly during
the first nine months of 2003 compared to the first nine months of 2002, due to
the disposition of one leased hotel during the first quarter of 2002, and the
purchase of one leased AmeriHost Inn hotel and the termination of another
non-AmeriHost Inn hotel lease upon its expiration during the third quarter of
2003, partially offset by the annual rent increase.
Corporate general and administrative expense decreased due primarily to
management transition expenses incurred during the third quarter of 2002, offset
by increases in professional fees and director expenses. Director expenses
include director fees which were revised in 2003 to be competitive with other
public companies of a similar size and increases in travel costs. In addition,
the decrease in corporate general and administrative expense for the nine month
period was also offset by the non-recurring reimbursement of a portion of the
out of pocket costs and professional fees in the amount of approximately $64,000
incurred by the Committee To Enhance Shareholder Value, which was responsible
for the election of two of our independent directors at the 2002 annual meeting.
This reimbursement was approved unanimously by all disinterested members of the
Company's Board.
The hotel impairment provision was recorded primarily in connection with our
plan for the disposition of certain hotel assets that we intend to market for
sale as discussed above. The amount represents an adjustment for certain hotel
assets to decrease the carrying value of the assets to the anticipated market
value, net of closing costs. The impairment adjustment includes $4.8 million
pre-tax related to AmeriHost Inn hotels to be sold which has been included in
operating income. An additional $893,000 pre-tax related to non-AmeriHost Inn
hotels to be sold has been included in "discontinued operations" in the
accompanying statements of operations.
OPERATING INCOME BY SEGMENT. The following discussion of operating income by
segment excludes any corporate general and administrative expense and the
non-cash hotel impairment charges. Operating income from consolidated AmeriHost
Inn hotels decreased due to a decrease in same room revenues, certain new hotels
operating during their ramping up stage when revenues are typically lower, and
increase in certain expenses, including insurance, real estate taxes, energy,
general and administrative, and maintenance. Operating income from the hotel
Page 35
development segment in 2002 decreased to an operating loss in 2003 due to the
decrease in hotels developed and constructed for third parties and
minority-owned entities during the first nine months of 2003, compared with the
first nine months of 2002. Operating income from hotel sales and commissions
increased due to the sale of more AmeriHost Inn hotels and at a greater profit
during the first nine months of 2003, versus the sale of AmeriHost Inn hotels
during the first nine months of 2002. The decrease in hotel management segment
operating income during the first nine months of 2003 was due primarily to a
reduction in hotels managed. Employee leasing operating income decreased
slightly, due primarily to the decrease in hotel employee payroll expenses.
Office building rental operating income decreased, attributable to the change in
allocation of expenses to our other business segments.
INTEREST EXPENSE. The decrease in interest expense during the first nine months
of 2003 compared to 2002 was attributable to the sale of AmeriHost Inn hotels
and the use of proceeds to repay the related mortgage debt, thus reducing our
overall level of debt. The decrease from lower interest on floating rate debt
was offset by the mortgage financing of newly constructed or acquired
consolidated hotels. Interest expense does not include interest incurred on
hotels under development and construction. We capitalize interest expense
incurred during the pre-opening construction period of a consolidated hotel
project, as part of the total development cost. The amount capitalized includes
both interest charges from a direct construction loan, plus interest computed at
our incremental borrowing rate on the total costs incurred to date in excess of
the construction loan funding.
GAIN ON SALE OF ASSETS. Pursuant to the terms of the agreement for the sale of
the AmeriHost Inn brand name and franchising rights to Cendant Corporation in
2000, the Company was due three annual installments of $400,000 each. The
Company received each of the $400,000 payments as scheduled, including the final
installment which was due on September 30, 2003. These payments have been
classified as gain on sale of assets in the consolidated financial statements.
CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during the
first nine months of 2003, compared to 2002, was primarily attributable to the
recognition of our share of the operations in excess of our stated ownership
interest as a result of our position as general partner. Distributions from
affiliates were $9,794 during the nine months ended September 30, 2003, compared
to $10,768 during the nine months ended September 30, 2002.
OFF-BALANCE SHEET ARRANGEMENTS
Through wholly-owned subsidiaries, we are a general partner or managing member
in 15 joint ventures as of September 30, 2003. As a general partner or managing
member, we are secondarily liable for the obligations and liabilities of these
joint ventures. As of September 30, 2003, these joint ventures had $27.9 million
outstanding under mortgage loan agreements. Approximately $6.3 million of this
amount has been included in our consolidated financial statements as of
September 30, 2003, reflecting the debt owed by joint ventures in which we have
a majority or controlling ownership interest, leaving approximately $21.6
million in off-balance sheet mortgage debt owed by unconsolidated joint
ventures. If we subsequently obtain a majority or controlling ownership interest
in a joint venture, the joint venture's debt will be included in our
consolidated financial statements. Of this $21.6 million of financing, we also
have provided approximately $17.0 million in guarantees to the lenders. Other
partners have also guaranteed $10.8 million of these financings. One
unconsolidated joint venture mortgage loan in the amount of approximately $1.7
million at September 30, 2003 matured on November 1, 2003, however the lender
has extended the maturity of the loan to November 1, 2004. Unless the properties
collateralizing the debt are sold, the remaining joint venture mortgage loans
mature after 2004.
