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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-15291
AMERIHOST PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3312434
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 S. ARLINGTON HEIGHTS RD., SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005
- --------------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 228-5400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
------------------- -------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.005 per share
----------------------------------------
(Title of class)
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
While it is difficult to determine the number of shares owned by non-affiliates
(within the meaning of the term under the applicable regulations of the
Securities and Exchange Commission), the registrant estimates that the aggregate
market value of the registrant's Common Stock held by non-affiliates on March
17, 2000 (based upon an estimate that 89.8% of the shares are so owned by
non-affiliates and upon the closing price for the Common Stock of $3.375) was
$15,068,746.
- --------------------------------------------------------------------------------
As of March 17, 2000, 4,973,498 shares of the Registrant's Common Stock were
outstanding.
The following documents are incorporated into this Form 10-K by reference: None
1
PART I
ITEM 1. BUSINESS.
GENERAL
Amerihost Properties, Inc. and its subsidiaries (collectively, where
appropriate, "Amerihost," or the "Company") is engaged in the development and
construction of AmeriHost Inn(R) hotels, its proprietary hotel brand, and the
ownership, operation and management of both AmeriHost Inn(R) hotels and other
hotels. The Company also began to franchise the AmeriHost Inn(R) brand in 1999.
The AmeriHost Inn(R) brand was created by the Company to provide for the
consistent, cost-effective development and operation of mid-price hotels in
various markets. All AmeriHost Inn(R) hotels have been designed and developed
using the Company's 60 to 120 room, interior corridor and indoor pool prototype
design and are located in tertiary and secondary markets. In 1999, the Company
also developed a 3-story AmeriHost Inn & SuitesSM prototype designed for larger
markets.
As of December 31, 1999, the Company owned, operated, franchised or managed 90
hotels located in 18 states. Of these hotels, 77 hotels are operated, managed or
franchised under the Company's proprietary brand, the AmeriHost Inn(R). Of the
90 hotels, the Company owns a 100% or majority ownership interest in 69 hotels
and a minority equity interest, ranging from 1% to 33.6%, in 15 hotels. Of the
84 hotels in which the Company has an ownership interest, 74 are AmeriHost
Inn(R) hotels and 10 are other brands, which in most cases were acquired,
renovated and repositioned in their respective marketplaces between 1987 and
1993. The Company has three franchised AmeriHost Inn(R) hotels which were owned
and operated by unaffiliated third parties at December 31, 1999. The other brand
hotels are franchised through Days Inn, Hampton Inn, Holiday Inn and Ramada Inn.
The Company also managed three non-AmeriHost Inn(R) hotels at December 31, 1999
for unaffiliated third parties. As of December 31, 1999, an additional four
AmeriHost Inn(R) hotels were under construction in all of which the Company has
a minority ownership interest.
The table below sets forth information regarding the hotels at December 31,
1999.
Open Under
Hotels Construction Total
--------------- ----------------- ---------------
Hotels Rooms Hotels Rooms Hotels Rooms
100% or majority owned or leased:
AmeriHost Inn(R)hotels 62 3,931 - - 62 3,931
Other brands 7 936 - - 7 936
------- ------ ------ ------- ------ ------
69 4,867 - - 69 4,867
------- ------ ------ ------- ------ ------
Minority ownership interest:
AmeriHost Inn(R)hotels 12 774 4 256 16 1,030
Other brands 3 349 - - 3 349
------- ------ ------ ------- ------ ------
15 1,123 4 256 19 1,379
------- ------ ------ ------- ------ ------
Franchised hotels:
AmeriHost Inn(R)hotels 3 182 - - 3 182
------- ------ ------ ------- ------ ------
Managed only hotels:
AmeriHost Inn(R)hotels - - - - - -
Other brands 3 573 - - 3 573
------- ------ ------ ------- ------ ------
3 573 - - 3 573
------- ------ ------ ------- ------ ------
Totals:
AmeriHost Inn(R)hotels 77 4,887 4 256 81 5,143
Other brands 13 1,858 - - 13 1,858
------- ------ ------ ------- ------ ------
90 6,745 4 256 94 7,001
======= ====== ====== ======= ====== ======
2
Since 1993, the Company's growth strategy has focused on the expansion of the
AmeriHost Inn(R) hotel brand through new development and construction.
Historically, the AmeriHost Inn(R) hotels achieved a revenue per available room
("RevPAR") higher than that realized by the Company's other owned hotels,
including those operated under national franchise affiliations. These favorable
operating results experienced by the AmeriHost Inn(R) hotels led to the
Company's decision to focus on expanding this brand rather than acquiring or
developing hotels under other brand affiliations and ultimately to franchise the
brand in 1999. The Company intends to continue expanding the development as well
as franchising of AmeriHost Inn(R) hotels.
The Company entered into a sale/leaseback arrangement for 30 of its hotels in
1998, of which 26 were sold in 1998, and the remaining four were sold in March
1999. This transaction provided funds for additional expansion of the AmeriHost
Inn(R) brand and other fee based revenue sources, while allowing the Company to
continue realizing the benefits of its hotel operations. A large portion of the
proceeds from this transaction were used for the purchase of AmeriHost Inn(R)
hotels in 1998 from entities in which the Company had a minority ownership
interest.
For new construction projects, the Company offers "turn-key" development
services, having the in-house expertise to manage a project from inception
through completion, including market research, site selection, architectural
services, the securing of financing and construction management. The
construction contracts entered into between the Company and the entities owning
the hotels have generally been one of two types, providing either for the
Company to receive costs plus developer's and construction overhead fees or a
fixed fee. The Company has used its development and construction expertise for
its own account, for joint ventures in which the Company has an ownership
interest, and for unaffiliated parties, and intends to use its expertise for
franchisees.
The Company began franchising the AmeriHost Inn(R) brand in 1999. The Company
believes that the AmeriHost Inn(R) franchise agreement is franchisee friendly,
providing a strong brand affiliation with an excellent reputation for
consistency. The AmeriHost Inn(R) franchise agreement is a long-term agreement
and provides for a franchise fee, marketing fee and reservation fees based on
the hotel's revenue. In addition, since the Company has extensive experience in
all facets of hotel development and operation, it can offer this expertise to
franchisees in addition to the franchise services. As a franchisor of hotels,
the Company provides a number of services designed to increase occupancy rates,
revenue and profitability, including a centralized reservation system and
regional and local marketing campaigns.
The Company offers complete operational and financial management services,
including sales, marketing, quality control, training, purchasing and
accounting. This expertise is used for the Company's own account, as well as for
joint ventures and unaffiliated entities pursuant to written management
contracts. However, under certain management contracts, the Company's joint
venture partners or co-managers are responsible for the day-to-day operational
management, while the Company provides full financial management and operational
consulting and assistance. The Company is currently managing or co-managing all
of the hotels in which it has a minority ownership interest, and is also
managing three hotels for unaffiliated third parties. These hotels are managed
under contracts ranging from 1 to 10 years, with optional renewal periods of
equal length, and contain provisions under which the Company is paid fees equal
to a percentage of total gross revenues for its services and, in some instances,
additional incentive fees based upon hotel performance. The Company has
developed centralized systems and procedures which it believes allow it to
manage the hotels effectively and efficiently. The Company intends to actively
pursue management contracts with additional third parties, while continuing to
manage hotels for current as well as future joint ventures.
The Company also provides employee leasing services to hotels in which the
Company has a minority ownership interest and to hotels owned by unaffiliated
third parties which are managed by the Company. Under its employee leasing
program, the Company employs all of the personnel working at the participating
hotels and leases them to the hotels pursuant to written agreements. Employee
leasing affords the Company greater control over payroll costs and allows the
participating hotels to benefit from economies of scale on personnel-related
costs. The Company's employee leasing agreements typically provide for one year
terms, with automatic one year renewals. The Company generally receives fees
from each participating hotel in an amount equal to the gross payroll costs for
the leased employees, including all related taxes and benefits, plus a
percentage of the gross payroll.
3
All revenues attributable to development, construction, management, franchising
and employee leasing services with respect to hotels in which the Company has a
100% or majority ownership interest have been eliminated in consolidation.
AMERIHOST INN(R) HOTELS
AmeriHost Inn(R) hotels, the Company's proprietary brand, are designed and
constructed using the Company's two- or three-story prototype, featuring 60 to
120 rooms, interior corridors and an indoor pool area. The AmeriHost Inn(R)
hotel's amenities and services include 24-hour front desk and message service,
facsimile machines, whirlpool, exercise room, meeting room, a covered entrance
and extensive exterior lighting for added security. The standard AmeriHost
Inn(R) guest room features an electronic card-key lock, in-room safe, in-room
coffee maker, telephone with data port for personal computer, a work area and a
25" color television with premium cable service or movies on demand. In
addition, each Amerihost Inn(R) hotel typically includes two to 12 whirlpool
suites which, in addition to the standard amenities, include in-room whirlpools,
microwave ovens, compact refrigerators and an expanded sitting area. AmeriHost
Inn(R) hotels do not contain food and beverage facilities normally associated
with full-service hotels. Food service for hotel guests is generally available
from adjacent or nearby free-standing restaurants which are independently owned
and operated.
The AmeriHost Inn(R) hotels are operated, managed or franchised by the Company
in accordance with strict guidelines designed to provide guests with a
consistent lodging experience. The Company believes the quality and consistency
of the amenities and services provided by its AmeriHost Inn(R) hotels increase
guest satisfaction and repeat business. The quality of the AmeriHost Inn(R)
product and the consistency of the amenities and services have assisted the
chain in becoming one of only a few hotel chains in the U.S. to have achieved an
American Automobile Association ("AAA") Three Diamond rating at all of its
hotels. During 1999, the Company introduced its Commitment PlusSM 100% guest
satisfaction guarantee program. This program guarantees that every guest will
leave satisfied. All AmeriHost Inn(R) employees have the unconditional authority
to correct any oversight to the guest'S satisfaction, or we will refund the
guest's money, up to 100%. This 100% satisfaction guarantee will help the brand
maintain its quality and consistency.
The Company targets smaller communities in tertiary and secondary markets with
established demand generators such as major traffic arteries, office complexes,
industrial parks, shopping malls, colleges and universities or tourist
attractions, as the principal location for the development and construction of
AmeriHost Inn(R) hotels. An AmeriHost Inn(R) hotel is typically positioned to
attract both business and leisure travelers seeking consistent amenities and
quality rooms at reasonable rates, generally ranging from $45 to $70 per night.
The Company's in-house design staff, centralized purchasing program, strict cost
controls, and low average land costs all contribute to a favorable cost
structure in developing and constructing new AmeriHost Inn(R) hotels.
Furthermore, due to the centralization of all accounting, purchasing, payroll
and other administrative functions, each hotel is operated efficiently and
effectively with a minimal on-site staff. These factors assist the Company in
maximizing its return on invested capital, while offering an excellent value to
its guests.
OTHER OWNED HOTELS
The Company's non-AmeriHost Inn(R) hotels were primarily acquired by the Company
through joint ventures prior to 1993, in most instances at prices below
estimated replacement costs. The other hotels have been owned, operated and
managed by the Company independently, or as part of a national franchise system
such as Days Inn, Hampton Inn, Holiday Inn, and Ramada Inn. The Company believes
that franchises in these locations are important in maintaining occupancy
levels, which are supported by the Franchisor's national reservation systems and
marketing efforts and brand name recognition.
The Company's non-AmeriHost Inn(R) hotels typically are also located in
secondary and tertiary markets, with nearby demand generators such as airports,
major traffic arteries, office complexes, industrial parks, shopping malls,
colleges and universities or tourist attractions. The non-AmeriHost Inn(R)
hotels contain 60 to 215 rooms, generate
4
average daily rates ranging from $35 to $65 per night and offer a variety of
amenities and services. Approximately one-third of these hotels contain food and
beverage facilities.
As part of the Company's strategy to focus its ownership primarily on AmeriHost
Inn(R) hotels, the Company intendS to pursue selective sales of certain of these
other hotels, if and when attractive terms are available. During 1998, five
hotel partnerships in which the Company was a general partner sold their hotels,
resulting in proceeds to the Company upon the sale. During 1999, the Company
sold four 100% owned hotels, including three to franchisees. In addition, three
joint ventures in which the Company was a partner sold their hotels. These
proceeds were, and any proceeds from future sales, if and when completed, are
expected to be used by the Company to develop additional AmeriHost Inn(R) hotels
or pursue other growth objectives of the Company.
HOTEL PROPERTIES
At December 31, 1999, the Company owned, managed and/or franchised 90 hotels in
18 states, concentrated in the midwestern and southern United States. The
Company had an additional four hotels under construction located generally in
the same geographical areas.
Because the hotel industry is seasonal, the revenues generated by the hotels
managed by the Company will increase or decrease depending upon the time of
year. Since the Company's management fees are based upon a percentage of the
hotels' total gross revenues, the Company is further susceptible to these
seasonal variations. Given the location of the properties the Company manages,
the revenues are typically lower in the first and fourth quarters of each year.
The following is a list of hotel properties under the Company's management or
franchised at December 31, 1999 by state:
Date
State Hotel (1) Rooms Operations Began
- ----- --------- ------- ----------------
California AmeriHost Inn(R)Anderson 61 01/20/97
AmeriHost Inn(R)Corning 60 05/29/98
AmeriHost Inn(R)Marysville (3) 62 09/01/99
AmeriHost Inn(R)Yreka 61 08/04/97
------
244
Florida Hampton Inn Ft. Myers 123 09/30/92
------
Georgia AmeriHost Inn(R)Eagles Landing, Stockbridge 60 08/08/95
AmeriHost Inn(R)LaGrange 59 03/01/95
AmeriHost Inn(R)Smyrna 60 12/21/95
Days Inn Northwest, Atlanta (5) 107 11/01/91
Days Inn Peachtree, Atlanta (5) 142 11/01/91
------
428
Illinois AmeriHost Inn(R)Harvard 60 07/01/96
AmeriHost Inn(R)Jacksonville (3) 60 06/14/96
AmeriHost Inn(R)Macomb 60 05/19/95
AmeriHost Inn(R)Players Riverboat Hotel, Metropolis (3) 120 02/25/94
AmeriHost Inn(R)Rochelle 61 03/07/97
AmeriHost Inn(R)Sycamore 60 05/31/96
AmeriHost Inn(R)Tuscola 59 08/17/94
Days Inn Niles 149 01/01/90
Days Inn Shorewood 116 10/01/89
------
745
------
5
Date
State Hotel (1) Rooms Operations Began
- ----- ----- ------- ----------------
Indiana AmeriHost Inn(R)Columbia City 60 03/05/99
AmeriHost Inn(R)Decatur 60 08/30/98
AmeriHost Inn(R)Hammond 86 03/29/96
AmeriHost Inn(R)Huntington 62 08/21/98
AmeriHost Inn(R)Plainfield 60 09/01/92
Days Inn Plainfield 64 05/01/90
Ramada Inn Lafayette 144 02/02/94
------
536
Iowa AmeriHost Inn(R)Boone 60 08/21/98
AmeriHost Inn(R)Le Mars 63 01/07/98
AmeriHost Inn(R)Mt. Pleasant 63 07/02/97
AmeriHost Inn(R)Storm Lake 61 08/13/97
AmeriHost Inn(R)Waverly 60 08/28/96
------
307
Kentucky AmeriHost Inn(R)Murray 60 11/01/96
------
Louisiana Days Inn Kenner, New Orleans (5) 324 11/01/91
------
Michigan AmeriHost Inn(R)Battle Creek 62 03/19/99
AmeriHost Inn(R)Coopersville 60 12/31/95
AmeriHost Inn(R)Dundee (3) 60 08/14/98
AmeriHost Inn(R)Grand Blanc (3) 60 07/17/96
AmeriHost Inn(R)Grand Rapids North, Walker 60 07/05/95
AmeriHost Inn(R)Grand Rapids South 61 06/11/97
AmeriHost Inn(R)Hudsonville 61 11/24/97
AmeriHost Inn(R)Ionia 60 04/22/98
AmeriHost Inn(R)Marshall (4) 61 04/02/97
AmeriHost Inn(R)Monroe 63 09/19/97
AmeriHost Inn(R)Muskegon, Norton Shores 61 11/04/96
AmeriHost Inn(R)Port Huron 61 07/01/97
------
730
Mississippi AmeriHost Inn(R)Batesville (3) 60 04/26/96
AmeriHost Inn(R)Tupelo 61 07/25/97
AmeriHost Inn(R)Vicksburg Landing 89 05/13/95
------
210
Missouri AmeriHost Inn(R)Fulton 62 01/21/99
AmeriHost Inn(R)Mexico 61 12/06/97
AmeriHost Inn(R)Warrenton 63 11/07/97
------
186
Ohio AmeriHost Inn(R)Ashland 62 08/09/96
AmeriHost Inn(R)Athens (2) 102 11/04/89
AmeriHost Inn(R)Cambridge (2) 72 02/06/98
AmeriHost Inn(R)Columbus Southeast (2) 60 04/17/98
AmeriHost Inn(R)Delaware 73 05/16/97
AmeriHost Inn(R)Jeffersonville North (2) 60 07/20/96
AmeriHost Inn(R)Jeffersonville South (2) 60 10/14/94
AmeriHost Inn(R)Kenton (2) 60 08/02/96
6
Date
State Hotel (1) Rooms Operations Began
- ----- ----- ------- ----------------
AmeriHost Inn(R)Lancaster (2) 60 09/04/92
AmeriHost Inn(R)Logan (2) 60 04/16/93
AmeriHost Inn(R)Mansfield 60 11/19/94
AmeriHost Inn(R)Marysville 79 06/01/90
AmeriHost Inn(R)Newark (2)(3) 72 01/29/99
AmeriHost Inn(R)St. Mary's (2) 61 11/25/97
AmeriHost Inn(R)Upper Sandusky 60 04/12/95
AmeriHost Inn(R)Wilmington (2) 61 02/21/97
AmeriHost Inn(R)Wooster East 58 01/18/94
AmeriHost Inn(R)Wooster North 60 10/20/95
AmeriHost Inn(R)Zanesville (2) 60 07/30/96
Days Inn New Philadelphia (2) 104 06/04/92
Ramada Inn Dayton Mall 215 01/20/92
Ramada Inn Middletown 120 07/03/92
------
1,679
Oklahoma AmeriHost Inn(R)Enid 60 06/11/98
------
Pennsylvania AmeriHost Inn(R)Grove City 61 04/27/97
AmeriHost Inn(R)Shippensburg 60 08/09/96
Holiday Inn Altoona 144 08/31/92
Holiday Inn Oil City 106 12/02/92
------
371
Tennessee AmeriHost Inn(R)Jackson 61 04/01/98
------
Texas AmeriHost Inn(R)Allen (3) 60 07/25/96
AmeriHost Inn(R)McKinney 61 01/07/97
AmeriHost Inn(R)San Marcos (3) 61 05/23/97
------
182
West Virginia AmeriHost Inn(R)New Martinsville (2) 60 05/03/96
AmeriHost Inn(R)Parkersburg North (2) 79 06/26/95
AmeriHost Inn(R)Parkersburg South (2) 61 12/30/96
------
200
Wisconsin AmeriHost Inn(R)Green Bay (4) 60 10/12/96
AmeriHost Inn(R)Kimberly 63 06/30/97
AmeriHost Inn(R)Mosinee 53 04/30/93
AmeriHost Inn(R)Sun Prairie 62 03/03/99
AmeriHost Inn(R)Whitewater 61 09/08/97
------
299
TOTAL ROOMS 6,745
TOTAL PROPERTIES 90
(1) Unless otherwise noted, the Company owns a direct or indirect
equity or leasehold interest in the hotel.
