June 27, 2005
Ms. Linda Van Doorn
Senior Assistant Chief Accountant
U.S. Securities and Exchange Commission
Division of Corporation Finance
Washington, D.C. 20549
RE: ARLINGTON HOSPITALITY, INC.
FORM 10-K: FOR THE YEAR ENDED DECEMBER 31, 2004
FILE NO. 0-15291
Dear Ms. Van Doorn:
We are pleased to provide the following responses to the follow-up staff comment
letter dated June 8, 2005. For convenience of reference, our responses are
organized using the same headings and numbered captions as your letter.
Additionally, we have reproduced your comments in this letter and included our
responses directly below each comment.
Note 12 - Sale of Hotels and Plan for Future Hotel Disposition, page F-29:
1. Staff Comment:
We note your response to our previous comment number one. If the basis for
reporting the proceeds from the sale of these hotels gross is because you
are developing and constructing the hotels for sale, explain why you are
not reporting hotels under development as a separate line item on your
balance sheet. In addition, your impairment policy should be revised to
address how you assess and recognize impairment for properties under
development. Refer to Paragraphs B122 and B123 of SFAS 144. Further,
explain why the sales of AmeriHost Inn hotels are not accounted for as
discontinued operations under SFAS 144. Refer to the guidelines of EITF
03-13 in your response, and also address whether these hotels produce cash
flows to you through their operations prior to their sale. If you are
operating these hotels prior to their sale, and they are providing
operating cash flows, explain why you believe these hotels should be
classified as hotels under development, and, correspondingly, why the
proceeds from their sales should be reported as revenues rather than net as
gain or loss on sale.
1
Response:
When the Company builds a hotel for its own account (i.e., a "consolidated"
hotel, meaning a 100% owned hotel or a hotel where the Company has a
controlling ownership interest), it is reflected on the balance sheet as
"construction in progress" during the construction period. As of December
31, 2004, there was one such hotel in the early development stages. The
December 31, 2004 balance sheet had construction in progress of
approximately $313,000 reflecting costs incurred in connection with this
development. In the first quarter of 2005, this project was terminated and
the land parcel was sold. The Company recorded an impairment charge on this
project of approximately $188,000 in 2004, and the gain from the sale in
2005 was nominal.
As of December 31, 2004, there was also one hotel under construction, which
the Company was contracted to build for an unconsolidated joint venture
(i.e., the Company has a minority, non-controlling ownership interest). The
Company accounted for this construction using the percentage of completion
method. The "construction in progress" asset for this hotel was not
reported on the Company's balance sheet since the hotel is owned by an
unconsolidated joint venture.
After a "consolidated" hotel is open, it is classified as "held for sale"
in the Company's balance sheet if the hotel is being actively marketed for
sale, and is expected to be sold within the next twelve months. AmeriHost
Inn hotels and "other" brand hotels held for sale are classified
separately. AmeriHost Inn hotels that are not classified as "held for sale"
are shown as fixed assets under the separate categories including land,
building, furniture, fixtures and equipment, etc. Once the decision is made
to actively market a hotel for sale, and it is expected to be sold within
the next twelve months, it is then classified as "held for sale".
All of the "consolidated" hotels provide operational cash flows to the
Company until the time they are sold. With respect to the consolidated
AmeriHost Inn hotels, the Company does have a continuing interest in the
hotel after the sale, and therefore the operations of the hotel prior to a
sale have not been included as "discontinued operations." The continuing
involvement with the AmeriHost Inn hotels is in the form of a royalty
sharing payment the Company receives from Cendant Corporation. After the
Company sells an AmeriHost Inn hotel, the Company receives a stipulated
percentage of the ongoing royalty fees that Cendant receives from the new
owner/franchisee of the hotel through 2025. Since there is this continuing
involvement, the Company reports the operations of the hotels, prior to
their sale, as continuing operations rather than discontinued operations.
The operations of "other" brand hotels, including any gain or loss on sale,
are classified as "discontinued operations" in the Company's statement of
operations in accordance with SFAS 144, as it has been the stated objective
of the Company to divest of these hotels, and the Company has no continuing
involvement with the hotel after it is sold.
The Company earns development profit building hotels for its own account as
well as for unrelated third parties and unconsolidated joint ventures. The
method and timing of this
2
profit recognition is different under each scenario. The revenue and
expenses from the development of a hotel for an unconsolidated joint
venture (or for an unrelated third party) are recognized on a percentage of
completion basis throughout the construction period. For a consolidated
AmeriHost Inn hotel, this revenue and expense is recognized upon the sale
of the hotel, as an operating activity rather than a net gain upon sale
(non-operating). With respect to the sale of consolidated AmeriHost Inn
hotels, since this activity is considered an ongoing, central operation of
the Company, we believe it is appropriate to record operating revenue and
expenses in connection with the sale of these hotels, in accordance with
FASB Statement of Concepts No. 6.
Finally, based on your comment, we intend to add language to our impairment
policy footnote disclosure as follows (with changes in bold):
Long-lived assets and impairment:
The Company periodically reviews the carrying value of its long-lived
assets, INCLUDING UNDEVELOPED LAND PARCELS AND CONSTRUCTION IN
PROGRESS, in relation to historical results, current business
conditions and trends to identify potential situations in which the
carrying value of assets may not be recoverable. SUCH FACTORS MAY
INCLUDE CONSTRUCTION OVERRUNS, TIMING DELAYS, CHANGES IN DEVELOPMENT
PLANS, AND UNFORESEEN DEVELOPMENT COSTS. If such reviews indicate that
the carrying value of such assets may not be recoverable, the Company
would estimate the undiscounted sum of the expected cash flows of such
assets, INCLUDING THE POTENTIAL SALE OF THE ASSET, to determine if such
sum is less than the carrying value of such assets to ascertain if an
impairment exists. If an impairment exists, the Company would determine
the fair value by using quoted market prices, if available for such
assets, or if quoted market prices are not available, the Company would
discount the expected future cash flows of such assets.