From time to time, we advance funds to these 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 $2.2 million at
September 30, 2003, and are included in investments in and advances to
unconsolidated hotel joint ventures in our consolidated financial statements. We
expect the joint ventures to repay these advances through cash flow generated
from hotel operations, mortgage financing, or the sale of the hotel. These
advances will be repaid to us prior to distributions being paid to the partners.
We apply the provisions of FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others," with respect to mortgage loan guarantees for joint
ventures in which the Company is a partner. This interpretation elaborates on
the disclosures required by the guarantor and requires the guarantor to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. During the third quarter of 2003, the Company provided a
guarantee related to the mortgage debt of a joint venture in which it shares the
responsibility of the guarantee on a joint and several basis with its joint
Page 36
venture partners. The guarantee is effective for the 20-year term of the
mortgage loan. The Company has recorded as an additional investment in this
joint venture, and a liability for its share of this guarantee of approximately
$40,000, its estimated fair value, as of September 30, 2003.
In January 2003, Interpretation No. 46, "Consolidation of Variable Interest
Entities", was issued. We are required to adopt the requirements of this
Interpretation for interim periods beginning after December 15, 2003. This
Interpretation clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements," and requires that we present any variable
interest entities in which we have a majority variable interest on a
consolidated basis in our financial statements. We are continuing to assess the
provisions of this Interpretation and the impact to us of adopting this
Interpretation. Therefore the following amounts may change based on additional
analysis. Due to the adoption of this Interpretation, we expect that we will
begin to present our investments in three joint ventures in which we have a
majority variable interest, as determined in accordance with the provisions of
this Interpretation, on a consolidated basis in our financial statements
beginning with the consolidated financial statements issued for the quarterly
period ended December 31, 2003. The consolidation of these joint ventures is
expected to add approximately $6.8 million in assets and $6.1 million in
liabilities to our consolidated balance sheet. As of September 30, 2003, we had
investments in, and advances to, these joint ventures of approximately $608,000,
which was presented as such under the equity method of accounting in the
accompanying consolidated financial statements. We expect that we will continue
to present all of our other unconsolidated investments under the equity method.
The following table summarizes our contractual obligations, 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 $ 36,654,943 $ 2,899,632 $ 7,060,695 $ 4,547,838 $ 22,146,778
Long-term debt of assets held for
sale - non-AmeriHost Inn hotels 10,408,395 10,408,395 -- -- --
Long-term debt of assets held for
sale - AmeriHost Inn hotels 23,105,654 23,105,654 -- -- --
Long-term debt - unconsolidated
joint ventures 21,594,345 2,388,622 1,390,186 2,111,167 15,704,370
Line of credit 2,250,000 2,250,000 -- -- --
Operating leases - consolidated 64,486,985 5,814,823 11,365,607 11,801,669 35,504,886
Operating leases - unconsolidated -- -- -- -- --
Purchase obligations:
Construction contracts 1,082,659 1,082,659 -- -- --
Other long-term liabilities -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Total $159,582,981 $ 47,949,785 $ 19,816,488 $ 18,460,674 $ 73,356,034
============ ============ ============ ============ ============
We expect these obligations to be funded through operations, including the sale
of hotels, or refinanced/extended prior to maturity. The sale of the hotels to
be sold as part of our hotel disposition plan, and those under contract for sale
at the time the plan was implemented, is expected to generate net cash of
approximately $11.3 million to $14.5 million, after the repayment of the related
mortgage debt which is included in the amounts above. See "Risk Factors"
discussed below. Actual sales prices may be materially less than what we expect.
There is no assurance, for example, that we will generate the expected proceeds
associated with the strategic plan for hotel disposition.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
We currently lease 21 hotels from a REIT. Pursuant to an amendment to the master
lease agreement with this REIT, we 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, we receive:
o a commission from the REIT for facilitating the transaction which is
based upon the sales price;
Page 37
o an incremental fee from Cendant, and
o long-term royalty sharing fees from Cendant from the future royalties
paid to Cendant.