(2) Indicates properties which are co-managed with an unaffiliated
third party.
(3) Indicates properties which are owned and operated by franchisees.
(4) Property was sold in 2000 to a franchisee.
7
(5) Indicates properties in which the Company does not have a direct
or indirect equity or leasehold interest.
The table below shows the average occupancy, average daily rate ("ADR") and
revenue per available room ("RevPAR") experienced by the Company in 1999 in
various locations. These statistics include all hotels open as of December 31,
1999.
Average Average Revenue Per
Occupancy Daily Rate Available Room
--------- ---------- --------------
Ohio (22 hotels) 53.2% $57.73 $30.72
Illinois, Iowa and Wisconsin (19 hotels) 54.8% $54.40 $29.82
Michigan and Pennsylvania (16 hotels) 60.2% $57.70 $34.78
Georgia, Mississippi and West Virginia (11 hotels) 60.3% $56.27 $33.95
Indiana and Kentucky (8 hotels) 50.7% $55.35 $28.09
Texas and California (7 hotels) 59.3% $55.51 $32.95
Other hotels (7 hotels located in Tennessee, Florida,
Louisiana, Missouri and Oklahoma) 52.7% $47.59 $25.10
All hotels 55.6% $55.45 $30.88
LODGING INDUSTRY
The United States lodging industry's performance is strongly correlated to
economic activity, with changes in gross national product growth affecting both
room supply and demand, resulting in cyclical changes in average occupancy
rates, average daily rates, and revenue per available room. The general downturn
in the economy and the oversupply of rooms during the late 1980's and early
1990's resulted in decreased economic performance in the lodging industry.
Since the early 1990's, the United States lodging industry has shown significant
improvement. The primary element contributing to the industry's improved
performance has been increased economic activity, which has resulted in growth
in the demand for hotel rooms. This growth in hotel room demand has resulted in
positive trends industry-wide for room revenues. Although industry analysts
expect slight declines in industry-wide occupancy over the next few years, they
still expect industry-wide revenues to expand given the anticipated demand
growth and strong average daily rate increases. According to Smith Travel
Research, the overall United States hotel room occupancy declined 0.8% in 1999,
while average daily rates increased 4.0%.
GROWTH STRATEGY
The Company's growth strategy is to increase revenues, EBITDAR (as defined
below) and net income per share by: (i) developing, operating and owning or
leasing additional AmeriHost Inn(R) hotels; (ii) franchising the AmeriHost
Inn(R) brand, (iii) developing and managing hotels for affiliated and
unaffiliated parties and franchisees; (iv) maintaining or enhancing occupancy
and average daily rate results at all of its hotels; and (v) controlling
operating and corporate overhead expenses. EBITDAR is used by the Company as a
supplemental performance measure along with net income to report its operating
results. EBITDAR is defined as net income, adjusted to eliminate the impact of
(i) interest expense; (ii) interest and other income; (iii) leasehold rents for
hotels, which the Company considers to be financing costs similar to interest;
(iv) income tax expense (benefit); (v) depreciation and amortization; and (vi)
gains or losses from property transactions.
The Company's primary growth strategy is to focus on the expansion of its
proprietary brand, the AmeriHost Inn(R). During 1999, the Company opened five
wholly-owned AmeriHost Inn(R) hotels and one joint venture hotel, and had
another four joint venture AmeriHost Inn(R) hotels under construction at
December 31, 1999. The Company acquired a 100% ownership interest during 1998 in
26 AmeriHost Inn(R) hotels in which the Company already held a minority
ownership interest. The Company may seek to increase its ownership interest in
additional existing AmeriHost Inn(R) hotels in which the Company has less than a
100% ownership interest, if available on favorable economic terms. These hotels
had been built by the Company using the AmeriHost Inn(R) standard prototype.
8
Due to the expansion of the AmeriHost Inn(R) brand over the past few years, and
the recognition the brand has received for the consistency of guest services and
amenities, the Company decided to begin selling franchises in 1999. The Company
has satisfied all Federal Trade Commission requirements and is currently able to
sell franchises in 50 states. The AmeriHost Inn(R) franchise agreement is a
long-term agreement, providing for a franchise royalty, marketing and
reservation fees based on the hotel's revenue. Due to the Company's expertise in
all areas of hotel development and management, the Company anticipates making
these services available to the franchisee, including site selection,
operational management, and property accounting, in addition to the franchise
agreement. Although the Company believes that it can sell a significant number
of franchises, it does not expect this segment to contribute to the
profitability of the Company during its initial start up period.
The Company intends to continue using its hotel development and management
expertise to build and operate hotels for itself, as well as for future joint
ventures in which the Company holds a minority ownership interest and in some
instance, for franchisees. In addition, the Company is also focused on actively
pursuing development contracts and management contracts with unaffiliated
entities. This may include building and managing non-AmeriHost Inn(R) hotels.
During 1999, the Company began construction on four AmeriHost Inn(R) hotels, and
completed construction of six hotels, all of which were AmeriHost Inn(R) hotels.
The Company intends to continue developing and constructing AmeriHost Inn(R)
hotels in communities located in tertiary and secondary markets which already
have established demand generators, such as major traffic arteries, office
complexes, industrial parks, shopping malls, colleges and universities or
tourist attractions. Typically, the Company seeks communities where an active
economic development program is in place, which suggests long-term growth
potential for additional lodging demand. In most cases, the local community is
interested in a new hotel because existing facilities are dated or inconvenient.
The Company provides comfortable, professionally managed accommodations which
are typically not available in that community.
The Company has an in-house development staff dedicated to identifying and
evaluating new development opportunities. Once a market has been identified and
a site has been selected, the Company initiates its due diligence process prior
to the construction of one of its hotels. Such due diligence typically consists
of environmental surveys, feasibility and engineering studies and the securing
of zoning and building permits. The Company also maintains an in-house
construction and design department, which enables it to manage all phases of
construction. The Company's in-house architects and design personnel prepare the
blueprints for each AmeriHost Inn(R) hotel through the use of computer assisted
drafting equipment, thereby reducing architectural fees. In most cases, the
Company hires a general contractor to construct the hotel for a fixed price,
eliminating much of the risk typically associated with construction. The
Company's project managers oversee the general contractor through each phase of
construction in order to assure the quality and timing of the construction. With
few exceptions, such as the interior color scheme, each AmeriHost Inn(R) hotel
is the same in every detail, including the overall layout, the room sizes and
the indoor pool area. The replication of its prototype design allows for
accurate budgeting of its construction and overhead costs.
Historically, the Company has financed its hotel development and construction
through a combination of equity and debt financing, with the equity financing
typically provided by the Company and/or its joint venture partners, and the
debt financing typically provided by local or regional banks. All of the
AmeriHost Inn(R) hotels under construction at December 31, 1999 are being
financed in this manner.
The Company intends to increase its revenue, EBITDAR and net income per share
through the continued development and franchising of its AmeriHost Inn(R) brand
hotel and the continued implementation of its operating and marketing
strategies. The Company believes that it can develop and operate additional
AmeriHost Inn(R) hotels having occupancies and average daily rates similar to
those the Company has achieved at its existing AmeriHost Inn(R) hotels.
Moreover, the Company believes that the development of additional AmeriHost
Inn(R) hotels and expanded geographic diversity will continue to enhance the
awareness of the AmeriHost Inn(R) brand and thus improve revenues at existing,
as well as future, AmeriHost Inn(R) hotels. The Company believes that leveraging
its expertise in hotel development and management by providing these services to
unaffiliated parties and franchisees will also assist the Company in reaching
its financial objectives.
9
OPERATING STRATEGY
The Company's operating strategy is to provide its customers with a consistent
lodging experience by offering a package of amenities and services which meet or
exceed the customer's expectations during each stay. The Company has developed
uniform standards and procedures for each aspect of the development,
construction, operation and marketing of its AmeriHost Inn(R) hotels, from site
selection to operational management.
The Company's operational management activities are overseen by a Senior Vice
President of Operations who supervises regional and area managers, who in turn
oversee the general managers of the hotels. Each regional manager is responsible
for 6 to 10 hotels, depending on each hotel's size and location. In addition to
having responsibilities as the general manager of a specific hotel, each area
manager is responsible for overseeing the general managers at 1 to 2 additional
hotels. In addition to these managers, the Company has centralized sales and
marketing personnel who assist and direct the general managers and other on-site
personnel in their marketing efforts. The Company also has internal auditors who
perform audits of each hotel at least two times each year, including tests of
financial items such as cash and receivables, as well as operational, security
and ADA (Americans with Disabilities Act) compliance matters, and who are also
responsible for developing and conducting a variety of educational and training
seminars for general managers and other on-site personnel.
The Company has designed a financial management system whereby all accounting
and operating information is processed in the Company's centralized accounting
office at its headquarters. The system includes cash management, accounts
payable and the generation of daily financial and operating information and
monthly financial statements which allow senior management and the regional,
area and general managers to closely monitor performance and to quickly react to
changes in operational conditions. The Company provides each hotel with
standardized forms and procedures to ensure uniform and efficient financial
reporting. The Company's financial management system relieves certain management
and reporting burdens from the individual hotel managers, enabling them to focus
on the operation and marketing of the hotel. The centralized financial
management system also enhances the quality and timing of internal financial
reports. All payroll functions are also centralized at the Company's
headquarters through its employee leasing subsidiary, allowing the Company to
have greater control over payroll costs. In addition, since all of the
approximately 1,700 hotel personnel are employed by the same company, the costs
of certain payroll related expenses are lower than if each hotel maintained its
own employees, and the Company is able to offer a more attractive health
insurance program to its employees.
MARKETING STRATEGY
The Company believes it has a unique marketing strategy which is to actively
seek involvement in and ties to the local communities in which its hotels are
located. The local businesses and residential communities are each hotel's best
referral source. When staying in smaller communities where the Company's hotels
are located, visitors typically seek recommendations from family, friends and
business associates. The general managers of the hotels are expected to devote a
majority of their time toward marketing activities with local businesses and the
community. In an effort to promote community awareness and build strong
relationships with business leaders and local residents, general managers are
very active in local civic groups and frequently sponsor special events. In
addition, the hotels typically sponsor various local social and community events
and permit the use of their facilities by local clubs and civic organizations.
This community involvement, combined with a professional marketing program,
allows the hotel to showcase its facilities for both business and leisure
purposes. By focusing on the local community as its primary referral source, the
Company believes that each hotel can build a strong sales force of local
residents.
In order to enhance this local marketing strategy, the Company became part of
the Global Distribution System ("GDS") in 1999. The GDS system is the airline
reservation system through which most travel agents make hotel bookings. GDS
offers tremendous exposure of the AmeriHost Inn(R) brand to travel agents
globally. In addition, our guests are now able to book hotel reservations easily
through their preferred travel agent.
With respect to AmeriHost Inn(R) hotels, the Company's primary marketing
strategy is to consistently develop and operate AmeriHost Inn(R) hotels using
its prototype design under the trademarked AmeriHost Inn(R) diamond-shaped
10
logo. The Company believes that a consistent product offering, including the
same design features, amenities and quality guest services, will promote guest
loyalty, referrals and repeat business. The amenities and services featured in
the AmeriHost Inn(R) prototype design are not consistently found in the hotels
of competitors in the markets which the Company targets. By providing amenities
and services on a consistent basis, along with centralized administrative and
financial reporting systems, the Company believes it is able to operate
profitable hotels while offering an excellent value to its guests.
The Company also maintains a toll-free reservation number for the AmeriHost
Inn(R) hotels. By dialing 800-434-5800, a guest can make a reservation at any
one of the AmeriHost Inn(R) hotels throughout the country. In addition, the
Company's internet web site is capable of accepting reservations on-line,
further improving our guests' ability to book rooms easily. The Company
anticipates that the reservation system will significantly increase the number
of reservations as the brand awareness increases. The Company also periodically
implements a regional marketing campaign using various media including radio and
newspaper. The markets and media selected for the marketing activities are based
on extensive research done by the Company and in some cases, an advertising
consultant. The Company, its franchisees, and its joint venture partners have
committed that 1% of each hotel's room revenues will be used for the regional
marketing program.
The Company targets independent hotel owners and developers to franchise the
AmeriHost Inn(R) brand. The Company has a sales force which covers the majority
of the United States. The Company also conducts national and regional
advertising campaigns primarily through trade magazines and journals. The
Company believes that the consistency maintained by the AmeriHost Inn(R) hotels
with regard to amenities and service will attract franchisees, along with the
brand's central reservation system and marketing programs.
JOINT VENTURES
The Company continued to develop new hotels through joint ventures in 1999
whereby the Company and other investors agree to jointly undertake the
development, construction, acquisition or renovation of a hotel property. As of
December 31, 1999, the Company had 23 projects with joint venture partners,
including multiple projects with certain joint venture partners. Four of these
joint venture projects were under construction at December 31, 1999.
The Company's joint ventures have taken various forms, including general
partnerships, limited partnerships, and limited liability companies. Each joint
venture has been formed with respect to a particular hotel project and reflects
the characteristics of that project, including the relative contributions, in
cash, property or services, of its partners. In most instances, the joint
venture has taken the form of a limited partnership or a limited liability
company, with a wholly-owned subsidiary of the Company as a general partner or
managing member with sole or joint management authority. The Company's
subsidiary, as general partner or managing member, has typically received an
ownership interest ranging from 1% to 30% for contributing the Company's
expertise. In certain cases, the subsidiary has also contributed a minimal
amount of cash. The limited partners or members (which may include the Company
or its affiliates in some instances) have typically contributed the cash equity
required to fund the project and have received interests proportionate to their
contributions. A typical joint venture agreement provides that the profits and
losses of the entity will be allocated among the partners in proportion to their
respective interests. However, the distribution of operating cash flow and asset
sale proceeds to the Company in proportion to its ownership interest is often
subordinate to the prior return of capital and other distributions payable to
the other joint venture partners. In addition, in three recent joint venture
arrangements, the equity interests held by the joint venture partners are
exchangeable into shares of the Company's common stock and the Company has
guaranteed minimum annual distributions to the joint venture partners.
As the general partner or managing member, the Company's subsidiary generally
has the sole or primary management authority with respect to the joint venture.
However, in some instances, the joint venture agreement or applicable law may
provide to the other joint venture partners the right to amend the joint venture
agreement, approve a transfer of the general partner's partnership interest,
remove the general partner for cause, or dissolve the joint venture. The joint
venture agreements do not typically restrict the right of the Company or its
affiliates to engage in related or competitive business activities.
11
COMPETITION
There is significant competition in the mid-price lodging industry. There are
numerous hotel chains that operate on a national or regional basis, as well as
other hotels, motor inns and other independent lodging establishments throughout
the United States. Competition is primarily in the areas of price, location,
quality, services and amenities. Many of the Company's competitors have
recognized trade names, greater resources and longer operating histories than
the Company. However, the Company believes that its management is sufficiently
experienced, and the markets which the Company targets for development typically
offer lesser competition, enabling the Company to compete successfully.