We also intend to incorporate similar revisions to the "critical accounting
policies" section of the "Management's Discussion and Analysis" included in
the future periodic reports on Form 10-Q and 10-K.
2. Staff Comment:
In your response to our previous comment number two, you state "this
obligation was contingent since the Company had the option to pay higher
rent rather than pay PMC the Assigned Value shortfall, if any, upon the
sale of a hotel pursuant to this Amendment." Tell us if you paid higher
rent during this period.
Response:
The Company never exercised the option to pay the higher rent rate to PMC.
Instead the Company facilitated the sale of certain hotels on behalf of PMC
to unrelated third parties or to the Company, under certain terms and by
certain dates as prescribed by the
3
amendment. In connection with these sales, the Company paid PMC, or
remained obligated to pay PMC, the Assigned Value shortfall.
Note 14 - Commitments, Contingencies and Other Matters, page F-33:
3. Staff Comment:
We note your response to our previous comments four through six. Please
provide us with a schedule showing your accounting for the conversion of
the 17 hotels from an operating lease to a capital lease. Specifically,
show the amount of the loss recognized in the reduction in fair market
value that was considered in the recordation of the capital leases. Please
provide the balance sheet activity and statement of operations activity by
line item for this transaction, and the subsequent activity in these
accounts for 2004, including the Arlington Fee and Proceeds Deficit Notes.
Response:
Please see attached schedule, as requested, which shows the accounting for
the conversion of 17 hotels from operating leases to capital leases. This
schedule shows the initial recording of the transaction, as well as the
activity in all related accounts from the effective date (October 1, 2004)
through December 31, 2004. Please note that there was no loss recognized
upon the recordation of the capital leases, as the capital leases were
recorded initially at estimated fair market value, in accordance with SFAS
13. The Proceeds Deficit Note was increased as a result of the sale of a
hotel during the fourth quarter of 2004 (the AmeriHost Inn Smyrna, GA), and
decreased by the payment of an Arlington Fee related to the sale of a hotel
prior to October 1, 2004, as reflected in the attached schedule.
We appreciate the opportunity to respond to the staff's follow-up questions
regarding our financial disclosures. The Company hopes that the information
included above is responsive to the additional questions raised by the staff.
Please contact our outside counsel, Kimberly Copp, at Shefsky & Froelich, Ltd.
at 312- 836-4068 or myself at 847-228-5400 ext. 361 with any additional
questions or comments regarding our responses or the enclosed information.
Sincerely,
/s/ James B. Dale
James B. Dale
Chief Financial Officer
cc: Stephen Miller, Interim CEO
4
ARLINGTON HOSPITALITY INC.
SUPPLEMENTAL INFORMATION
RESPONSE TO COMMENT 3 OF SEC COMMENT LETTER DATED JUNE 8, 2005
<Table>
<Caption>
BALANCE SHEET DEBIT (CREDIT)
--------------------------------------------------------------------------------
CAPITAL PRECEEDS
LEASES/FIXED CAPITAL LEASE ACCRUED DEFICIT
TRANSACTION CASH ASSETS LIABILITY INTEREST NOTE DEFERRED GAIN
- ----------------------------------------------------------------------------------------------------------------------------
TO RECORD CAPITAL LEASE ASSETS AND
OBLIGATIONS UPON EXECUTION OF THE LEASE
MODIFICATION EFFECTIVE 10/01/04 30,041,497 (35,238,258) 5,196,761
PAYMENT OF ARLINGTON FEE - PORT HURON
SALE (164,890) 164,890
TO RECORD LEASE PAYMENTS OCTOBER -
DECEMBER 2004 (888,557) -
AMORTIZATION OF CAPITAL LEASE OBLIGATION
OCTOBER - DECEMBER 2004 (308,806)
RATE DIFFERENTIAL ACCRUAL OCTOBER -
DECEMBER 2004 (213,563)
TO RECORD THE SALE OF SMYRNA -
DECEMBER 2004 (1,663,377) 1,828,567 (505,259)
----------------------------------------------------------------------------------
TOTAL $(1,053,447) $28,378,120 $ (33,718,497) $ (213,563) $ (340,369) $ 5,196,761
==================================================================================
<Caption>
STATEMENT OF OPERATIONS DEBIT (CREDIT)
------------------------------------------------------------------
LEASE
INTEREST TERMINATION
TRANSACTION EXPENSE REVENUES EXPENSES FEE TOTAL
- ----------------------------------------------------------------------------------------------------------------
TO RECORD CAPITAL LEASE ASSETS AND
OBLIGATIONS UPON EXECUTION OF THE LEASE
MODIFICATION EFFECTIVE 10/01/04 -
PAYMENT OF ARLINGTON FEE - PORT HURON
SALE -
TO RECORD LEASE PAYMENTS OCTOBER -
DECEMBER 2004 888,557 -
AMORTIZATION OF CAPITAL LEASE OBLIGATION
OCTOBER - DECEMBER 2004 308,806 -
RATE DIFFERENTIAL ACCRUAL OCTOBER -
DECEMBER 2004 213,563 -
TO RECORD THE SALE OF SMYRNA -
DECEMBER 2004 (1,693,573) 1,663,377 370,265 -
----------------------------------------------------------------------
TOTAL $ 1,410,926 $(1,693,573) $ 1,663,377 $ 370,265 $ -
======================================================================
</Table>