Both we and the REIT choose which properties are sold. For each hotel chosen by
us, one hotel is also chosen by the REIT. Our choice is final when the sale
transaction closes. The REIT makes their corresponding choice at this time. If
we, or the REIT, are not successful in selling the REIT's choice to a third
party, then we are obligated under the agreement to purchase the hotel from the
REIT at predetermined prices. If we do not complete the purchase of the hotel
within the specified time period, then our rent payment on all of the REIT
hotels shall be increased by 0.25% each time. We cannot close on the sale of our
third and fourth choice until the first and second REIT choices have been sold
(or purchased by us), respectively. During 2001, we facilitated the sale of two
hotels by the REIT (our first and second choices), and purchased one hotel from
the REIT (the REIT's first choice). During 2002, we 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 third scheduled increase was avoided in September 2003, when
the Company purchased a hotel from the REIT, using cash of approximately
$556,000 and mortgage financing provided by the REIT of approximately $1.7
million. If the Company does not either facilitate the sale to a third party, or
purchase from the REIT, one hotel prior to June 5, 2004, the fourth 0.25% rent
increase becomes effective. If the Company decides to purchase this hotel prior
to June 4, 2004 with approximately $2.0 million of mortgage financing already
committed by the REIT, it will need to use approximately $656,000 in operating
cash flow or working capital to consummate the purchase.
LIQUIDITY AND CAPITAL RESOURCES
We have seven main sources of cash from operating activities:
o revenues from hotel operations;
o fees from development, construction and renovation projects,
o revenues from the sale of hotel assets;
o fees from management contracts,
o fees from employee leasing services,
o hotel development incentive fees and royalty sharing pursuant to the
Cendant transaction, and
o rental income from the ownership of an office building.
Approximately 10% of our hotel operations revenue not received at checkout 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 our construction
draws, we typically do not pay our contractors until we receive our draw from
the equity or lending source. We typically receive 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 us within five working days of the end of
each month. Cash from our 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 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
us. Office space rents are typically received monthly in advance, around the
first of each month.
During the first nine months of 2003, we received cash from operations of $17.9
million, compared to cash received from operations of $9.2 million during the
first nine months of 2002, or an increase in cash provided by operations of $8.7
million. The increase in cash flow from operations during the first nine months
of 2003, when compared to 2002, can be primarily attributed to the sale of six
wholly-owned hotels in 2003, versus the sale of two wholly-owned hotels and one
leased hotel in 2002, offset by a decrease in hotel development for a
minority-owned hotels during 2003, and the decrease in operating income from
hotel operations. The increase in accounts receivable during the nine months
ended September 30, 2003, compared to the same period in 2002 was due to three
development incentive fees outstanding from Cendant for sales consummated during
the third quarter of 2003, plus other hotel development activity. The decrease
in accounts payable for the nine months ended September 30, 2003, compared to
the same period in 2002, was attributable to the reduction in payables as a
result of increased operating cash flow. Deferred income tax asset increased
significantly during the nine months ended September 30, 2003, due
Page 38
to the deferred taxes recognized in connection with the hotel impairment
adjustments. The significant increase in deferred income in both 2003 and 2002
was primarily attributable to the receipt of significant development incentive
fees from Cendant. A significant portion of operating cash flow from hotel
operations is anticipated to be used for leasehold rent obligations.
We invest cash in three principal areas:
o to purchase property and equipment for constructing and renovating
consolidated hotels;
o to purchase equity interests in hotels; and
o to make loans to affiliated and non-affiliated hotels for the purpose
of construction, renovation and working capital.
From time to time, we may also utilize cash to purchase our own common stock.
Our board of directors has authorized a common stock buy back, at any time and
without notice, of up to 1,000,000 shares under certain conditions and
consistent with securities laws governing these buybacks. Under this
authorization, to date in 2003 we have repurchased 36,800 shares. All shares
that we have repurchased have been retired. In addition, 37,000 options to
purchase stock were exercised during the third quarter of 2003 resulting in
proceeds to us of approximately $130,000.
During the first nine months of 2003, we used $6.4 million in investing
activities compared to using $15.3 million during the first nine months of 2002.
During the first nine months of 2003, we used $6.3 million to purchase property
and equipment for consolidated AmeriHost Inn hotels, used approximately $571,000
for investments in and advances to affiliates, net of distributions and
collections on advances from affiliates, and used approximately $777,000 for the
acquisition of partnership interests, offset by approximately $1.4 million in
net proceeds from the sale of a non-AmeriHost Inn hotel and the final
installment from the sale of the AmeriHost Inn brand to Cendant Corporation.
During the first nine months of 2002, we used $14.1 million to purchase property
and equipment for consolidated AmeriHost Inn hotels, used $464,000 for
investments in and advances to affiliates, net of distributions and collections
on advances from affiliates, and used approximately $797,000 for the acquisition
of partnership interests.