There are a number of companies which develop, construct and renovate hotels.
Some of these companies perform these services only for their own account, while
others actively pursue contracts for these services with third party owners. The
Company believes that it can develop, construct and renovate hotels at costs
which are competitive. The Company believes that its use of a well-developed
prototype, significant experience (the Company has managed the development and
construction of approximately 90 hotels) and volume purchasing of furniture and
amenities result in development costs which are lower than those experienced by
many competitors building comparable hotels. The Company also believes that its
ability to offer additional services, such as hotel management, provides some
competitive advantages.
There are many hotel management companies which provide management services to
hotels similar to the services provided by the Company. While the quantity of
competition may be high, the Company believes that the quality of its services,
including its information and management systems and employee leasing
operations, will enable the Company to compete successfully. The Company
believes that its focus on tertiary and secondary markets also lessens
competition for the types of services provided by the Company.
The Company believes that the relationship between the development and
construction costs and the average daily rates achieved by the AmeriHost Inn(R)
hotels is more favorable than that experienced by many of the Company'S
competitors. In addition, a significant portion of the purchasing and accounting
functions related to the hotels is handled in the Company's headquarters, thus
enabling the local general managers and their staff to focus their efforts on
marketing and sales. The centralization of many functions also assists in
keeping costs lower due to certain economies of scale. This allows the AmeriHost
Inn(R) hotels to operate efficiently and compete effectively.
There is significant competition among the national and regional lodging
franchisors in the limited service mid-market segment. The Company's competitors
include brands such as Holiday Inn Express(R), Hampton Inn(R), And Fairfield
Inn(R), among others. The Company believes that potential franchisees select a
brand based upon theiR expectation of franchise costs versus the potential for
enhanced revenue and profitability, in addition to their perception of a brand's
reputation. The Company believes that the high degree of consistency among the
AmeriHost Inn(R) hotels with regard to amenities and service, along with its
national reservation system and franchise-friendly franchise agreement will
enable the Company to compete successfully.
FRANCHISE AGREEMENTS
At December 31, 1999, the Company had franchise agreements (collectively, the
"Franchise Agreements") with Days Inn of America, Inc., Promus Hotels, Inc.
(regarding Hampton Inns), Holiday Inns, Inc., Holiday Inns Franchising, Inc. and
Ramada Franchise Systems, Inc. Although the terms of the various Franchise
Agreements differ, each requires the Company to pay a monthly royalty fee for
the right to operate the hotel under the "flag" of that Franchisor and to have
access to the other benefits provided by such Franchisor, including access to
reservation systems, marketing plans and use of trademarks. The royalty fees are
typically based on gross revenues attributable to room rentals, plus marketing
and reservation contributions, and typically range between 8% and 10% of gross
room revenues. In addition, the Company and/or the joint venture which owns a
hotel operated pursuant to a Franchise Agreement will have ongoing obligations
to maintain the quality and condition of the hotel to the standards required by
the Franchisor. The term of a Franchise Agreement typically is between 10 and 20
years, with a substantial penalty for early termination by the Company with
either party typically having the right to terminate after
12
five years. The Company believes that it is generally in compliance with its
Franchise Agreements, and the loss of any one of the Franchise Agreements would
not have a material impact on the Company.
EMPLOYEES
As of December 31, 1999, the Company and its subsidiaries had 1,742 full and
part-time employees:
Hotel Management:
Operations 40
Accounting and finance 18
Property general managers 88
Hotel Franchising: 10
Hotel Development: 10
Hotel Operations: 1,168
Corporate:
General and administrative 8
Officers 2
Employee Leasing:
General and administrative 3
Operations 395
-----
1,742
=====
To date, the Company has not experienced any work stoppages or significant
employee-related problems. The Company believes that its relationship with its
employees is good.
ITEM 2. PROPERTIES.
The Company's corporate offices and the offices of its wholly-owned subsidiaries
are located in approximately 19,000 square feet of space at 2355 South Arlington
Heights Road, Suite 400, Arlington Heights, Illinois 60005. These offices are
occupied under a lease that expires on December 19, 2011.
At December 31, 1999, the Company had a 100% or majority ownership or leasehold
interest in 69 operating hotels located in 15 states. The land, building,
furniture, fixtures and equipment and construction in progress for these hotels
is reflected in the Company's Consolidated Balance Sheet at December 31, 1999.
These assets were substantially pledged to secure the related long-term mortgage
debt. See Item 1 and Notes 6 and 7 to the Consolidated Financial Statements
under Item 14.
In addition to the foregoing, the Company has an equity interest in partnerships
which own and/or lease property. See Note 4 to Consolidated Financial Statements
under Item 14.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to claims and suits in the ordinary course of business.
In management's opinion, currently pending legal proceedings and claims against
the Company will not, individually or in the aggregate, have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol HOST. As of March 17, 2000, there were 1,317 holders of record of the
Company's Common Stock. The following table shows the range of reported high and
low closing prices per share.
High($) Low($)
------- ------
FISCAL 1998
First quarter 5.81 3.94
Second quarter 5.38 4.38
Third quarter 4.63 3.09
Fourth quarter 4.50 2.56
FISCAL 1999
First quarter 3.81 3.00
Second quarter 4.25 3.00
Third quarter 4.13 3.00
Fourth quarter 3.94 2.69
FISCAL 2000
First quarter (through March 17, 2000) 3.75 2.88
The Company has not declared or paid any cash dividends on its Common Stock. The
Company currently intends to retain any earnings for use in its business and
therefore does not anticipate paying any cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be made by the Board
of Directors in light of the Company's earnings, financial position, capital
requirements and such other factors as the Board of Directors deems relevant.
The Board of Directors has the authority to issue up to 100,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued shares of
Preferred Stock, including without limitation, dividend rates, conversion
rights, voting rights, redemption and sinking fund provisions, and liquidation
provisions, and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
shareholders. The Board of Directors, without shareholder approval, may issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of the holders of Common Stock and could have the effect of delaying,
deferring or preventing a change in control of the Company. The Company has no
present plans to issue any Preferred Stock.
14
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below have been derived from
the Company's consolidated financial statements. The consolidated financial
statements for all years presented have been audited by the Company's
independent certified public accountants, whose report on such consolidated
financial statements for each of the three years in the period ended December
31, 1999 is included herein under Item 14. The information set forth below
should be read in conjunction with the consolidated financial statements and
notes thereto under Item 14 and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(in thousands, except per share data)
Fiscal Year Ended December 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
-------- ------- -------- -------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue $ 76,058 $ 68,618 $ 62,666 $ 68,342 $ 51,962
Operating costs and expenses 57,868 54,286 52,285 54,360 41,317
Depreciation and amortization expense 4,567 5,487 4,532 3,479 2,268
Leasehold rents - hotels 7,307 4,192 1,729 2,122 1,976
Corporate general and administrative 1,537 1,569 2,140 1,928 2,111
Operating income 4,780 3,084 1,980 6,453 4,290
Interest expense, net 5,155 5,592 3,299 2,142 1,195
Income (loss), before extraordinary item and
cumulative effect of change in accounting principle(1) $ 201 $ (1,167) $ (966) $ 3,395 $ 2,138
======== ======== ======== ======== ========
Net income (loss) $ 201 $ (2,796) $ (966) $ 3,395 $ 2,138
======== ======== ======== ======== ========
Earnings (loss) per share, before extraordinary item
and cumulative effect of
change in accounting principle(1):
Basic $ 0.04 $ (0.19) $ (0.15) $ 0.57 $ 0.37
======== ======= ======= ======== ========
Diluted $ 0.02 $ (0.20) $ (0.19) $ 0.49 $ 0.34
======== ======= ======= ======== ========
Earnings (loss) per share:
Basic $ 0.04 $ (0.45) $ (0.15) $ 0.57 $ 0.37
======== ======= ======= ======== ========
Diluted $ 0.02 $ (0.45) $ (0.19) $ 0.49 $ 0.34
======== ======= ======= ======== ========
Weighted average shares outstanding:
Basic 5,567 6,180 6,283 6,008 5,839
======== ======== ======== ======== ========
Diluted 5,857 6,513 6,659 6,839 6,371
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets $103,108 $115,281 $ 92,668 $ 66,901 $ 52,453
Long-term debt, including current portion 60,349 71,841 60,235 34,339 25,014
Working capital (6,817) (6,924) (2,208) 366 1,854
Shareholders' equity 14,181 18,316 21,593 20,912 17,267
OTHER DATA:
EBITDAR (2) $ 16,280 $ 12,790 $ 6,023 $ 12,447 $ 8,862
Cash (used in) provided by operating activities (885) 5,408 1,858 7,558 1,918
Cash provided by (used in) investing activities 12,344 15,555 (28,463) (11,347) (13,506)
Cash (used in) provided by financing activities (12,187) (18,819) 25,926 5,447 9,933
Capital expenditures 2,103 42,183 29,343 14,049 12,539
15
(1) The Company recorded an extraordinary loss of $333,000 in 1998, net of
income taxes, relating to the early extinguishment of mortgage debt on
hotels sold in connection with a sale/leaseback transaction. The
Company recorded a cumulative effect of a change in accounting
principle of $1,296,000 in 1998, net of income taxes, relating to the
adoption of Statement of Position No. 98-5, "Reporting on the Costs of
Start-up Activities."
(2) EBITDAR is not defined by generally accepted accounting principles
("GAAP"), however the Company believes it provides relevant information
about its operations and is necessary for an understanding of the
Company's operations, given its significant investment in real estate.
EBITDAR should not be considered as an alternative to operating income
(as determined in accordance with GAAP) as an indicator of the
Company's operating performance or to cash flows from operating
activities (as determined in accordance with GAAP) as a measure of
liquidity. EBITDAR is defined as net income, adjusted to eliminate the
impact of (i) interest expense; (ii) interest and other income; (iii)
leasehold rents for hotels, which the Company considers to be financing
costs similar to interest; (iv) income tax expense (benefit); (v)
depreciation and amortization; and (vi) gains or losses from property
transactions. EBITDAR for 1997, when calculated to exclude
non-recurring charges for costs associated with contractual
terminations and costs incurred in connection with a potential merger
or acquisition which was not consummated, would have been approximately
$7.9 million. EBITDAR for 1996, when calculated to exclude a
non-recurring charge for costs associated with a public offering of
common stock which was not consummated, would have been approximately
$12.9 million.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
GENERAL
The Company is engaged in the development of AmeriHost Inn(R) hotels, its
proprietary brand, and the ownership, operation and management of AmeriHost
Inn(R) hotels and other mid-price hotels. As of December 31, 1999, there were 77
AmeriHost Inn(R) hotels open, of which 61 were wholly-owned or leased, one was
majority-owned, 12 were minority-owned, and three were owned by franchisees. A
total of six AmeriHost Inn(R) hotels were opened during the past twelve months.
The Company intends to use the AmeriHost Inn(R) brand when expanding its hotel
operations segment. Same room revenues for all AmeriHost Inn(R) hotels
(including minority-owned, managed-only, and franchised) increased approximately
7.2% during 1999, compared to 1998, primarily attributable to an increase of
$2.56 in average daily rate. These results relate to the 74 AmeriHost Inn(R)
hotels that were operating for at least thirteen full months during the twelve
months ended December 31, 1999.
After approximately 10 years of developing and using the AmeriHost Inn(R) name
exclusively for the Company's own account and for joint ventures in which the
Company maintains an ownership interest, the Company has begun to franchise the
AmeriHost Inn(R) brand name. Currently, the Company is qualified to sell
AmeriHost Inn(R) hotel franchises in all 50 states and Canada and Mexico.
Through December 31, 1999, the Company entered into nine AmeriHost Inn(R)
franchise agreements, including six with entities in which the Company has a
partial ownershiP interest. However, the Company does not anticipate the
franchising activity to have a significant impact on the operations of the
Company in 2000, and there can be no assurance that the Company will be
successful in selling AmeriHost Inn(R) franchises in the future.
Revenues from hotel operations consist of the revenues from all hotels in which
the Company has a 100% or majority ownership or leasehold interest
("Consolidated" hotels). Investments in other entities in which the Company has
a minority ownership interest are accounted for using the equity method. As a
result of the Company's focus on increasing the number of Consolidated hotels,
the revenues from the hotel operations segment have increased as a percentage of
the Company's overall revenues. The Company has begun to realize revenues in
1999 from its newly formed AmeriHost Inn(R) franchising segment. Franchise fees
are recognized pursuant to franchise agreements witH minority-owned entities and
unrelated third parties. Development and construction revenues consist of
one-time fees for new construction and renovation activities performed by the
Company for minority-owned hotels and unrelated third parties, as well as the
sale of wholly-owned properties which have been built by the company and held
for sale for less than one year. The Company also receives revenue from
management and employee leasing services provided to minority-owned hotels and
unrelated third parties.
The results for 1999 were consistent with the Company's objective of
establishing the AmeriHost Inn(R) hoteL franchising department. In addition, due
to the Company's focus on developing and constructing a significant number of
Consolidated AmeriHost Inn(R) hotels during 1998 and the first part of 1999, as
well as acquiring the remaining ownership interests in a significant number of
AmeriHost Inn(R) hotels which were previously minority-owned, the Company
recognized lower revenues from the development and construction of hotels for
minority-owned and unrelated third parties during 1999. In conjunction with the
Company's objective of building a franchising segment, the Company decided to
develop AmeriHost Inn hotels to be held for sale to potential franchisees. The
sale of these hotels held for sale are included in the Company's hotel
development segment. During the third quarter of 1999, the Company sold three of
its Consolidated AmeriHost Inn(R) hotels to franchisees, two of which were
recorded as operational transactions in the hotel development segment. This
strategy has a short-term positive impact on revenues and earnings from the
sale, while allowing the Company to benefit from a long-term franchise
agreement.
Revenues from Consolidated AmeriHost Inn(R) hotels increased 49.6% to $49.5
million during 1999, from revenues oF $33.1 million during 1998, due to the net
addition of 19 Consolidated AmeriHost Inn(R) hotels during the past eighteen
months. Revenues from the hotel management and employee leasing segments
decreased by 40.7% in total during 1999, compared to 1998, due primarily to the
acquisition of the remaining ownership interest in 17 minority-owned joint
venture hotels during the last eighteen months, 16 of which are AmeriHost
17
Inn(R) hotels. Revenues from Consolidated non-AmeriHost Inn(R) hotels decreased
11.6% during 1999, compared to 1998, primarily as a result of the disposition of
one Consolidated non-AmeriHost Inn(R) hotel during the second quarter of 1998
and the disposition of two others in 1999. Total revenues increased 10.8% to
$76.1 million during 1999, from $68.6 million during 1998. The Company recorded
net income of $200,591 for 1999, or $0.02 per diluted share, compared to a net
loss of ($2.8) million, or ($0.45) per diluted share in 1998. The results for
1998 include an extraordinary item and the cumulative effect of a change in
accounting principle in the total amount of ($1.6) million, after income tax
benefit, or ($0.25) per diluted share.
The Company uses EBITDAR as a supplemental performance measure, along with net
income, to report its operating results. EBITDAR is defined as net income before
extraordinary items, adjusted to eliminate the impact of (i) interest expense;
(ii) interest and other income; (iii) leasehold rents for hotels, which the
Company considers to be financing costs similar to interest; (iv) income tax
expense (benefit), (v) depreciation and amortization; and (vi) gains or losses
from property transactions. EBITDAR should not be considered as an alternative
to operating income (as determined in accordance with Generally Accepted
Accounting Principles, "GAAP") as an indicator of the Company's operating
performance or to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. EBITDAR, as defined by the
Company, is included herein due to numerous requests by investors and analysts.
Management believes that investors and analysts find it to be a useful tool for
measuring the Company's ability to service debt. EBITDAR increased 27.3% to
$16.3 million during 1999, from $12.8 million during 1998.
On June 30, 1998, the Company completed the sale of 26 AmeriHost Inn(R) hotels
to PMC Commercial Trust ("PMC") foR $62.2 million. The Company sold an
additional four AmeriHost Inn(R) hotels to PMC during March 1999 for $10.8
million. Upon the sale to PMC, the Company entered into agreements to lease back
the hotels for an initial term of ten years, with two five year renewal options.
The lease payments are fixed at 10% of the sale price for the first three years.
Thereafter, the lease payments are subject to a CPI increase with a 2% annual
maximum. The Company has deferred the gain on the sale of these hotels pursuant
to sale/leaseback accounting. This deferral will be recognized over the initial
term of the lease as a reduction of leasehold rent expense.
Amerihost had an ownership interest in the operations of 84 hotels, including 34
hotels which are leased, at December 31, 1999 versus 85 hotels at December 31,
1998 (excluding hotels under construction). These figures include 69
Consolidated hotels at December 31, 1998 and December 31, 1999.
18
RESULTS OF OPERATIONS
The following table sets forth the percentages of revenues of the Company
represented by components of net income for 1999, 1998 and 1997.