Cash used in financing activities was $11.3 million during the first nine months
of 2003, compared to cash provided by financing activities of $3.8 million
during the first nine months of 2002. In 2003, we incurred principal repayments
on our debt of $18.2 million, primarily through the repayment of mortgages in
connection with the sale of hotels, and net repayments on the line of credit,
compared to $5.7 million in 2002, including the repayment of mortgages and net
repayments on the line of credit. We also generated fewer proceeds from debt
issuance, from $9.7 million in 2002 to $6.9 million in 2003.
We have secured a $20 million construction line of credit facility, which
provides for both construction financing as well as long-term mortgage
financing. We utilize this facility primarily for the construction of
wholly-owned AmeriHost Inn properties, as approved by the lender on a
project-by-project basis. The loans under this facility bear interest at the
floating rate of LIBOR plus 2.25%. As of September 30, 2003, approximately $8.2
million has been utilized for three hotel projects, which has already been, or
will be, automatically converted to long-term financing. The lender's commitment
to utilize this facility for new construction projects expired October 31, 2003,
however the Company is currently negotiating with this lender for an extended
and enhanced construction line of credit facility.
Certain of our hotel mortgage notes and our 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 our fiscal year end. We
are not aware of any covenant violations as of September 30, 2003.
The Company's plan to sell certain AmeriHost Inn hotel assets is expected to
result in the payoff of the related mortgage debt in the amount of approximately
$23.1 million, which has been classified in current liabilities in the
accompanying consolidated balance sheet as of September 30, 2003.
At September 30, 2003, we had $2.25 million outstanding under our $6.0 million
operating line-of-credit, which matures April 30, 2004. The line-of-credit is
collateralized by substantially all of our assets, subject to first mortgages
from other lenders on hotel assets. The amount we can draw under this line
declines to $5.5 million on February 27, 2004. Draws on the line-of-credit bears
interest at the rate of prime, plus 2.5%, with a floor of 6.75%. The credit line
agreement also requires us to maintain 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
Page 39
2003. Our lender has agreed to exclude the impact of the non-cash impairment
charges from these covenant calculations through the third quarter of 2003. The
year end 2003 results will be reviewed in connection with a renewal of the
line-of-credit, if any, with this lender. During the third quarter of 2003, we
reduced the outstanding balance on the line-of-credit by approximately $4.1
million, due primarily to the net proceeds from the sale of three hotels and the
positive cash flow from hotel operations.
We intend to pursue longer term financing options with our current
line-of-credit lender or other lenders that is consistent with our business plan
of developing, building and selling AmeriHost Inn hotels. However, there can be
no assurance that we will obtain an alternative credit facility of longer
duration under terms and conditions that we deem satisfactory.
We expect cash from operations, including proceeds from the sale of hotels, to
be sufficient to pay all operating and interest expenses during the next 12
months, as well as commitments to purchase hotel assets, provided that current
financing facilities remain in place.
SEASONALITY
The lodging industry, in general, is seasonal by nature. Our 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 many of our hotels are located, as well as general business and leisure
travel trends. This seasonality can be expected to continue to cause quarterly
fluctuations in our revenues. Quarterly earnings also may be adversely affected
by events beyond our 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 our management fees are based upon a percentage
of the hotel's total gross revenues, we are further susceptible to seasonal
variations.
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others," and interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the interpretation are
applicable to guarantees issued or modified after December 31, 2002. As
described in Note 4, the Company has guaranteed mortgage loan obligations on
certain joint ventures in which the Company holds a minority ownership interest,
to secure undertakings made by those joint ventures. For those guarantees issued
prior to 2003, the Company anticipates that no such contingent liability will be
realized, and that the various guarantees will eventually expire. As such, the
Company believes the aggregate fair value of all such guarantees is negligible.
The Company issued a guarantee during the third quarter of 2003 in connection
with a mortgage loan of a joint venture in which it shares the responsibility of
the guarantee on a joint and several basis with its joint venture partners. The
guarantee is effective for the 20-year term of the mortgage loan. The Company
has recorded as an additional investment in this joint venture, and a liability
for its share of this guarantee, of approximately $40,000, its estimated fair
value, as of September 30, 2003.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," (FIN46) an interpretation of ARB No. 51. This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the interpretation. The interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests obtained in variable interest
entities after January 31, 2003. For public companies like the Company, the
interpretation is applied to the enterprise no later than the beginning of the
first annual reporting period beginning after December 15, 2003. The
interpretation requires certain disclosures in the consolidated financial
statements issued after January 15, 2003, if it is reasonably possible that the
Company will consolidate or disclose information about variable interest
entities when the interpretation becomes effective. The Company currently
anticipates consolidating three variable interest entities upon the application
of FIN 46, however the Company is continuing to assess the provisions of this
Interpretation and the impact to the Company of adopting this Interpretation.
Therefore, the impact may change based upon this additional analysis.