Percentage of Total Revenue
Year Ended December 31,
-------------------------------------------
1999 1998 1997
-------- -------- ------
Revenue 100.0% 100.0% 100.0%
Operating costs and expenses 76.1 79.1 83.4
------ ----- -------
23.9 20.9 16.6
Depreciation and amortization 6.0 8.0 7.2
Leasehold rents - hotels 9.6 6.1 2.8
Corporate general and administrative 2.0 2.3 3.4
Operating income 6.3 4.5 3.2
Interest expense (7.9) (8.9) ( 6.5)
Interest and other income 1.9 1.1 1.4
Equity in income and losses of affiliates (0.2) (0.4) ( 0.8)
Gain on sale of assets 0.7 0.5 2.7
Non-recurring expenses 0.0 0.0 (3.0)
Income (loss) before minority interests and
income taxes 0.8 (3.2) ( 3.0)
Minority interests in operations of consolidated
subsidiaries and partnerships (0.3) 0.4 0.3
Income (loss) before income taxes 0.5 (2.8) ( 2.7)
Income tax (expense) benefit (0.2) 1.1 1.2
Income (loss) before extraordinary item and
cumulative effect of change in accounting principle 0.3 % (1.7)% (1.5)%
==== ==== ====
1999 compared to 1998
Revenues increased 10.8% to $76.1 million during 1999, from $68.6 million during
1998. The increase in revenue from the Consolidated AmeriHost Inn(R) hotels was
partially offset by the decreases from the hotel management and employee leasing
segments, a decrease from the hotel development and construction segment, as
well as the decrease from non-AmeriHost Inn(R) hotel operations.
Hotel operations revenue increased 31.2% to $62.1 million during 1999, from
$47.3 million during 1998. Revenues from Consolidated AmeriHost Inn(R) hotels
increased 49.6% to $49.5 million during 1999, from $33.1 million durinG 1998.
These increases were attributable primarily to the net addition of 19
Consolidated AmeriHost Inn(R) hotels from July 1, 1998 through December 31,
1999, including the addition of seven newly constructed Consolidated AmeriHost
Inn(R) hotels, and the acquisition of additional ownership interest in 16
existing hotels causing them to become Consolidated AmeriHost Inn(R) hotels, as
well as an increase in same room revenues, offset by the sale of four
Consolidated AmeriHost Inn(R) hotels. The increase in Consolidated AmeriHost
Inn(R) hotel revenue was offset by an 11.6% decrease in Consolidated other brand
hotel revenue during 1999, compared to 1998. This decrease was primarily the
result of the sale of two non-AmeriHost Inn(R) Consolidated hotels, partially
offset by thE acquisition of one non-AmeriHost Inn(R)
19
Consolidated hotel. The hotel operations segment included the operations of 69
Consolidated hotels (including 62 AmeriHost Inn(R) hotels) comprising 4,867
rooms at December 31, 1999, compared to 69 Consolidated hotels (including 61
AmeriHost Inn(R) hotels) comprising 4,916 rooms at December 31, 1998. AfteR
considering the Company's ownership interest in the majority-owned Consolidated
hotels, this translates to 4,624 and 4,647 equivalent owned rooms as of December
31, 1999 and 1998, respectively, or a decrease of 0.5%. Recently, the Company
has experienced an increase in competition in certain markets, primarily from
newly constructed hotels. As a result, there is increased downward pressure on
occupancy levels and average daily rates. The Company believes that as the
number of AmeriHost Inn(R) hotels increases, the greater the benefits will be at
all locations from marketplace recognition and repeat business. In addition, the
Company typically builds new hotels in growing markets where it anticipates a
certain level of additional hotel development.
Hotel development activity is summarized as follows:
1999 1998 1997
------------------------------------------------------------------------------------------
Unaffiliated & Unaffiliated & Unaffiliated &
Minority- Consolidated Minority- Consolidated Minority- Consolidated
Owned (1) Hotels (2) Owned (1) Hotels (2) Owned (1) Hotels (2)
--------- ---------- --------- ---------- --------- ----------
Under construction at
beginning of year 1 5 4 4 7 12
Starts 4 - 2 7 6 6
Completions 1 5 5 6 9 14
Under construction at
end of year 4 - 1 5 4 4
===== ======= ===== ===== ===== ====
(1) hotels developed/constructed for unaffiliated third parties and
entities in which the Company holds a minority ownership interest
(2) hotels developed/constructed for the Company's own account and for
entities in which the Company holds a
majority ownership interest
Hotel development revenue decreased 28.3% to $6.4 million during 1999, from $9.0
million during 1998. The Company was developing and constructing five hotels for
minority-owned entities during 1999, compared to six hotels during 1998. In
conjunction with the Company's objective of building a franchise segment, the
Company decided to develop AmeriHost Inn(R) hotels to be held for sale to
potential franchisees. Any sale of these hotels held for sale less than twelve
months from the date opened are included in the hotel development segment. The
Company sold two AmeriHost Inn(R) hotels for $5.3 million in the third quarter
of 1999 to franchisees, which was recognized as development revenue. The Company
had several additional projects in various stages of pre-construction
development during both years.
Hotel management revenue decreased 41.6% to $1.3 million during 1999, from $2.3
million during 1998. The number of hotels managed for third parties and
minority-owned entities decreased from 22 hotels, representing 1,930 rooms, at
December 31, 1998 to 18 hotels, representing 1,696 rooms, at December 31, 1999.
The addition of a management contract for one newly constructed hotel (72 rooms)
was more than offset by the termination of one management contract (60 rooms)
with a minority-owned entity as a result of the sale of the hotel (non-AmeriHost
Inn(R) hotel), the termination of one management contract (64 rooms) with a
minority-owned hotel which became a Consolidated hotel due to the Company
acquiring additional ownership interest, and the termination of three management
contracts with unrelated third parties (182 rooms).
Employee leasing revenue decreased 40.5% to $6.0 million during 1999, from $10.1
million during 1998, due primarily to the reduction in hotels managed for
minority-owned entities and unrelated third parties as described above, and the
associated decrease in payroll costs which is the basis for the employee leasing
revenue.
20
Franchising realized revenues of $222,187 during its initial year of operation,
consisting primarily of initial franchise fees from newly franchised hotels and
the royalty fees from these franchised hotels which are based on the hotel's
operational revenue. As of December 31, 1999, the Company has three franchise
agreements with independent third parties, and has executed additional franchise
agreements with certain existing AmeriHost Inn hotel joint ventures.
Total operating costs and expenses increased 6.6% to $57.9 million (76.1% of
total revenues) during 1999, from $54.3 million (79.1% of total revenues) during
1998. Operating costs and expenses in the hotel operations segment increased
29.8% to $45.1 million during 1999, from $34.8 million during 1998. These
increases resulted primarily from the net addition of 18 Consolidated hotels to
this segment during the last eighteen months, and are directly related to the
31.2% increase in Consolidated hotel revenues during 1999. Hotel operations
segment operating costs and expenses as a percentage of segment revenue
decreased to 72.7% during 1999, from 73.5% during 1998. Operating costs and
expenses as a percentage of revenues for the Consolidated hotels decreased
slightly during 1999 due to fewer AmeriHost Inn(R) hotels operating during their
pre-stabilization period in 1999 compared to 1998.
Operating costs and expenses for the hotel development segment decreased 36.2%
to $5.4 million during 1999, from $8.5 million during 1998, consistent with the
28.3% decrease in hotel development revenue for 1999. Operating costs and
expenses in the hotel development segment as a percentage of segment revenue
decreased to 83.9% during 1999, from 94.4% during 1998. In connection with the
Company's objective of developing AmeriHost Inn(R) hotels held for sale to
potential franchisees, the Company recognized development costs of $4.3 million
in 1999, which resulted in a lower percentage of operating costs compared to
construction activity. The results for 1998 consisted of a greater amount of
construction activity, which resulted in higher operating costs in relation to
the revenue recognized.
Hotel management segment operating costs and expenses decreased 38.1% to
$809,061 during 1999, from $1.3 million during 1998. This decrease was due to
the decrease in the number of hotels operated and managed for unrelated third
parties and minority-owned entities. Employee leasing operating costs and
expenses decreased 41.0% to $5.7 million during 1999, from $9.7 million during
1998, which is consistent with the 40.5% decrease in segment revenue for 1999,
compared to 1998. Franchising had operating costs and expenses of $786,658
during 1999, which is its initial year of operations.
Depreciation and amortization expense decreased 16.8% to $4.6 million during
1999, from $5.5 million during 1998. The decrease was primarily attributable to
the sale and leaseback of 30 hotels, 26 of which closed on June 30, 1998 and
four of which closed in March 1999, and the sale of six additional hotels that
closed in 1999, partially offset by the addition of 24 Consolidated hotels to
the hotel operations segment during the past eighteen months and the resulting
depreciation and amortization therefrom. The Company does not recognize any
depreciation on the assets sold in the sale/leaseback transaction.
Leasehold rents - hotels increased 74.3% to $7.3 million during 1999, compared
to $4.2 million during 1998. The increase is attributable to the sale and
leaseback transaction with PMC. The Company anticipates leasehold rents - hotels
to remain relatively constant after 1999.
Corporate general and administrative expense decreased 2.0% to $1.5 million
during 1999, from $1.6 million during 1998, and can be attributed primarily to
efficiencies gained in the overall administration of the Company.
The Company's operating income increased 55.0% to $4.8 million during 1999 from
$3.1 million during 1998. The following discussion of operating income by
segment is exclusive of any corporate general and administrative expense.
Operating income from Consolidated AmeriHost Inn(R) hotels increased 8.6% to
$5.2 million during 1999, from $4.8 million during 1998. This increase in
operating income was due to the increased number of Consolidated AmeriHost
Inn(R) hotels and the increase in same room revenues as a significant number of
recently opened Consolidated AmeriHost Inn(R) hotels in 1998 were still
operating during their pre-stabilization period when revenues are typically
lower. Operating income from the hotel development segment increased 136.8% to
$1.0 million during 1999 from $426,427 during 1998. The increase in hotel
development operating income was due to
21
the timing of hotels developed and constructed for third parties and
minority-owned entities during 1998, compared with 1999, the overall decrease in
the number of hotels developed and constructed for third parties and
minority-owned entities during 1999, and the sale of two AmeriHost Inn(R) hotels
held for sale during the third quarter of 1999 which were included in operating
income. The hotel management segment operating income decreased 17.5% to
$448,710 during 1999, from $543,747 during 1998. This decrease was due primarily
to fewer hotels managed during the past twelve months for unrelated third
parties and minority-owned properties, and the expensing of start-up costs as
incurred during 1999. Employee leasing operating income decreased 23.7% to
$242,309 during 1999, from $317,668 during 1998, due to the decrease in employee
leasing agreements with minority-owned entities and unrelated third parties.
Interest expense decreased 1.3% to $6.0 million during 1999, from $6.1 million
during 1998. This decrease was primarily attributable to the sale and leaseback
transaction with PMC, whereby the Company does not incur any interest expense on
the sold hotels after the sale dates, offset by the additional mortgage
financing of newly constructed and acquired Consolidated hotels.
The Company's share of equity in income (loss) of affiliates was ($160,837)
during 1999, compared to ($240,868) during 1998. The fluctuation in equity of
affiliates was primarily attributable to additional newly opened AmeriHost
Inn(R) hotels operating during their initial stabilization period in 1999 when
revenues are typically lower, offset by the sale of one minority-owned property
in the second quarter of 1999 at a gain. Distributions from affiliates were
$278,096 during 1999, compared to $831,113 during 1998.
The Company recorded income tax expense of $160,000 in 1999 compared to an
income tax benefit, before an extraordinary item and cumulative effect of a
change in accounting principal of $780,000 in 1998, which is directly related to
the pre-tax income (loss) incurred in 1999 and 1998, respectively.
The Company had net income of $200,591 in 1999 compared to a loss before
cumulative effect of change in accounting principle of $(1.2) million in 1998,
primarily due to the factors discussed above.
1998 Compared to 1997
Revenues increased 9.5% to $68.6 million during 1998, from $62.7 million during
1997. The increase in revenue from the Consolidated AmeriHost Inn(R) hotels was
partially offset by the decreases from the hotel management and employee leasing
segments, a decrease from the hotel development and construction segment, as
well as the decrease from non-AmeriHost Inn(R) hotel operations.
Hotel operations revenue increased 48.5% to $47.3 million during 1998, from
$31.9 million during 1997. Revenues from Consolidated AmeriHost Inn(R) hotels
increased 125.8% to $33.1 million during 1998, from $14.7 million during 1997.
This increase was attributable primarily to the addition of 31 Consolidated
AmeriHost Inn(R) hotels in 1998, including the addition of six newly constructed
Consolidated AmeriHost Inn(R) hotels, and the acquisition of additional
ownership interest in 25 existing hotels causing them to become Consolidated
AmeriHost Inn(R) hotels, as well as an increase in same room revenues of 9.3%.
The increase in Consolidated AmeriHost Inn(R) hotel revenue was offset by a
17.4% decrease in Consolidated other brand hotel revenue during 1998, compared
to 1997. This decrease was the result of the sale of one non-AmeriHost Inn(R)
Consolidated hotel in 1998, and the sale or lease termination of four
non-AmeriHost Inn(R) hotels in 1997. The hotel operations segment included the
operations of 69 Consolidated hotels (including 61 AmeriHost Inn(R) hotels)
comprising 4,916 rooms at December 31, 1998, compared to 39 Consolidated hotels
(including 30 AmeriHost Inn(R) hotels) comprising 3,124 rooms at December 31,
1997. After considering the Company's ownership interest in the majority-owned
Consolidated hotels, this translates to 4,647 and 2,804 equivalent owned rooms
as of December 31, 1998 and 1997, respectively, or an increase of 65.7%.
Hotel development revenue decreased 38.7% to $9.0 million during 1998, from
$14.6 million during 1997. Hotel development revenues are directly related to
the number of hotels being developed and constructed for minority-owned entities
or unrelated third parties. The Company was constructing six hotels for
minority-owned entities or
22
unrelated third parties during 1998, compared to 13 hotels during 1997. The
Company also had several additional projects in various stages of
pre-construction development during both years.
Hotel management revenue decreased 25.5% to $2.3 million during 1998, from $3.0
million during 1997. The number of hotels managed for third parties and
minority-owned entities decreased from 49 hotels, representing 3,957 rooms, at
December 31, 1997 to 22 hotels, representing 1,930 rooms, at December 31, 1998.
The addition of management contracts for five newly constructed hotels (312
rooms) was more than offset by the termination of four management contracts (310
rooms) with minority-owned entities as a result of the sale of the hotels
(non-AmeriHost Inn(R) hotels), the termination of 25 management contracts (1,629
rooms) with minority-owned hotels which became Consolidated hotels due to the
Company acquiring additional ownership interests, and the termination of three
management contracts for non-AmeriHost Inn(R) hotels with unrelated third
parties (400 rooms).
Employee leasing revenue decreased 23.3% to $10.1 million during 1998, from
$13.1 million during 1997, due primarily to the reduction in hotels managed for
minority-owned entities and unrelated third parties as described above, and the
associated decrease in payroll costs which is the basis for the employee leasing
revenue.
Total operating costs and expenses increased 3.8% to $54.3 million (79.1% of
total revenues) during 1998, from $52.3 million (83.4% of total revenues) during
1997. Operating costs and expenses in the hotel operations segment increased
42.8% to $34.8 million during 1998, from $24.3 million during 1997. These
increases resulted primarily from the net addition of 30 Consolidated hotels to
this segment and are directly related to the 125.8% increase in Consolidated
AmeriHost Inn(R) revenues during 1998, offset by the 17.4% decrease in
non-AmeriHost Inn(R) hotel revenues during 1998. Hotel operations segment
operating costs and expenses as a percentage of segment revenue decreased to
73.5% during 1998, from 76.4% during 1997. Operating costs and expenses as a
percentage of revenues for the Consolidated AmeriHost Inn(R) hotels decreased to
70.8% during 1998, from 75.5% during 1997, due primarily to the significant
number of stabilized AmeriHost Inn(R) hotels acquired during 1998 which were
operating after their pre-stabilization period in 1998.
Operating costs and expenses for the hotel development segment decreased 38.3%
to $8.5 million during 1998, from $13.7 million during 1997, consistent with the
38.7% decrease in hotel development revenues in 1998. Operating costs and
expenses in the hotel development segment as a percentage of segment revenue
remained relatively consistent at 94.4% in 1998 compared to 93.7% in 1997, as
the level of hotel development and construction activity performed for
minority-owned entities and unrelated third parties was consistent between both
years. Construction activity has significantly higher operating costs compared
to the pre-construction development activity. Hotel management segment operating
costs and expenses decreased 8.2% to $1.3 million during 1998, from $1.4 million
during 1997. This decrease was due to the decrease in the number of hotels
managed for minority-owned and unrelated entities, and the allocation of certain
general and administrative expenses. Employee leasing operating costs and
expenses decreased 23.8% to $9.7 million during 1998, from $12.8 million during
1997, which is consistent with the 23.3% decrease in segment revenue for 1998.
Depreciation and amortization expense increased 21.1% to $5.5 million during
1998, from $4.5 million during 1997. The increase was primarily attributable to
the net addition of 30 Consolidated hotels to the hotel operations segment and
the resulting depreciation and amortization therefrom, offset by the decrease in
depreciation from non-AmeriHost Inn(R) hotels as a result of the
sale/dispositions, and the completion of the sale and leaseback of 26 hotels on
June 30, 1998.