Page 40
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that the costs
associated with exit or disposal activity be recognized and measured at fair
value when the liability is incurred. The provisions of SFAS 146 are effective
for exit or disposal activities initiated after December 31, 2002. As discussed
in Note 18, the Company anticipates incurring restructuring charges of
approximately $140,000 through the first quarter of 2004.
In December 2002, the FASB issues SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). This statement amends
FASB Statement No. 123, "Accounting for Stock-based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
148 and the disclosure requirements of Statement No. 123 require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after December 15,
2002, and are included in the notes to these consolidated financial statements.
During 2003, the Company has adopted the provisions of FASB No. 123, including
the reporting of the fair value of any options as a charge against earnings.
On May 15, 2003 the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). The issuance of SFAS 150 was intended to improve the accounting
for certain financial instruments that, under previous guidance, issuers could
account for as equity. SFAS 150 requires that those instruments be classified as
liabilities in statements of financial position and also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. SFAS 150 affects the
issuer's accounting for a number of freestanding financial instruments,
including mandatorily redeemable shares, which the issuing company is obligated
to buy back in exchange for cash or other assets. Most of the guidance in
Statement 150 is effective for all financial instruments entered into or
modified after May 31, 2003. The Company does not expect that the implementation
of SFAS 150 will result in a material financial statement impact.
FACTORS AFFECTING FUTURE PERFORMANCE
The following important factors, among others, have affected, and may in the
future continue to affect, our business, results of operations and financial
condition, and could cause our operating results to differ materially from those
expressed in any forward-looking statements made by us or on our behalf
elsewhere in this report.
Our development activities may be more costly and take longer than we have
anticipated.
o As part of our growth strategy, we plan to develop additional
AmeriHost Inn hotels. Development involves many substantial risks,
which include the following:
o actual development costs may exceed our budgeted or contracted
amounts;
o construction delays may prevent us from opening hotels on schedule;
o we may not be able to obtain all necessary zoning, land use, building,
occupancy and construction permits;
o these properties may not achieve our desired revenue or profit goals;
and
o we compete for suitable development sites, and may not be able to
locate attractive sites in terms of location or economic feasibility.
Our ability to sell hotels in a timely manner and at favorable prices could be
adversely affected by market conditions and other factors.
Our ability to increase our revenues and operate profitably depends to a large
extent on our ability to sell hotels that we develop at favorable prices. The
sales prices and timing of hotel sales are affected by numerous factors, such as
demand and supply of hotel product and conditions in the real estate and capital
markets, as well as the uncertainties associated with negotiating conditions and
terms of sales, many of which are beyond our control. Actual sales prices may be
materially less than we expect. There is no assurance for example, that we will
generate the expected
Page 41
proceeds associated with "Operation Sell." If we are not able to sell the hotels
we develop in a timely manner and at favorable prices, our revenues and ability
to operate profitably will be significantly impaired.
We may have to make significant capital improvements to maintain our hotel
properties.
We may be required to replace, from time to time, furniture, fixtures and
equipment and to make other capital improvements at the hotels we operate. We
also must make periodic capital improvements to comply with standards
established by Cendant Corporation, the franchisor of our hotels, under our
franchise agreements. Generally, we are responsible for the costs of these
capital improvements, which give rise to the following risks:
o cost overruns and delays;
o the disruption to operations and potential lost room revenue
associated with renovations;
o the cost of funding renovations and the possibility that financing for
these renovations may not be available on attractive terms; and
o the risk that the return on our investment in these capital
improvements will not be what we expect.
In the past we have funded capital expenditures from cash flow from operations
and, to a lesser degree, by borrowing. If we are required to borrow additional
funds to fund capital expenditures, this could have a material adverse effect on
our financial condition.
Our financial performance depends in part on Cendant promoting and supporting
the AmeriHost brand.
The successful operation of the hotels we own, operate or manage depends in part
on the promotion of the AmeriHost brand by Cendant, the owner of the AmeriHost
Inn brand and on Cendant devoting sufficient resources to support services, such
as reservation systems, frequent guest loyalty and marketing programs, provided
to franchisees. We have very little control over Cendant's activities in these
areas, including the amount it spends on brand promotion or franchisee support.
If Cendant Corporation is unable or unwilling to successfully promote the
AmeriHost brand or to provide adequate support to franchisees, our results of
operations and financial condition could be adversely affected.
Our business is concentrated in particular segments of a single industry and our
hotels are primarily operated under a single brand name.
Nearly all of our business has been, and will likely continue to be, hotel
related. Our current strategy is to develop, operate and sell mid-market hotels.
We are thus exposed to downturns in the hotel industry and are more susceptible
to adverse conditions in the mid-market segment of the hotel industry than more
diversified hotel companies. Finally, our hotels are operated primarily under
the AmeriHost brand name, and our success depends heavily on the strength of
this single brand.
We may not be able to effectively compete for guests with other branded and
independent hotels.
The mid-market segment of the hotel business is highly competitive. Our hotels
compete on the basis of location, room rates and quality, service levels,
reputation, and reservation systems, among many other factors. There are many
competitors in our market segment, and many of them or the brands under which
they are franchisees, may have substantially greater marketing and financial
resources. New hotels are continually being constructed and opened, in some
cases. without corresponding increases in demand for hotel rooms. The result in
some cases may be decreased revenues.
We will encounter risks that may adversely affect real estate ownership.
Our investments in hotels are subject to the numerous risks generally associated
with owning real estate, including among others:
o adverse changes in general or local economic or real estate market
conditions;
o changes in zoning laws;
Page 42
o changes in traffic patterns and neighborhood characteristics;
o increases in assessed valuation and real estate tax rates;
o increases in the cost of property insurance;
o governmental regulations and fiscal policies;
o the potential for uninsured or underinsured property losses;
o the impact of environmental laws and regulations; and
o other circumstances beyond our control.
Moreover, real estate investments are relatively illiquid, and we may not be
able to vary our portfolio in response to changes in economic and other
conditions.
Environmental problems are possible and can be costly.
We believe that our properties comply, in all material respects, with applicable
environmental laws. Unidentified environmental liabilities could arise, or we
may be required to investigate, clean up or pay for property damage caused by
hazardous or toxic substances that may arise at one of our properties whether we
knew of or caused the presence of the contaminants. We are also required to
properly manage and maintain any asbestos that may be present in our hotels.
Failure to do so may subject us to fines and penalties and may allow third
parties to seek recovery for personal injury associated with exposure to
asbestos fibers.
Changes in government regulation may have significant effects on our business.
We are subject to numerous laws and regulations including the Americans with
Disabilities Act or "ADA." The ADA requires that all public accommodations such
as hotels meet federal requirements related to access and use by disabled
persons. Compliance with, or changes in any of these laws, including the ADA,
could reduce the revenue and profitability of our hotels and could otherwise
adversely affect our results of operations and financial condition.
Uninsured and underinsured losses could result in loss of value of hotel
properties.
Our insurance coverage may not be sufficient to fully protect our business and
assets from all claims or liabilities, including environmental liabilities.
Further, we may not be able to obtain existing or additional insurance at
commercially reasonable rates. There are certain types of losses, generally of a
catastrophic nature or related to certain environmental liabilities, that are
either uninsurable or not insurable at a reasonably affordable price. In the
event losses or claims are beyond the limits or scope of our coverage, our
results of operations or financial condition could be materially adversely
affected.
We are subject to the risks of hotel operations.
Through our ownership of our hotels, or our serving as lessee under long-term
leases, we are subject to the risk of fluctuating hotel operating expenses at
our hotels, including but not limited to:
o wage and benefit costs;
o repair and maintenance expenses;
o gas and electricity costs;
o insurance costs, including health, general liability and workers
compensation; and
o other operating expenses.
Page 43
These operating expenses are difficult to predict and control, resulting in an
increased risk of volatility in our results of operations.
Our revenues are significantly influenced by economic conditions in the Midwest.
Our hotels are located primarily in the States of Illinois, Ohio, Indiana,
Michigan, and Wisconsin. In 2002, more than two-thirds of our revenues were
derived from hotels in the Midwest. As a result, our results of operations and
financial condition are largely dependent on economic conditions in the Midwest,
and could be adversely affected by a decline in economic conditions in this
region.
Geopolitical events could adversely affect us.
Geopolitical events including terrorist attacks have adversely affected the
travel and hospitality industries. The impact which these terrorist attacks have
had, or could have on our business in particular and the United States economy,
the global economy and global financial markets in general is indeterminable.
These attacks or the potential for future attacks could have a material adverse
effect on our business, our ability to finance our business, our ability to
insure our properties.
The seasonal nature of the lodging industry may cause our quarterly results to
fluctuate significantly.
The lodging industry, in general, is seasonal in nature. As is typical in the
industry, our hotel revenues are generally greater in the second and third
calendar quarters than in the first and fourth quarters due to weather
conditions in the markets in which our hotels are located and general business
and leisure travel trends. Thus, our quarterly revenues and earnings may be
adversely affected by events beyond our control, such as extreme weather
conditions, economic factors and other factors affecting travel. In addition,
hotel construction is seasonal, depending upon the geographic location of the
construction projects. For example, construction activity in the Midwest may be
slower in the first and fourth quarters due to weather conditions.
If we are not able to obtain capital on favorable terms or at all, our ability
to grow will be hampered and our financial results may suffer.