Leasehold rents - hotels increased 142.5% to $4.2 million during 1998, from $1.7
million during 1997. This increase was due primarily to the sale and leaseback
transaction with PMC on June 30, 1998, partially offset by the sale of two
leased Consolidated non-AmeriHost Inn(R) hotels and the termination of the lease
for another Consolidated non-AmeriHost Inn(R) hotel in the first and second
quarters of 1997.
Corporate general and administrative expense decreased 26.7% to $1.6 million
during 1998, from $2.1 million during 1997, and can be attributed primarily to
the recognition of compensation expense in 1997 for options issued
23
at an exercise price below the then current market price, operational
efficiencies and the allocation of certain expenses.
The Company's operating income increased 55.8% to $3.1 million during 1998, from
$2.0 million during 1997. The following discussion of operating income by
segment is exclusive of any corporate general and administrative expense.
Operating income from Consolidated AmeriHost Inn(R) hotels increased 255.0% to
$4.8 million during 1998, from $1.3 million during 1997. This increase in
operating income was due to the increased number of Consolidated AmeriHost
Inn(R) hotels and the increase in same room revenues as a significant number of
recently opened Consolidated AmeriHost Inn(R) hotels were still operating in
1997 during their pre-stabilization period when revenues are typically lower.
Operating income from the hotel development segment decreased 49.1%, to $426,427
during 1998 from $838,452 during 1997. The fluctuation in hotel development
operating income was due to the timing of hotels developed and constructed for
third parties and minority-owned entities during 1998, compared with 1997, and
the overall decrease in the number of hotels developed and constructed for
minority-owned entities and unrelated third parties. Operating income from the
hotel management segment decreased 57.1% to $543,748 in 1998 from $1.3 million
in 1997. This decrease was due primarily to the decrease in hotel management
contracts with minority-owned entities (as a result of the Company acquiring the
remaining ownership interest in these hotels) and unaffiliated entities.
Employee leasing operating income decreased 1.0% to $317,668 during 1998, from
$320,826 during 1997, due to the decrease in employee leasing agreements with
minority-owned entities and unrelated third parties.
Interest expense increased 50.8% to $6.1 in 1998 from $4.1 million during 1997.
The increase attributable to the additional mortgage financing of newly
constructed and acquired Consolidated AmeriHost Inn(R) hotels, was partially
offset by the sale and leaseback transaction with PMC, whereby the Company did
not recognize any interest expense after the hotels were sold on June 30, 1998.
The Company's share of equity in income (loss) of affiliates improved to
($240,868) during 1998, from ($516,583) during 1997. The fluctuation in equity
of affiliates during 1998, compared to 1997, was primarily due to the sale of
four minority owned hotels at a significant gain and the acquisition of a
significant number of minority owned hotels by the Company resulting in 100%
ownership positions.
The Company recorded an income tax benefit, before an extraordinary item and a
cumulative effect of a change in accounting principle, of $780,000 in 1998
compared to a benefit of $737,000 in 1997, which is directly attributable to the
pre-tax loss incurred in 1998.
The Company expensed $332,738 in 1998 as an extraordinary item, net of income
tax benefit, in deferred loan costs associated with the early extinguishment of
mortgage debt in connection with a sale/leaseback transaction. In addition, the
Company expensed $1.3 million in 1998, net of income tax benefit, in previously
capitalized start-up and pre-opening costs as a cumulative effect of a change in
accounting principle to comply with Statement of Position No. 98-5, "Reporting
on the Costs of Start-Up Activities." The Company expensed $1.7 million during
1997 in costs associated with the termination of a consulting agreement and an
employment agreement. The Company considers these costs non-recurring in nature.
LIQUIDITY AND CAPITAL RESOURCES
The Company has five main sources of cash from operating activities: (i)
revenues from hotel operations; (ii) fees from development, construction and
renovation projects, including proceeds from the sale of assets held for sale;
(iii) fees from management contracts; (iv) fees from employee leasing services;
and (v) fees from franchise agreements. Cash from hotel operations is typically
received at the time the guest checks out of the hotel. Approximately 10% of the
Company's hotel operations revenues is generated through other businesses and
contracts and is usually paid within 30 to 45 days from billing. Fees from
development, construction and renovation projects are typically received within
15 to 45 days from billing. Due to the procedures in place for processing its
construction draws, the Company typically does not pay its contractors until the
Company receives its draw from the equity or lending source. Management fee
revenues typically are received by the Company within five working days from the
end of each month. Cash from the Company's employee leasing segment
24
typically is received 24 to 48 hours prior to the pay date. Franchise fees are
typically received within ten days from the end of each month.
During 1999, the Company used cash for operations of $885,080, compared to cash
provided from operations of $5.4 million during 1998, or an increase in cash
used by operations of $6.3 million. The decrease in cash flow from operations
during 1999, when compared to 1998, can be attributed to a significant level of
hotel development expenditures which were accrued at December 31, 1998, and paid
in 1999, the timing of collections from hotel development and construction
activity, the start-up of the franchising segment, and a significant number of
hotels acquired or opened in 1998 or 1999 which were still operating during
their pre-stabilization period. In addition, 1999 had significantly less revenue
from the development and construction of hotels for minority-owned entities.
The Company invests cash in four principal areas: (i) the purchase of property
and equipment through the construction and renovation of Consolidated hotels;
(ii) the purchase of equity interests in hotels; (iii) the making of loans to
affiliated and non-affiliated hotels for the purpose of construction, renovation
and working capital; and (iv) the purchase of property and equipment held for
sale. During 1999, the Company received $12.3 million from investing activities
compared to receiving $15.6 million during 1998. During 1999, the Company
received $16.7 million from the sale of eight hotels, used $2.1 million to
purchase property and equipment for Consolidated hotels, and used $2.2 million
for investments in and advances to affiliates, net of distributions and
collections, and used $260,648 for the acquisition of a hotel partnership
interest, net of cash acquired. During 1998, the Company received $64.8 million
from the sale of hotels, received $1.5 million in collections on notes
receivable, used $42.2 million to purchase property and equipment for
Consolidated hotels, and used $8.4 million for the acquisition of hotel
partnership interests, net of cash acquired.
Cash used in financing activities was $12.2 million during 1999 compared to cash
used in financing activities of $18.8 million during 1998. In 1999, the primary
factors were principal repayments of $20.3 million on long-term debt, including
the repayment of mortgages in connection with the sale of hotels, offset by $7.2
million in proceeds from the mortgage financing of Consolidated hotels, and net
proceeds of $5.6 million from the Company's operating line-of-credit. Also, the
Company used cash of $4.3 million to repurchase its own common stock. In 1998,
the contributing factors were principal payments of $50.0 million on long-term
debt, including the repayment of mortgages in connection with the sale of
hotels, offset by $31.6 million in proceeds from the mortgage financing of
Consolidated hotels, and $671,504 in net proceeds from the Company's operating
line-of-credit.
At December 31, 1999, the Company had $7.6 million outstanding under its
operating line-of-credit. The operating line-of-credit (i) has a limit of $8.5
million (ii) is collateralized by a security interest in certain of the
Company's assets, including its interest in various joint ventures; (iii) bears
interest at an annual rate equal to the lending bank's base rate plus 1/2% (with
a minimum interest rate of 7.5%); and (iv) matures May 15, 2000. During 1999,
the Company repaid $2.3 million of unsecured 7% Subordinated Notes with
operational cash flow and proceeds from its line-of-credit.
In March 1998, the Company's Board of Directors authorized the repurchase of its
Common Stock from time to time on the open market. In addition, in 1999 the
Company completed a Dutch Auction self tender offer to purchase up to 1,000,000
shares of its Common Stock. Through December 31, 1999, the Company repurchased
approximately 1.2 million shares of the Company's Common Stock for approximately
$4.8 million. The Company does not anticipate any significant additional
repurchases during 2000.
The Company expects cash from operations to be sufficient to pay all operating
and interest expenses in 2000.
YEAR 2000
The following disclosure is a Year 2000 readiness disclosure statement pursuant
to the Year 2000 Readiness Disclosure Act.
25
In order to minimize or eliminate the effect of the Year 2000 risk on our
business systems and applications, we identified, evaluated, implemented and
tested changes to our computer systems, applications and software necessary to
achieve Year 2000 compliance. Our computer systems and equipment successfully
transitioned to the Year 2000 with no significant issues. Costs incurred to
achieve Year 2000 compliance were not material. We continue to keep our Year
2000 project management in place to monitor latent problems that could surface
at key dates or events in the future. We do not anticipate any significant
problems related to these events.
SEASONALITY
The lodging industry, in general, is seasonal by nature. The Company's hotel
revenues are generally greater in the second and third calendar quarters than in
the first and fourth quarters due to weather conditions in the markets in which
the Company's hotels are located, as well as general business and leisure travel
trends. This seasonality can be expected to continue to cause quarterly
fluctuations in the Company's revenues, and is expected to have a greater impact
as the number of Consolidated hotels increases. Quarterly earnings may also be
adversely affected by events beyond the Company's control such as extreme
weather conditions, economic factors and other general factors affecting travel.
In addition, hotel construction is seasonal, depending upon the geographic
location of the construction projects. Construction activity in the Midwest may
be slower in the first and fourth calendar quarters due to weather conditions.
INFLATION
Management does not believe that inflation has had, or is expected to have, any
significant adverse impact on the Company's financial condition or results of
operations for the periods presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
establishes accounting and reporting standards for derivative instruments and
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133 has been amended by SFAS No. 137,
which delayed the effective date to periods beginning after June 15, 2000. The
Company, to date, has not engaged in derivative and hedging activities.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software developed or obtained for
internal use, including the requirement to capitalize and amortize specific
costs. The adoption of this standard did not have a material effect on its
capitalization policy.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
All statements contained herein that are not historical facts, including but not
limited to, statements regarding the Company's hotels under construction and the
operation of AmeriHost Inn(R) hotels are based on current expectations. These
statements are forward looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plan on
terms satisfactory to the Company; competitive factors, such as the introduction
of new hotels or renovation of existing hotels in the same markets; changes in
travel patterns which could affect demand for the Company's hotels; changes in
development and operating costs, including labor, construction, land, equipment,
and capital costs; general business and economic conditions; and other risk
factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission. The Company wishes to caution readers not to
place undue reliance on any such forward looking statements, which statements
are made pursuant to the Private Securities Litigation Reform Act of 1995 and,
as such, speak only as of the date made.
26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations. The Company has some cash
flow exposure on its long-term debt obligations to changes in market interest
rates. The Company primarily enters into long-term debt obligations in
connection with the development and financing of hotels. The Company maintains a
mix of fixed and floating debt to mitigate its exposure to interest rate
fluctuations.
The Company's management believes that fluctuations in interest rates in the
near term would not materially affect the Company's consolidated operating
results, financial position or cash flows as the Company has limited risks
related to interest rate fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements filed as a part of this Form 10-K are
included under "Exhibits, Financial Statements and Reports on Form 8-K" under
Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements on accounting and financial disclosure matters
which are required to be described by Item 304 of Regulation S-K.
27
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers and directors are:
Name Age Position
---- --- --------
Michael P. Holtz 43 Chairman of the Board of Directors, President
and Chief Executive Officer
James B. Dale 36 Senior Vice President of Finance, Secretary,
Treasurer and Chief Financial Officer
Russell J. Cerqua 43 Director
Reno J. Bernardo 68 Director
Salomon J. Dayan 54 Director
Jon K. Haahr 46 Director
Thomas J. Romano 47 Director
Michael P. Holtz has been a Director of the Company since August 1985. From 1985
to 1989, Mr. Holtz served as the Company's Treasurer and Secretary. In 1986, Mr.
Holtz was promoted to Chief Operating Officer of the Company with direct
responsibility for the Company's day-to-day operations. In 1989, Mr. Holtz was
elected President and Chief Executive Officer of the Company. In 1999, in
addition to his other responsibilities, Mr. Holtz was elected Chairman of the
Board of Directors. Mr. Holtz is responsible for development and implementation
of all Company operations including hotel development, finance and management.
Mr. Holtz has over 20 years experience in the operation, development and
management of hotel properties.
James B. Dale was promoted to Chief Financial Officer in 1998, in addition to
his responsibilities as Senior Vice President of Finance. Mr. Dale began his
employment with the Company in May 1994 as the Company's first Corporate
Controller. He has been responsible for overseeing all aspects of the Company's
property and corporate accounting departments, including preparation of all SEC
filings. In 1999, Mr. Dale was elected Secretary by the Board of Directors.
Prior to joining the Company, Mr. Dale was an Audit Manager with BDO Seidman,
LLP, the Company's external auditors, with nearly nine years of experience in
auditing, financial reporting and taxation. Mr. Dale is a Certified Public
Accountant and is a member of the American Institute of Certified Public
Accountants and the Illinois CPA Society.
Russell J. Cerqua served as the Executive Vice President of Finance, Chief
Financial Officer, Treasurer and Secretary of the Company from 1987 through
1998, where his primary responsibilities included internal and external
financial reporting, corporate financing, development of financial management
systems, and financial analysis. Mr. Cerqua continues to serve as a Director of
the Company. Mr. Cerqua is currently the Chief Financial Officer of Metro
Technologies, L.L.C. Prior to joining the Company, Mr. Cerqua was an audit
manager with Laventhol & Horwath, the Company's former independent certified
public accountants. Mr. Cerqua was involved in public accounting for over 9
years, with experience in auditing, financial reporting and taxation. Mr. Cerqua
is a Certified Public Accountant.
Reno J. Bernardo served as the Senior Vice President of Construction of the
Company from 1987 through March 1994, when he retired. His primary
responsibilities included managing construction of new properties and directing
renovation projects. In 1989, Mr. Bernardo became a Director of the Company and
continues to serve in this capacity. From 1985 to 1986, Mr. Bernardo was Vice
President of Construction with Devcon Corporation, a hotel construction company.
From 1982 to 1985, Mr. Bernardo was Project Superintendent with J.R. Trueman and
Associates, a hotel
28
construction company, and a subsidiary of Red Roof Inns, where his
responsibilities included supervision of the development and construction of
several Red Roof Inns.
Salomon J. Dayan, M.D. has been a director of the Company since August 1996.
Since 1980, Dr. Dayan, a physician certified in internal and geriatric medicine,
has been the Chief Executive Officer of Salomon J. Dayan Ltd., a multi-specialty
medical group which he founded and which is dedicated to the care of the elderly
in hospital and nursing home settings. Since 1986, Dr. Dayan has been the
Medical Director and Executive Director of Healthfirst, a corporation which
operates multiple medical ambulatory facilities in the Chicago, Illinois area,
and since 1994 he has also been an assistant professor at Rush Medical Center in
Chicago. Dr. Dayan is currently the Chairman of the Board of Directors of J. D.
Financial, a bank holding company owning Pan American Bank. Dr. Dayan also has
numerous investments in residential and commercial real estate.
Jon K. Haahr has been a director of the Company since May 1999. Mr. Haahr is the
Managing Director of Investment Banking for First Union Securities, Inc. Real
Estate Group. Mr. Haahr joined First Union Investment Banking Department in 1987
and, prior to establishing the Real Estate Group, provided banking expertise to
corporate finance clients in the financial services sector and in the area of
closed-end funds. His experience includes six years at Continental Bank in
Chicago where he was an officer of the bank providing corporate lending and
capital markets services to middle market companies. Mr. Haahr is a member of
the Board of Directors of the Center for Urban Land Economics Research at the
University of Wisconsin Real Estate School, and speaks regularly at a variety of
real estate industry events.
Thomas J. Romano has been a director of the Company since September 1999. Mr.
Romano is currently an Executive Vice President and Chief Credit Officer for the
Bridgeview Bank Group. Mr. Romano is a member of the Executive Management
Committee and is responsible for all lending activities for a significant loan
portfolio. In addition, Mr. Romano manages the credit underwriting department.
His experience includes nineteen years with First of America Bank where his
responsibilities included the management of commercial lending functions and
numerous branch locations. Mr. Romano is currently a member of the Lake County
Muscular Dystrophy Association and a member of Robert Morris Associates.
Dr. Dayan purchased approximately 10,000 shares of the Company's Common Stock in
July, August and September 1999. These transactions were not reported to the SEC
on Form 4 pursuant to Registration S-K until December 1999.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the annual and
long-term compensation for services as officers to the Company for the fiscal
years ended December 31, 1999, 1998 and 1997, of those persons who were, at
December 31, 1999: The chief executive officer and the other executive officer
of the Company (the "Named Officers"). See "Compensation of Directors" under
Item 11.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Annual Compensation --------------------
----------------------------- Restricted Securities
Name and Principal Stock Underlying All Other
Position Year Salary Bonus Awards Options(#)(1) Compensation(2)
- ------------------------ ------ -------- ---------- ----------- -------------- ---------------
Michael P. Holtz 1999 325,000 20,000 - - 17,500
Chairman of the Board, President 1998 325,000 20,000 - 256,100 12,633
and Chief Executive Officer 1997 334,615 - - 50,000 12,375
James B. Dale 1999 120,000 5,500 - 20,500 1,251
Senior Vice President Finance, 1998 98,462 - - - 1,031
Secretary, Treasurer, and
Chief Financial Officer
(1) All options were fully vested as of December 31, 1999, except for 25,100
options held by Mr. Holtz and 14,500 options held by Mr. Dale.
29
(2) Represents life insurance premiums paid by the Company on behalf of the
Named Officers and the Company's 401(k) matching contributions of $2,500
and $1,251 for Messrs. Holtz and Dale, respectively. Amounts for 1998
include the Company's 401(k) matching contributions of $2,633 and $1,031
for Messrs. Holtz and Dale, respectively.
STOCK OPTIONS
The following table summarizes the number and terms of stock options granted to
each of the Named Officers during the year ended December 31, 1999.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
----------------------------------------------------------- -----------------------------
% of Total
Options
Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- --------------- ------------ --------------- ------------ ------------ ---------- ---------
James B. Dale 18,000 11.8% $3.31 Jan. 2009 34,815 84,217
2,500 1.6 3.69 Oct. 2009 4,387 12,250
-------- ------ ------- ------
20,500 13.4% 39,202 96,467
====== ==== ====== ======
The following table provides information concerning the exercise of stock
options during 1999, and the year-end value of unexercised options for each of
the Named Officers and Directors of the Company.
OPTION EXERCISES AND YEAR-END VALUE TABLE
Number of Unexercised Value of Unexercised
Options Held at in-the-Money Options at
Shares December 31, 1999 December 31, 1999 (1)
Acquired Value --------------------------- -------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------- ----------- -------- ----------- ------------- ----------- -------------
Michael P. Holtz - - 701,000 25,100 $ 92,188 $ -
James B. Dale - - 26,500 14,500 375 750
Russell J. Cerqua - - 198,958 1,000 28,809 -
Reno J. Bernardo - - 3,000 1,000 - -
Salomon J. Dayan - - 33,000 1,000 - -
Jon K. Haahr - - - 1,000 - -
Thomas J. Romano - - - - - -
(1) The closing sale price of the Company's Common Stock on such date on the
Nasdaq National Market was $3.38.
EMPLOYMENT AGREEMENT
The Company's President and Chief Executive Officer, Michael P. Holtz, provides
services to the Company under the terms of an employment agreement dated January
1, 1995, amended February 4, 1997 and amended November 23, 1999. On April 22,
1997, Mr. Holtz exercised his option to renew his agreement for an additional
three-year period ending December 31, 2000. Pursuant to Amendment No. 3 dated
November 23, 1999, the agreement renewed for an additional three-year period
ending December 31, 2003. On January 1, 1998, Mr. Holtz received options to
purchase a minimum of 256,100 shares of the Company's common stock at the market
price on date of issuance under the Company's 1996 Omnibus Incentive Stock Plan,
of which 110,000 vested immediately, 121,000 vested on July 1, 1999 and 25,100
will vest on July 1, 2000. Pursuant to Amendment No. 3, Mr. Holtz will receive
100,000 options each year,
30
with 50,000 vesting 90 days from the date of issuance and 50,000 vesting only if
the Company attains certain financial performance criteria. Amendment No. 3 also
provides for a cash bonus based upon financial performance, franchising growth
and hotel operation performance. Under the terms of the amended employment
agreement, stock awards were eliminated as a component of annual compensation.
The employment agreement entitles the executive officer to receive severance
payments, equal to two years' compensation, if his employment is terminated by
the Company without cause or if he elects to terminate such employment for a
"good reason," including a change of control of the Company. For purposes of the
employment agreements, a change of control means (i) any change in the Company's
Board of Directors such that a majority of the Board of Directors is composed of
members who were not members of the Board of Directors on the date the
employment agreement was made or (ii) removal of the executive from membership
on the Board of Directors by a vote of a majority of the shareholders of the
Company or failure of the Board of Directors to nominate the executive for
re-election to Board membership. In 1998, Mr. Holtz agreed that a change in a
majority of the members as described in (i) above shall no longer constitute a
"good reason" for electing to terminate his employment agreement. The executive
officer is also entitled to severance payments, equal to one year's
compensation, if he voluntarily terminates his employment with the Company for a
reason other than a "good reason" and provides appropriate notice of such
resignation.
COMPENSATION OF DIRECTORS
Each nonemployee Director of the Company received an annual retainer fee of
$9,000 ($750 per month) in 1999. Each nonemployee Director of the Company also
received $250 for each Board of Directors meeting attended in person, $150 for
each Board of Directors meeting conducted by telephone and $150 for each
committee meeting. Each Director is reimbursed for all out-of-pocket expenses
related to attendance at Board meetings.
Each nonemployee Director of the Company receives an option to purchase 1,000
shares of Common Stock annually, pursuant to the 1996 Stock Option Plan for
Nonemployee Directors. In addition, beginning in 2000, each Director will
receive 2,500 options annually which vest only if the Company meets certain
performance criteria, including earnings per share and EBITDA. All Director
stock options are priced at the market price on the date of issuance.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 17 2000, by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's Directors, (iii) each of the Named
Officers and (iv) all Directors and executive officers as a group.
Shares Beneficially Owned
As of March 17, 2000
---------------------
Name Number Percent
- ----------------------------- ------------------ ----------
Michael P. Holtz 907,857 (1) 16.0%
Wellington Management Company 615,000 (2) 12.4
Massachusetts Financial Services Company 527,000 (3) 10.6
Dimensional Fund Advisors, Inc. 408,100 (4) 8.2
Raymond and Liliane R. Dayan 364,774 (5) 7.3
Salomon J. Dayan 361,059 (1) 7.0
H. Andrew Torchia 354,989 (6) 6.9
Russell J. Cerqua 257,413 (1) 5.0
Reno J. Bernardo 34,612 (1) 0.7
James B. Dale 33,775 (1) 0.7
Jon K. Haahr 2,400 0.1
Thomas J. Romano 4,700 0.1
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (7 PERSONS) 1,601,816 26.4%
============ =======
31
______________________
(1) Includes shares subject to options exercisable presently or within 60 days
as follows: Mr. Holtz, 701,000 shares, Dr. Dayan, 157,676 shares, Mr.
Cerqua, 198,958 shares, Mr. Bernardo, 3,000 shares, and Mr. Dale, 32,500
shares.
(2) Based upon information provided in its Schedule 13G dated December 31,
1999, Wellington Management Company ("WMC"), in its capacity as investment
advisor, may be deemed beneficial owner of 615,000 shares of the Company
which are owned by numerous investment counseling clients. Of the shares
shown above, WMC has shared voting power for 615,000 shares and shared
investment power for 615,000 shares.
(3) Based upon information provided in its Schedule 13G dated February 8, 2000,
Massachusetts Financial Services Company ("MFS"), in its capacity as
investment manager, may be deemed beneficial owner of 527,000 shares of the
Company which are also beneficially owned by MFS Series Trust II - MFS
Emerging Growth Stock Fund, shares of which are owned by numerous
investors. MFS has sole voting and investment power for the 527,000 shares.
(4) Based upon information provided in its Schedule 13G dated February 3, 2000,
Dimensional Fund Advisors, Inc. ("DFA"), in its capacity as investment
advisor, may be deemed beneficial owner of 408,100 shares of the Company
which are owned by numerous investment counseling clients. Of the shares
shown above, DFA has sole voting and investment power for 408,100 shares.
(5) Based upon information provided in their Schedule 13D dated August 25,
1997, Mr. and Mrs. Dayan beneficially own 364,744 shares of the Company. Of
the shares shown above, Mr. and Mrs. Dayan have sole voting and investment
power for 364,774 shares.
(6) Based upon information provided in his 13D dated December 2, 1996. Includes
375,832 shares owned by Urban 2000 Corp. Mr. Torchia is the 51% stockholder
of Urban 2000 Corp. and disclaims beneficial ownership of all but an
aggregate of 195,589 shares owned directly, or indirectly, by Urban 2000
Corp. Also includes 150,000 options currently exercisable.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In the past, certain of the Company's directors and executive officers have,
directly or indirectly, invested in joint ventures with the Company. For
example, Dr. Dayan, a director of the Company, has invested approximately $1.6
million in seven joint ventures since 1988. Dr. Dayan and each of the Company's
directors and executive officers who have made such investments have done so on
the same terms as all other investors in such joint ventures.
Mr. Romano is an executive officer of Bridgeview Bank & Trust, which is the bank
that maintains the Company's operating line-of-credit.
32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
Financial Statements:
---------------------
The following consolidated financial statements are filed as part of this Report
on Form 10-K for the fiscal year ended December 31, 1999.
(a)(1) Financial Statements:
Report of Independent Certified Public Accountants....... F-1
Consolidated Balance Sheets at December 31, 1999
and 1998................................................ F-2
Consolidated Statements of Operations for the years
ended December 31, 1999, 1998 and 1997.................. F-4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999, 1998 and 1997... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 1999, 1998 and 1997.................. F-6
Notes to Consolidated Financial Statements............... F-8
(a)(2) Financial Statement Schedules:
No financial statement schedules are submitted as part of this report because
they are not applicable or are not required under regulation S-X or because the
required information is included in the financial statements or notes thereto.
(a)(3) Exhibits:
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
Amerihost Properties, Inc.
3.2 By-laws of Amerihost Properties, Inc.
4.2 Specimen Common Stock Purchase Warrant for Employees
4.3 Specimen 7% Subordinated Note
4.4 Specimen Common Stock Purchase Warrant for 7%
Subordinated Noteholders
4.5 Form of Registration Rights Agreement for 7%
Subordinated Noteholders
33
The following exhibits were included in the Registrant's Amendment No. 1 to Form
S-2 filed on July 3, 1996, and are incorporated by reference herein:
Exhibit No. Description
----------- -----------
10.4 Employment Agreement between Amerihost Properties,
Inc. and Michael P. Holtz
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 exhibits were included in the Registrant's Report on Form 10-K
filed March 24, 1997; and are incorporated herein by reference:
Exhibit No. Description
----------- -----------
10.9 Amendment of Employment Agreement between Amerihost
Properties, Inc. and Michael P. Holtz
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 Amerihost Properties, Inc., including
exhibits thereto
The following exhibits are included in this Report on Form 10-K filed March
23, 2000:
Exhibit No. Description
- ----------- -----------
10.6 Amendment No. 3 of Employment Agreement between
Amerihost Properties, Inc. and
Michael P. Holtz
21.1 Subsidiaries of the Registrant
23.1 Consent of BDO Seidman, LLP
27.0 Financial Data Schedule
Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter ended December 31,
1999.
34
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.
AMERIHOST PROPERTIES, INC.
By: /s/ Michael P. Holtz
------------------------
Michael P. Holtz
Chief Executive Officer
By: /s/ James B. Dale
------------------------
James B. Dale
Chief Financial Officer
March 21, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Michael P. Holtz /s/ Reno J. Bernardo
- ---------------------------------- ---------------------------------
Michael P. Holtz, Director Reno J. Bernardo, Director
March 21, 2000 March 21, 2000
/s/ Russell J. Cerqua /s/ Jon K. Haahr
- ---------------------------------- ---------------------------------
Russell J. Cerqua, Director Jon K. Haahr, Director
March 21, 2000 March 21, 2000
/s/ Salomon J. Dayan /s/ Thomas Romano
- ---------------------------------- -----------------
Salomon J. Dayan, Director Thomas Romano, Director
March 21, 2000 March 21, 2000
35
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors of
Amerihost Properties, Inc.
We have audited the accompanying consolidated balance sheets of Amerihost
Properties, Inc. and subsidiaries as of December 31, 1999 and 1998 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Amerihost Properties, Inc. and subsidiaries at December 31, 1999 and 1998, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1999, in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1998 the
Company adopted Statement of Position (SOP) Number 98-5, "Reporting on the Costs
of Start-Up Activities."
BDO Seidman, LLP
Chicago, Illinois
March 8, 2000
F-1
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=================================================================================================================
December 31, December 31,
1999 1998
------------------ -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,766,323 $ 4,493,834
Accounts receivable (including $213,911 and $290,859
from related parties) 2,901,615 2,931,216
Notes receivable, current portion (Note 2) 568,485 168,061
Prepaid expenses and other current assets 971,836 902,457
Refundable income taxes 56,876 1,261,194
Costs and estimated earnings in excess of billings on
uncompleted contracts with related parties (Note 3) 834,820 649,858
--------------- --------------
Total current assets 9,099,955 10,406,620
--------------- --------------
Investments in and advances to unconsolidated
hotel joint ventures (Notes 4 and 6) 7,332,806 5,331,247
--------------- --------------
Property and equipment (Notes 6, 7 and 13):
Land 8,786,189 9,926,105
Buildings 56,670,991 65,506,004
Furniture, fixtures and equipment 17,758,161 14,799,111
Construction in progress 1,062,888 6,094,542
Leasehold improvements 1,990,822 1,156,174
Assets held for sale 7,967,318 9,075,179
--------------- --------------
94,236,369 106,557,115
Less accumulated depreciation and amortization 15,466,013 15,219,135
--------------- --------------
78,770,356 91,337,980
--------------- --------------
Notes receivable, less current portion (Note 2) 692,662 1,181,962
Deferred income taxes (Note 9) 4,327,000 3,904,000
Other assets, net of accumulated amortization of
$1,871,416 and $2,325,451 (Note 5) 2,885,388 3,118,979
--------------- --------------
7,905,050 8,204,941
$ 103,108,167 $ 115,280,788
=============== ==============
F-2
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
=================================================================================================================
December 31, December 31,
1999 1998
------------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,623,390 $ 5,638,250
Bank line-of-credit (Note 6) 7,560,214 1,961,213
Accrued payroll and related expenses 777,725 1,180,674
Accrued real estate and other taxes 2,260,048 2,285,333
Other accrued expenses and current liabilities 1,127,504 756,308
Current portion of long-term debt (Note 7) 1,567,643 5,508,498
--------------- --------------
Total current liabilities 15,916,524 17,330,276
--------------- --------------
Long-term debt, net of current portion (Note 7) 58,781,609 66,332,566
--------------- --------------
Deferred income (Note 13) 14,001,231 13,164,007
--------------- --------------
Commitments (Notes 8, 12 and 13)
Minority interests 228,235 138,131
--------------- --------------
Shareholders' equity (Notes 8 and 12):
Preferred stock, no par value; authorized 100,000 shares;
none issued - -
Common stock, $.005 par value; authorized 25,000,000 shares;
issued and outstanding 4,968,673 shares at December 31,
1999, and 6,089,550 shares at December 31, 1998 24,843 30,448
Additional paid-in capital 13,050,069 17,380,295
Retained earnings 1,542,531 1,341,940
--------------- --------------
14,617,443 18,752,683
Less:
Stock subscriptions receivable (Note 8) (436,875) (436,875)
14,180,568 18,315,808
$ 103,108,167 $ 115,280,788
=============== ==============
See notes to consolidated financial statements.
F-3
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
======================================================================================================================
1999 1998 1997
------------------ ------------------- -----------------
Revenue (NOTE 10):
Hotel operations:
AmeriHost Inn(R)hotels $ 49,508,745 $ 33,095,525 $ 14,655,498
Other hotels 12,587,253 14,232,886 17,223,293
Development and construction 6,431,995 8,968,111 14,639,746
Management services 1,315,212 2,251,962 3,023,944
Employee leasing 5,992,580 10,069,705 13,123,035
Franchising 222,187 - -
---------------- --------------- ---------------
76,057,972 68,618,189 62,665,516
---------------- --------------- ---------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn(R)hotels 34,866,053 23,419,321 11,066,502
Other hotels 10,260,074 11,348,680 13,276,726
Development and construction 5,398,384 8,463,341 13,719,250
Management services 809,061 1,306,864 1,423,814
Employee leasing 5,747,351 9,748,110 12,798,585
Franchising 786,658 - -
---------------- --------------- ---------------
57,867,581 54,286,316 52,284,877
---------------- --------------- ---------------
18,190,391 14,331,873 10,380,639
Depreciation and amortization 4,567,030 5,486,529 4,532,500
Leasehold rents - hotels (Note 13) 7,306,691 4,192,348 1,728,933
Corporate general and administrative 1,537,052 1,568,561 2,139,647
Operating income 4,779,618 3,084,435 1,979,559
Other income (expense):
Interest expense (6,031,759) (6,113,369) (4,053,933)
Interest income 877,194 521,250 755,115
Other income 555,749 227,822 136,018
Equity in net income and losses of affiliates (160,837) (240,868) (516,583)
Gain on sale of assets 553,298 305,484 1,697,999
Non-recurring expenses (Note 16) - - (1,874,492)
Income (loss) before minority interests and income taxes 573,263 (2,215,246) (1,876,317)
Minority interests in operations of
consolidated subsidiaries and partnerships (212,672) 267,801 172,874
Income (loss) before income taxes 360,591 (1,947,445) (1,703,443)
Income tax (expense) benefit (Note 9) (160,000) 780,000 737,000
Income (loss) before extraordinary item and
cumulative effect of change in accounting principle 200,591 (1,167,445) (966,443)
Extraordinary item - early extinguishment of debt,
net of income tax benefit (Note 17) - (332,738) -
Cumulative effect of change in accounting
principle, net of income tax benefit (Note 1) - (1,295,891) -
Net income (loss) $ 200,591 $ (2,796,074) $ (966,443)
================ =============== ==============
Income (loss) per share - Basic, before
extraordinary item and accounting change $ 0.04 $ (0.19) $ (0.15)
Net income (loss) per share - Basic $ 0.04 $ (0.45) $ (0.15)
Income (loss) per share - Diluted, before
extraordinary item and accounting change $ 0.02 $ (0.20) $ (0.19)
Net income (loss) per share - Diluted $ 0.02 $ (0.45) $ (0.19)
See notes to consolidated financial statements.