We require a substantial amount of capital to develop additional hotels. We or
the joint venture in which we are an investor and which owns a hotel, as the
case may be, typically invests between 0% and 50% of the total cost of
developing and constructing a hotel in the form of equity, with the remaining
portion of the costs generally financed through a bank, or through a development
line of credit. In addition, our operating cash flow is not always sufficient to
fund our operations. Consequently, we rely upon the availability of debt or
equity capital to fund hotel acquisitions and development, and discretionary
capital improvements. The capital markets have been adversely affected by the
occurrence of recent events including various geopolitical events. These events
or other future events deemed negative by capital market providers could
adversely affect the availability and cost of capital for our business. We
cannot assure you that we will be successful in attracting sufficient debt or
equity financing to fund future growth and operations at an acceptable cost, or
at all.
We have substantial leverage and other long-term obligations, which could limit
our flexibility or otherwise adversely affect our financial condition.
We have a significant amount of debt and obligations under long-term leases
requiring us to dedicate a substantial portion of our cash flow from operations
to make these required payments. These payments reduce the cash flow otherwise
available to fund capital expenditures, expansion efforts, distributions to our
shareholders and other general corporate needs.
If our cash flow and working capital is not sufficient to fund our expenditures
or to make our debt and lease payments, we will have to raise additional funds
through:
o the sale of capital stock;
o borrowing additional monies; or
o selling assets.
Page 44
We cannot assure you that any of these sources would be available to us on
acceptable terms, if at all. An inability to fund our capital needs would have a
material adverse effect on our results of operations and financial condition.
Rising interest rates could have an adverse effect on our cash flow and interest
expense.
Most of the money we have borrowed requires us to pay interest that varies over
time. In addition, we may borrow money in the future requiring us to pay
interest at "variable rates." Accordingly, increases in interest rates could
increase our interest expense and adversely affect our results of operations and
cash flow and reduce the amounts available to make payments on our other
indebtedness, make acquisitions, or pursue other business opportunities.
We have restrictive debt covenants that could adversely affect our ability to
run our business.
o The agreement governing our corporate and our development line of
credit contains various restrictive covenants including, among others,
provisions that can restrict our ability to:
o borrow additional money;
o make common and preferred distributions;
o make investments;
o make investments in capital expenditures and acquiring hotels in
excess of certain amounts;
o engage in transactions with affiliates;
o merge or consolidate with another person; and
o dispose of all or substantially all of our assets.
These restrictions may adversely affect our ability to finance our operations or
engage in other business activities that may be in our best interest. In
addition, these agreements require us to maintain certain specified financial
ratios. Our ability to comply with these ratios may be adversely affected by
events beyond our control. The breach of any of these covenants and limitations
could result in the acceleration of amounts outstanding under our line of
credit. We may not be able to refinance or repay our debt in full under those
circumstances.
It may be difficult for a third party to acquire us, even if doing so would be
beneficial to our shareholders.
Some provisions of our certificate of incorporation and bylaws, as well as some
provisions of Delaware law, may discourage, delay or prevent third parties from
acquiring us, even if doing so would be beneficial to our shareholders. Each of
these provisions makes it more difficult for shareholders to obtain control of
our board or initiate actions that are opposed by the then current board. For
example, our certificate of incorporation allows for the issuance of
undesignated preferred stock, which gives our board the ability to issue
preferred stock with voting or other rights and preferences that could impede
the success of any attempted change of control. Delaware law also could make it
more difficult for a third party to acquire us. Section 203 of the Delaware
General Corporation Law may have an anti-takeover effect with respect to
transactions not approved in advance by our board, including discouraging
attempts that might result in a premium over the market price of our common
stock.
Page 45
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our long-term debt obligations. We have some cash flow exposure on our long-term
debt obligations to changes in market interest rates. We primarily enter into
long-term debt obligations in connection with the development and financing of
hotels. We maintain a mix of fixed and floating debt to mitigate our exposure to
interest rate fluctuations. We do not enter into any market risk sensitive
investments for trading purposes.
Our management believes that fluctuations in interest rates in the near term
would not materially affect our consolidated operating results, financial
position or cash flows as we have limited risks related to interest rate
fluctuations.
The table below provides information about financial instruments that are
sensitive to changes in interest rates, for each interest rate sensitive asset
or liability as of September 30, 2003. As the table incorporates only those
exposures that existed as of September 30, 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 $ 2,250,000 6.75%
Mortgage debt - fixed rate $ 25,751,189 7.72%
Mortgage debt - variable rate $ 44,417,802 5.85%
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 our disclosure controls and procedures, as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
"Exchange Act"), are effective to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act 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 this evaluation.
Page 46
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
The following exhibits were included in the Registrant's Report on Form 10-K
filed on March 26, 1993, and are incorporated by reference herein:
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Arlington
Hospitality, Inc. (formerly Amerihost Properties, Inc.)