F-4
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
====================================================================================================================================
Common stock Stock
--------------------- subscrip-
Additional Retained tions Total
paid-in earnings and notes shareholders'
Shares Amount capital (Deficit) receivable equity
------ ------ ------- --------- ---------- ----------
BALANCE AT JANUARY 1, 1997 6,036,921 30,185 17,170,154 5,104,457 $(1,393,167) 20,911,629
Shares issued for compensation 9,350 47 49,092 - - 49,139
Exercise of common stock options 508,750 2,544 2,259,281 - - 2,261,825
Acquisition of common stock (157,073) (786 (1,094,964) - - (1,095,750)
Compensation recognized relating to employee
stock options granted - - 301,465 - - 301,465
Tax benefit relating to the exercise of
non-qualified options - - 356,533 - - 356,533
Repayment of notes receivable from officers (Note 8) (185,023) (925) (1,180,906) - 956,292 (225,539)
Net loss for the year ended December 31, 1997 - - - (966,443) - (966,443)
BALANCE AT DECEMBER 31, 1997 6,212,925 31,065 17,860,655 4,138,014 (436,875) 21,592,859
Acquisition of common stock (Note 8) (123,550) (618) (480,810) - - (481,428)
Shares issued for compensation 175 1 450 - - 451
Net loss for the year ended December 31, 1998 - - - (2,796,074) - (2,796,074)
BALANCE AT DECEMBER 31, 1998 6,089,550 $ 30,448 $17,380,295 $ 1,341,940 $(436,875) $18,315,808
Acquisition of common stock (Note 8) (1,121,002) (5,606) (4,330,558) - - (4,336,164)
Shares issued for compensation 125 1 332 - - 333
Net income for the year ended December 31, 1999 - - - 200,591 - 200,591
BALANCE AT DECEMBER 31, 1999 4,968,673 $ 24,843 $13,050,069 $ 1,542,531 $(436,875) $14,180,568
========= ========= =========== ============ ========== ===========
See notes to consolidated financial statements.
F-5
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
======================================================================================================================
1999 1998 1997
------------------ ------------------- -----------------
Cash flows from operating activities:
Cash received from customers $ 80,716,593 $ 71,281,629 $ 65,006,272
Cash paid to suppliers and employees (76,876,079) (58,610,075) (57,063,416)
Interest received 729,089 976,771 546,889
Interest paid (6,076,002) (6,089,595) (3,994,403)
Income taxes (paid) refunds received 621,319 (2,150,460) (939,572)
Contract and employment termination costs - - (1,697,448)
Net cash (used in) provided by operating activities (885,080) 5,408,270 1,858,322
--------------- --------------- ---------------
Cash flows from investing activities:
Distributions, and collections on advances,
from affiliates 967,465 2,805,517 2,274,863
Purchase of property and equipment (2,102,832) (42,182,698) (29,343,109)
Purchase of investments in, and advances
to, minority owned affiliates (3,124,618) (2,790,036) (4,658,738)
Acquisitions of partnership interests,
net of cash acquired (260,648) (8,358,145) 156,067
Increase in notes receivable - - (6,000)
Collections on notes receivable 138,876 1,465,378 139,050
Preopening and management contract costs - (223,230) (416,195)
Proceeds from sale of assets 16,726,198 64,838,108 3,390,576
Net cash provided by (used in) investing activities 12,344,441 15,554,894 (28,463,486)
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 7,203,482 31,593,918 34,813,511
Principal payments on long-term debt (20,328,540) (49,875,365) (8,880,899)
Net proceeds from (repayments of) line of credit 5,599,002 671,504 (417,715)
Decrease in minority interest (324,985) (731,691) (578,300)
Proceeds from issuance of common stock 333 451 1,166,075
Aborted stock offering and merger costs - - (177,044)
Common stock repurchases (4,336,164) (477,650) -
Net cash (used in) provided by financing activities (12,186,872) (18,818,833) 25,925,628
Net (decrease) increase in cash and cash equivalents (727,511) 2,144,331 (679,536)
Cash and cash equivalents, beginning of year 4,493,834 2,349,503 3,029,039
Cash and cash equivalents, end of year $ 3,766,323 $ 4,493,834 $ 2,349,503
=============== =============== ===============
F-6
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
1999 1998 1997
------------------ ------------------- -----------
Reconciliation of net income (loss)
to net cash (used in) provided by operating
activities:
Net income (loss) $ 200,591 $ (2,796,074) $ (966,443)
Adjustments to reconcile net income (loss) to
net cash (used in) provided by operating activities:
Depreciation and amortization 4,567,030 5,486,529 4,532,500
Equity in net income (loss) of affiliates and
amortization of deferred income 160,837 240,868 516,583
Minority interests in operations of subsidiaries 212,672 (267,801) (172,874)
Amortization of deferred interest and loan discount 34,045 45,393 39,760
Bad debt expense (150,000) - 200,000
Compensation recognized through issuance of common
stock and common stock options - - 350,604
Gains on sale of investments, property
and equipment (528,297) (305,484) (1,697,999)
Aborted stock offering and merger costs - - 177,044
Deferred income taxes (423,000) (4,012,000) 279,000
Amortization of deferred gain (1,462,096) (643,726) -
Extraordinary item and cumulative effect of change
in accounting principle - 2,157,195 -
Changes in assets and liabilities, net of effects
of acquisitions:
Decrease in accounts receivable 156,910 1,017,942 1,613,450
Increase in prepaid expenses and other
current assets (211,565) (612,070) (188,264)
Decrease (increase) in refundable income taxes 1,204,318 1,081,540 (1,955,572)
(Increase) decrease in costs and estimated earnings
in excess of billings (184,962) 1,263,245 170,156
(Increase) decrease in other assets (358,890) 1,494,948 (1,137,535)
Increase in assets held for sale (959,002) - -
Decrease in accounts payable (3,035,113) (46,020) (557,958)
(Decrease) increase in accrued payroll and other
accrued expenses and current liabilities (37,645) 713,282 220,601
(Decrease) increase in accrued interest (78,288) (21,619) 14,137
Increase in deferred income 7,375 612,122 421,132
Net cash (used in) provided by operating activities $ (885,080) $ 5,408,270 $ 1,858,322
=============== ============== =============
See notes to consolidated financial statements.
F-7
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization:
-------------
Amerihost Properties, Inc. and its subsidiaries (collectively, where
appropriate, "Amerihost," or the "Company") was incorporated under the
laws of Delaware on September 19, 1984. The Company is engaged in the
development and construction of AmeriHost Inn(R) hotels, its
proprietary hotel brand, the ownership, operation and management of
both AmeriHost Inn(R) hotels and other hotels and the franchising of
the AmeriHost Inn(R) brand. The AmeriHost Inn(R) brand was created by
the Company to provide for the consistent, cost-effective development
and operation of mid-price hotels in various markets. All AmeriHost
Inn(R) hotels are designed and developed using the Company's 60 to 120
room, interior corridor and indoor pool prototype design and are
located in tertiary and secondary markets.
Principles of consolidation:
----------------------------
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries, and entities in which the
Company has a majority ownership interest. All significant intercompany
accounts and transactions have been eliminated.
Construction accounting:
------------------------
Development fee revenue from construction/renovation projects is
recognized using the percentage-of-completion method over the period
beginning with the execution of contracts and ending with the
commencement of construction/renovation.
Construction fee revenue from construction/renovation projects is
recognized on the percentage-of-completion method, generally based on
the ratio of costs incurred to estimated total contract costs. Revenue
from contract change orders is recognized to the extent costs incurred
are recoverable. Profit recognition begins when construction reaches a
progress level sufficient to estimate the probable outcome. Provision
is made for anticipated future losses in full at the time they are
identified.
Franchise fee revenue:
----------------------
Franchise fees consist of a non-refundable application fee, an initial
franchise fee and monthly royalties based on the franchised hotel's
revenue. The application fee is recognized upon receipt. The initial
franchise fee is recognized as revenue when all material services or
conditions relating to the sale have been substantially performed. The
monthly royalty fee is recognized in the month in which the hotel
revenue was earned.
Cash equivalents:
-----------------
The Company considers all investments with an initial maturity of three
months or less to be cash equivalents.
F-8
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
Concentrations of credit risk:
------------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments, accounts receivable and notes receivable. The Company
invests temporary cash balances in financial instruments of highly
rated financial institutions generally with maturities of less than
three months. A substantial portion of accounts receivable are from
hotel guests staying at the Company's hotels located in the midwestern
United States, where collateral is generally not required, from these
same hotels for hotel management and payroll fees, and from hotel
operators for the development and construction of hotels pursuant to
written contracts.
Fair values of financial instruments:
-------------------------------------
The carrying values reflected in the consolidated balance sheet at
December 31, 1999 reasonably approximate the fair values for cash and
cash equivalents, accounts and contracts receivable and payable, and
variable rate long-term debt. The note receivable is collateralized by
shares of the Company's common stock, investments in hotels, a second
mortgage on a hotel property, and personal guarantees.
Construction/renovation and working capital notes are repaid to the
Company within a relatively short period after their origination. The
notes receivable bear interest at rates approximating the current
market rates and the carrying value approximates their fair value. The
Company estimates that the fair value of its fixed rate long-term debt
at December 31, 1999 approximates the carrying value considering the
property specific nature of the notes and in certain cases, the
subordinated nature of the debt. In making such assessments, the
Company considered the current rate at which the Company could borrow
funds with similar remaining maturities and discounted cash flow
analyses as appropriate.
Investments:
------------
Investments in entities in which the Company has a non-majority
ownership interest are accounted for using the equity method, under
which method the original investment is adjusted for the Company's
share of operations, and is reduced by distributions when received.
Property and equipment:
-----------------------
Property and equipment are stated at cost. Repairs and maintenance are
charged to expense as incurred and renewals and betterments are
capitalized. Depreciation is being provided for assets placed in
service, principally by use of the straight-line method over their
estimated useful lives. Leasehold improvements are being amortized by
use of the straight-line method over the term of the lease.
Construction period interest in the amount of $121,238, $176,920 and
$548,469 was capitalized in 1999, 1998 and 1997, respectively, and is
included in property and equipment.
F-9
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIE
(CONTINUED):
For each classification of property and equipment, depreciable periods
are as follows:
Building 31.5-39 years
Furniture, fixtures and equipment 5-7 years
Leasehold improvements 3-10 years
Assets held for sale include hotels which have opened during the last
twelve months, and where the Company is actively attempting to sell the
property. These assets which are sold within the first twelve months
after opening are recorded as development revenue and expense on the
date the assets are sold.
Other assets:
-------------
Investment in leases:
Investment in leases represents the amounts paid for the acquisition of
leasehold interests for certain hotels. These costs are being amortized
by use of the straight-line method over the terms of the leases.
Costs of management contracts acquired and preopening costs:
The costs of management contracts acquired and preopening costs were
being capitalized and amortized by use of the straight-line method
prior to 1998. During 1998, the Company adopted Statement of Position
(SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities," which
requires these costs to be expensed as incurred. As a result of the
adoption of SOP 98-5, all previously capitalized costs, net of an
income tax benefit of approximately $864,000, were written-off as a
cumulative effect of a change in accounting principle. The pro forma
effect on earnings of accounting for start-up activities pursuant to
SOP No. 98-5 is as follows for 1997:
1997
---------------
Pro forma net income (loss) $ (1,729,842)
Pro forma net income (loss) per share:
Basic $ (0.28)
Diluted $ (0.31)
Deferred loan costs:
Deferred loan costs represent the costs incurred in issuing mortgage
notes. These costs are being amortized by use of the interest method
over the life of the debt.
F-10
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
Initial franchise fees:
Initial franchise fees paid by the Company to franchisors for certain
hotels are capitalized and amortized by use of the straight-line method
over the terms of the franchise licenses, ranging from 10 to 20 years.
Deferred income:
----------------
Deferred income includes the gain on the sale and leaseback of 30
hotels during 1998 and 1999 (Note 13). This gain is being recognized on
a straight-line basis over the 10-year term of the lease as an
adjustment to leasehold rent expense.
Deferred income also includes that portion of development, construction
and renovation fees earned from entities in which the Company holds an
ownership interest. The portion of fees deferred is equal to the
Company's proportional ownership interest in the entity and is being
recognized in income over the life of the operating assets. The balance
of the fees are recorded in income as earned.
Income taxes:
-------------
Deferred income taxes are provided on the differences in the bases of
the Company's assets and liabilities as determined for tax and
financial reporting purposes and relate principally to depreciation of
property and equipment and deferred income.
Earnings per share:
-------------------
The Company calculates earnings per share in accordance with Financial
Accounting Standards Board ("FASB") Statement No. 128, "Earnings Per
Share" (FAS 128). Basic earnings per share ("EPS") is calculated by
dividing the income (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period,
without consideration for common stock equivalents. The Company
excluded stock options which had an anti-dilution effect on the EPS
computations. Diluted EPS gives effect to all dilutive potential common
shares outstanding for the period.
F-11
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
The calculation of basic and diluted earnings per share for each of the
three years ended December 31 is as follows:
1999 1998 1997
--------------- ---------------- ---------------
Income (loss), before extraordinary
item and cumulative effect of change
in accounting principle $ 200,591 $ (1,167,445) $ (966,443)
Extraordinary item (Note 13) - (332,738) -
Accounting change (Note 1) - (1,295,891) -
------------ --------------- -------------
Net income (loss) 200,591 (2,796,074) (966,443)
Impact of convertible partnership interests (88,117) (157,333) (325,291)
-------------- -------------- --------------
Net income (loss) available to common
shareholders $ 112,474 $ (2,953,407) $ (1,291,734)
============= ============== ==============
1999 1998 1997
--------------- ---------------- ----------------
Average common shares outstanding 5,566,957 6,180,279 6,282,874
Dilutive effect of:
Convertible partnership interests 249,350 332,579 376,225
Stock options 40,373 - -
Dilutive common shares outstanding 5,856,680 6,512,858 6,659,099
============= ============== ==============
Income (loss) per share - Basic, before
extraordinary item and accounting change$ 0.04 $ (0.19) $ (0.15)
Extraordinary item - (0.05) -
Accounting change - (0.21) -
Net income (loss) per share - Basic $ 0.04 $ (0.45) $ (0.15)
============= ============= =============
Income (loss) per share - Diluted, before
extraordinary item and accounting change$ 0.02 $ (0.20) $ (0.19)
Extraordinary item - (0.05) -
Accounting change - (0.20) -
$
Net income (loss) per share - Diluted $ 0.02 $ (0.45) $ (0.19)
============= ============= =============
F-12
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED):
Advertising:
------------
The costs of advertising, promotion and marketing programs are charged
to operations in the year incurred. These costs were approximately
$1,514,000, $1,883,000 and $899,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Estimates:
----------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the statements and reported amounts of revenue and expenses
during the reported periods. Actual results may differ from those
estimates.
Reclassifications:
------------------
Certain reclassifications have been made to the 1997 and 1998 financial
statements in order to conform to the 1999 presentation.
Asset impairments:
------------------
The Company periodically reviews the carrying value of certain of its
long-lived assets 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. 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 to determine if such sum is less than the carrying
value of such assets to ascertain if a permanent impairment exists. If
a permanent 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.
Impact of New Accounting Standards:
-----------------------------------
In June 1998, the FASB issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 has been amended by SFAS No.
137, which delayed the effective date to periods beginning after June
15, 2000. The Company, to date, has not engaged in derivative and
hedging activities.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." SOP 98-1 is effective
for financial statements for years beginning after December 15, 1998.
SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use, including the requirement to
F-13
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
capitalize and amortize specific costs. The adoption of this standard
did not have a material effect on its capitalization policy.
2. NOTES RECEIVABLE:
Notes receivable consists of: 1999 1998
--------------- ---------------
Diversified Innkeepers, Inc. $ 1,261,147 $ 1,250,023
Other notes - 100,000
-------------- --------------
1,261,147 1,350,023
Less current portion 568,485 168,061
-------------- --------------
Notes receivable, less current portion $ 692,662 $ 1,181,962
============== ==============
In connection with the purchase of management contracts from
Diversified Innkeepers, Inc. in a prior year, the Company accepted
notes to provide financing to the shareholders of Diversified,
collateralized by 125,000 shares of the Company's common stock, a
limited partnership interest in a hotel, a second mortgage on another
hotel property, and personal guarantees by the shareholders. The notes
as modified provide for monthly payments of $16,250, including interest
at the rate of 10% per annum, and are due the earlier of the
termination of the related management contracts or September 30, 2000.
The Company currently anticipates extending the due date for a portion
of the note for a period of three years.