4.2 Specimen Common Stock Purchase Warrant for Employees
The following exhibits were included in the Registrant's Proxy Statement for
Annual Meeting of Shareholders filed on July 25, 1996, and are incorporated by
reference herein:
Exhibit No. Description
- ----------- -----------
10.2 1996 Omnibus Incentive Stock Plan (Annex A)
10.3 1996 Stock Option Plan for Nonemployee Directors (Annex B)
The following exhibit was included in the Registrant's Report on Form 10-K filed
March 30, 1999:
Exhibit No. Description
- ----------- -----------
10.5 Agreement of Purchase and Sale between PMC Commercial Trust
and Arlington Hospitality, Inc. (formerly Amerihost
Properties, Inc.), including exhibits thereto
The following exhibits were included in the Registrant's Report on Form 10-Q
filed November 7, 2000:
Exhibit No. Description
- ----------- -----------
10.10 Asset Purchase Agreement between Arlington Hospitality, Inc.
and AmeriHost Inn Franchising Systems, Inc. (a subsidiary of
Cendant Corporation)
10.11 Royalty Sharing Agreement between Arlington Hospitality, Inc.
and AmeriHost Inn Franchising Systems, Inc. (a subsidiary of
Cendant Corporation)
10.12 Development Agreement between Arlington Hospitality, Inc. and
AmeriHost Inn Franchising Systems, Inc. (a subsidiary of
Cendant Corporation)
The following exhibits were included in the Registrant's Report on Form 10-Q
filed November 14, 2002:
Exhibit No. Description
- ----------- -----------
10.7 Form of Indemnification Agreement executed by independent
directors
The following exhibits were included in the Registrant's Report on Form 8-K
filed December 19, 2002:
Exhibit No. Description
- ----------- -----------
10.13 Employment agreement between Arlington Hospitality, Inc. and
Jerry H. Herman dated December 19, 2002
The following exhibit was included in the Registrant's Report on Form 10-K filed
March 31, 2003:
Exhibit No. Description
- ----------- -----------
10.14 Line-of-credit agreement with LaSalle Bank, NA
Page 47
The following exhibits were included in the Registrant's Proxy Statement for
Annual Meeting of Shareholders filed on September 26, 2003, and are incorporated
by reference herein:
Exhibit No. Description
- ----------- -----------
10.15 Non-Employee Director Restricted Stock Plan
10.16 Long Term Incentive Plan
The following exhibits are included in this Report on Form 10-Q filed November
__, 2003:
Exhibit No. Description
- ----------- -----------
3.2 By-laws of Arlington Hospitality, Inc. as revised on September
8, 2003
3.3 Amendment to By-laws of Arlington Hospitality, Inc. dated
September 8, 2003
10.17 Employment agreement between Arlington Hospitality, Inc. and
Stephen Miller dated July 25, 2003
10.18 Amendment to employment agreement between Arlington
Hospitality, Inc. and Stephen Miller dated September 10, 2003
10.19 Employment agreement between Arlington Hospitality, Inc. and
James B. Dale dated January 12, 2001 and Amendment No. 1
thereto dated October 29, 2001
10.20 Supplemental retention and performance agreement between
Arlington Hospitality, Inc. and James B. Dale dated December
1, 2002
10.21 Employment agreement between Arlington Hospitality, Inc. and
Richard A. Gerhart dated July 1, 2002
10.22 Supplemental retention and performance agreement between
Arlington Hospitality, Inc. and Richard A. Gerhart dated
December 1, 2002
31.1 Certification of Chief Executive Officer Pursuant to SEC Rules
13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to SEC Rules
13a-15(e) and 15(d)-15(e), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the three months
ended September 30, 2003:
Date Filed Description
- ---------- -----------
August 15, 2003 Press release announcing second quarter 2003 results
October 30, 2003 Press release announcing results of the annual shareholder
meeting
Page 48
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: November 14, 2003
Page 49
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.2 By-laws of Arlington Hospitality, Inc. as revised on September
8, 2003
3.3 Amendment to By-laws of Arlington Hospitality, Inc. dated
September 8, 2003
10.17 Employment agreement between Arlington Hospitality, Inc. and
Stephen Miller dated July 25, 2003
10.18 Amendment to employment agreement between Arlington
Hospitality, Inc. and Stephen Miller dated September 10, 2003
10.19 Employment agreement between Arlington Hospitality, Inc. and
James B. Dale dated January 12, 2001 and Amendment No. 1
thereto dated October 29, 2001
10.20 Supplemental retention and performance agreement between
Arlington Hospitality, Inc. and James B. Dale dated December
1, 2002
10.21 Employment agreement between Arlington Hospitality, Inc. and
Richard A. Gerhart dated July 1, 2002
10.22 Supplemental retention and performance agreement between
Arlington Hospitality, Inc. and Richard A. Gerhart dated
December 1, 2002
31.1 Certification of Chief Executive Officer Pursuant to SEC Rules
13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to SEC Rules
13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
Page 50