3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS:
Information regarding contracts-in-progress is as follows at December
31, 1999 and 1998:
1999 1998
--------------- ---------------
Costs incurred on uncompleted contracts $319,465 $ 1,747,128
Estimated earnings 515,355 503,912
-------------- --------------
834,820 2,251,040
Less billings to date - 1,601,182
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 834,820 $ 649,858
============== ==============
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES:
The Company has ownership interests, ranging from 1% to 33.6%, in
general partnerships, limited partnerships and limited liability
companies formed for the purpose of owning and operating hotels. These
investments are accounted for using the equity method. The Company had
investments in 18 hotels at December 31, 1999 with a total balance of
($764,156), and investments in 19 hotels at December 31, 1998 with a
total balance of ($180,467).
F-14
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES
(CONTINUED):
The Company advances funds to hotels in which the Company has a
minority ownership interest for working capital and construction
purposes. The advances bear interest ranging from the prime rate to 10%
per annum and are due on demand. The Company expects the partnerships
to repay these advances through cash flow generated from hotel
operations and mortgage financing. The advances were $8,096,963 and
$5,511,714 at December 31, 1999 and 1998, respectively, and are
included in investments in and advances to unconsolidated hotel joint
ventures on the accompanying balance sheets.
During 1999 and 1998, the Company acquired additional partnership
interests in one and 15 hotels, respectively, which resulted in these
hotels being 100% or majority owned by the Company subsequent to the
acquisition dates. The following is a summary of the acquisitions:
1999 1998
------------ -------------
Fair value of assets acquired $ 1,916,070 $ 39,451,675
Cash paid, net of cash acquired,
and redemption of note receivable (260,648) (8,358,145)
----------- -------------
Liabilities assumed $ 1,655,422 $ 31,093,530
============ =============
In addition, the Company purchased 11 hotels in 1998 from entities in
which the Company held a minority ownership position, for a total
purchase price of $26.7 million, including the assumption of $13.1
million in mortgage debt.
All acquisitions have been accounted for by the purchase method of
accounting. The purchase price was allocated to the acquired hotel
assets, primarily property and equipment, based upon an estimate of
fair values at the date of acquisition. The operating results of the
acquired hotels are included in the Company's consolidated results of
operations from the dates of acquisition. Presented below are the
unaudited pro forma consolidated results of operations as though the
hotels acquired in 1998 had been acquired as of the beginning of 1997:
1998 1997
--------------- ---------------
Pro forma revenue $ 79,789,162 $ 81,478,912
Pro forma loss before extraordinary item and
cumulative effect of change in accounting principle$ (1,857,930) $ (2,344,831)
Pro forma net loss $ (3,486,559) $ (2,344,831)
Pro forma loss per share - Basic, before
extraordinary item and accounting change $ (0.30) $ (0.37)
Pro forma net loss per share - Basic $ (0.56) $ (0.37)
Pro forma loss per share - Diluted, before
extraordinary item and accounting change $ (0.31) $ (0.40)
Pro forma net loss per share - Diluted $ (0.56) $ (0.40)
F-15
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES
(CONTINUED):
The proforma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisitions been
consummated as of the above date, nor are they indicative of future
operating results.
The following represents unaudited condensed financial information for
all of the Company's investments in affiliated companies accounted for
under the equity method at December 31, 1999, 1998 and 1997.
1999 1998 1997
-------------- --------------- ---------------
Current assets $ 1,211,864 $ 2,174,945 $ 4,338,114
Noncurrent assets 35,420,633 38,398,391 88,712,619
Current liabilities 5,240,776 10,028,804 4,939,989
Noncurrent liabilities 31,494,212 27,363,973 75,359,216
Equity (102,491) 3,180,559 12,751,528
Gross revenue 15,210,884 14,995,050 33,427,950
Gross operating profit 4,853,626 4,787,471 12,100,004
Depreciation and amortization 2,422,002 2,653,699 6,025,447
Net loss (1,586,557) (630,097) (2,042,178)
5. OTHER ASSETS:
Other assets, net of accumulated amortization, at December 31, 1999 and
1998 are comprised of the following:
1999 1998
--------------- ---------------
Deposits, franchise fees and other assets $1,552,639 $1,542,712
Deferred loan costs 1,054,836 1,190,668
Investment in leases 277,913 385,599
-------------- --------------
Total $ 2,885,388 $ 3,118,979
============== ==============
6. BANK LINE-OF-CREDIT:
The Company has a $8,500,000 bank operating line-of-credit, of which
$7,560,214 and $1,961,213 was outstanding at December 31, 1999 and
1998, respectively. The operating line-of-credit is collateralized by a
security interest in certain of the Company's assets, including its
interests in various joint ventures, bears interest at an annual rate
equal to the bank's base lending rate (8.5% at December 31, 1999) plus
one-half of one percent with a floor of 7.5%, and matures May 15, 2000.
The line-of-credit note contains two financial covenants, one requiring
a minimum net worth and the other requiring a maximum debt to net worth
ratio.
F-16
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
7. LONG-TERM DEBT:
Long-term debt consists of: 1999 1998
--------------- --------------
Mortgage notes maturing 2001 through 2018, with a
weighted average interest rate of 8.40% $ 60,265,543 $ 69,454,739
7% Subordinated Notes ($2,250,000 face amount) repaid
in October 1999 - 2,215,955
Other 83,709 170,370
-------------- --------------
60,349,252 71,841,064
Less current portion 1,567,643 5,508,498
-------------- --------------
$ 58,781,609 $ 66,332,566
============== ==============
The mortgage notes are collateralized by certain hotel properties. The
notes provide for monthly payments of principal and interest, with
interest on the fixed rate notes ranging from 7.5% to 9.25% (weighted
average interest rate of 8.04% at December 31, 1999), and interest on
the floating rate notes ranging from prime minus 0.25% to prime plus
1.25% (weighted average interest rate of 8.76% at December 31, 1999).
Certain of the mortgage notes provide for financial covenants,
principally minimum net worth requirements and minimum debt to equity
ratios. At December 31, 1999, the Company was not in compliance with
the minimum debt service coverage ratio contained in a mortgage loan of
approximately $1.7 million, however the Company has obtained a waiver
with respect to the violation. In addition, two joint ventures where
the Company has guaranteed the mortgage debt were not in compliance
with the minimum debt to equity ratio covenant, or the minimum debt
service coverage ratio covenant, contained in the mortgage loans. The
joint ventures have obtained waivers from the lender regarding these
violations.
The aggregate maturities of long-term debt, excluding construction
loans, are approximately as follows:
Year Ending December 31, Amount
------------------------ ---------
2000 $ 1,567,643
2001 1,659,585
2002 5,299,026
2003 5,952,861
2004 5,998,466
Thereafter 39,871,671
----------------
$ 60,349,252
================
F-17
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
8. SHAREHOLDERS' EQUITY:
Authorized shares:
------------------
The Company's corporate charter authorizes 25,000,000 shares of Common
Stock with a par value of $0.005 per share and 100,000 shares of
Preferred Stock without par value. The Preferred Stock may be issued in
series and the Board of Directors shall determine the voting powers,
designations, preferences and relative participating optional or other
special rights and the qualifications, limitations or restrictions
thereof.
Common Stock:
-------------
In 1998, the Company's Board of Directors authorized the repurchase of
Common Stock from time to time on the open market. In addition, in 1999
the Company completed a Dutch Auction self tender offer to purchase for
cash up to 1,000,000 shares of its Common Stock. Through December 31,
1999, the Company repurchased approximately 1.2 million shares of the
Company's Common Stock for approximately $4.8 million.
Stock options and warrants:
---------------------------
In connection with a financial relations consulting agreement, the
Company issued options in 1998 to acquire 5,000 shares of common stock
at an exercise price of $4.50 per share, expiring March 2001.
In connection with the issuance of debt, the Company has issued
warrants for the purchase of common stock. At December 31, 1999,
warrants to purchase 10,000 shares of common stock are outstanding at
an exercise price of $3.56 per share. These warrants expired in January
2000.
The Company has issued options to acquire shares of the Company's
common stock to certain of its partners in various hotel joint ventures
referred to in Note 4. At December 31, 1999, options to purchase 60,000
shares of common stock are outstanding with exercise prices ranging
from $6.13 to $8.00 per share and are exercisable through April 2001.
Limited partnership conversion rights:
--------------------------------------
The Company is a general partner in three partnerships where the
limited partners have the right at certain times and under certain
conditions to convert their limited partnership interests into 249,350
shares of the Company's common stock. These conversion rights expire
through April 2001.
Stock subscriptions receivable:
-------------------------------
In connection with the Diversified transaction (Note 2), the Company
issued 125,000 stock options which were exercised in January 1993, in
consideration for a secured promissory note in the amount of $436,875
with interest at 6.5% per annum, collateralized by the 125,000 shares
of common stock issued upon the exercise of the options and limited
partnership interests. The total principal balance is due the earlier
of the date the stock is sold or the related management contracts are
terminated. This note receivable has been classified as a reduction of
shareholders' equity on the accompanying balance sheets.
F-18
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
9. TAXES ON INCOME:
The provisions for income taxes (benefit) in the consolidated
statements of operations are as follows:
1999 1998 1997
-------------- --------------- --------------
Current $ 583,000 $ 3,232,000 $ (1,016,000)
Deferred (423,000) (4,012,000) 407,000
Valuation allowance decrease - - (128,000)
------------- -------------- -------------
Income tax expense (benefit), before
extraordinary item and cumulative
effect of change in accounting
principle 160,000 (780,000) (737,000)
Extraordinary item - (231,000) -
Accounting change (864,000) -
-
-------------- -------------- -------------
Income tax expense (benefit) $ 160,000 $ (1,875,000) $ (737,000)
============= ============== =============
Temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes that give
rise to a net deferred income tax asset relate to the following:
1999 1998
--------------- --------------
Deferred income recognized for tax purposes
and deferred for financial reporting purposes $ 385,000 $ 396,000
Gain on sale/leaseback transaction recognized
for tax purposes and deferred for financial
reporting purposes 3,911,000 3,444,000
Start-up costs capitalized for tax purposes and
expensed for financial reporting purposes 292,000 -
Differences in the basis of property and
equipment from partner acquisitions and due
to majority owned partnerships consolidated for
financial reporting purposes but not for tax purposes 818,000 619,000
------------- -------------
5,406,000 4,459,000
Cumulative depreciation differences (1,079,000) (555,000)
-------------- -------------
Net deferred income tax asset $ 4,327,000 $ 3,904,000
============== =============
F-19
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
9. TAXES ON INCOME (CONTINUED):
The following reconciles income tax expense (benefit) at the federal
statutory tax rate with the effective rate:
1999 1998 1997
------------ ------------- ------------
Income taxes (benefit) at the
federal statutory rate 34.0% (34.0%) (34.0%)
State taxes, net of federal tax benefit 10.4% (6.0%) (1.8%)
Decrease in valuation allowance - - (7.5%)
---------- ------------- ----------
Effective tax rate 44.4% (40.0%) (43.3%)
============ ============ ===========
10. RELATED PARTY TRANSACTIONS:
The following table summarizes related party revenue from various
unconsolidated partnerships in which the company has an ownership
interest:
1999 1998 1997
-------------- --------------- --------------
Development/acquisition revenue $ 1,173,054 $ 8,968,111 $ 14,268,017
Hotel management revenue 1,005,201 1,705,202 1,817,210
Employee leasing revenue 4,001,188 7,763,485 7,980,384
Franchising 41,313 - -
Interest income 601,477 530,364 335,172
During 1997, the Company paid $74,050 in fees and $1,289,141 in
termination costs in connection with a consulting agreement which was
terminated effective January 31, 1997. The consulting agreement was
with a company owned by the Company's former chairman.
11. BUSINESS SEGMENTS:
The Company's business is primarily involved in five segments: (1)
hotel operations, consisting of the operations of all hotels in which
the Company has a 100% or majority ownership or leasehold interest, (2)
hotel development, consisting of development, construction and
renovation activities, (3) hotel management, consisting of hotel
management activities, (4) employee leasing, consisting of the leasing
of employees to various hotels, and (5) AmeriHost Inn(R) hotel
franchising.
F-20
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
11. BUSINESS SEGMENTS (CONTINUED):
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, which is the information utilized by the Company's
decision makers in managing the business:
Revenues 1999 1998 1997
-------- -------------- --------------- -------------
Hotel operations $ 62,095,998 $ 47,328,411 $ 31,878,791
Hotel development 6,431,995 8,968,111 14,639,746
Hotel management 1,315,212 2,251,962 3,023,944
Employee leasing 5,992,580 10,069,705 13,123,035
Hotel franchising 222,187 - -
------------- -------------- ------------
$ 76,057,972 $ 68,618,189 $ 62,665,516
================= ============= ==============
Operating costs and expenses
Hotel operations $ 45,126,127 $ 34,768,001 $ 23,723,516
Hotel development 5,398,384 8,463,341 13,719,250
Hotel management 809,061 1,306,864 2,043,526
Employee leasing 5,747,351 9,748,110 12,798,585
Hotel franchising 786,658 - -
------------- -------------- -------------
$ 57,867,581 $ 54,286,316 $ 52,284,877
================= ============= ==============
Operating income
Hotel operations $ 5,249,019 $ 3,467,430 $ 2,422,728
Hotel development 1,009,720 426,426 838,452
Hotel management 448,710 543,748 647,230
Employee leasing 242,309 317,668 320,826
Hotel franchising (566,857) - -
Corporate (1,603,283) (1,670,837) (2,249,677)
------------- --------------- -------------
$ 4,779,618 $ 3,084,435 $ 1,979,559
============= ============== =============
Identifiable assets
Hotel operations $ 94,606,864 $ 104,076,512 $ 82,530,247
Hotel development 1,272,184 2,309,240 2,824,933
Hotel management 674,489 899,660 1,612,596
Employee leasing 494,806 978,985 1,415,174
Hotel franchising 164,485 - -
Corporate 5,895,339 7,016,391 4,285,148
------------- -------------- -------------
$ 103,108,167 $ 115,280,788 $ 92,668,098
============= ============== =============
F-21
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
11. BUSINESS SEGMENTS (CONTINUED):
Capital Expenditures 1999 1998 1997
--------------------- -------------- --------------- --------------
Hotel operations $ 1,920,734 $ 42,039,772 $ 29,272,953
Hotel development 2,091 54,065 7,288
Hotel management 69,697 58,659 40,830
Employee leasing - 3,288 4,228
Hotel franchising 29,335 - -
Corporate 80,975 26,914 17,810
------------- -------------- -------------
$ 2,102,832 $ 42,182,698 $ 29,343,109
============= ============== =============
Depreciation/Amortization
Hotel operations $ 4,414,161 $ 4,900,632 $ 4,003,613
Hotel development 23,891 78,343 82,044
Hotel management 57,441 401,351 333,188
Employee leasing 2,921 3,927 3,624
Hotel franchising 2,387 - -
Corporate 66,229 102,276 110,031
------------- -------------- -------------
$ 4,567,030 $ 5,486,529 $ 4,532,500
============= ============== =============
12. STOCK BASED COMPENSATION:
The Company applies APB No. 25, Accounting for Stock Issued to
Employees, and related interpretations, in accounting for options
granted to employees.
The Company established qualified incentive stock option plans for
employees and directors. Under the plan for employees, on an annual
basis, options for up to 3% of its common stock, as defined, can be
granted. Under the plan for directors, a total of 50,000 options can be
granted. The exercise price per share may not be less than the fair
market value per share on the date the options are granted. Generally,
options vest over a period of up to two years and are exercisable for a
period of ten years from the date of grant.
The Company has granted to various key employees, non-qualified options
to purchase shares of common stock with exercise prices ranging from
$3.56 to $6.50 per share. The exercise price is the market price on the
date of grant. At December 31, 1999, options to purchase 1,029,333
shares of common stock are outstanding. These options are currently
exercisable and expire through September 2007.
In 1997, the Company granted to two officers, options to purchase
65,625 shares of common stock with an exercise price of $1.53 per
share. These options are currently exercisable and expire in February
2007. Pursuant to APB Opinion 25, the Company recognized $301,465 in
compensation expense in 1997 as a result of this below-market grant.
F-22
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
12. STOCK BASED COMPENSATION (CONTINUED):
The following table summarizes the employee stock options granted,
exercised and outstanding:
Weighted
Average
Shares Exercise Price
------ --------------
Options outstanding January 1, 1997 1,541,583 $ 4.46
Options exercised (433,750) 4.61
Forfeitures (43,000) 4.93
Options granted 181,125 4.62
------------- -----------
Options outstanding December 31, 1997 1,245,958 4.42
Forfeitures (129,000) 5.82
Options granted 488,600 5.72
------------- ----------
Options outstanding December 31, 1998 1,605,558 4.71
Forfeitures (156,500) 5.30
Options granted 157,000 3.44
------------- ----------
Options outstanding December 31, 1999 1,606,058 $ 4.52
============= ==========
Options exercisable December 31, 1999 1,477,958 $ 4.58
============= ==========
The weighted-average grant-date fair value of stock options granted to
employees during the year and the weighted-average significant
assumptions used to determine those fair values, using a modified
Black-Sholes option pricing model, and the pro forma effect on earnings
of the fair value accounting for employee stock options under Statement
of Financial Accounting Standards No. 123 are as follows:
1999 1998 1997
-------------- -------------- ----------------
Grant-date fair value per share:
Options issued at market $ 1.47 $ 2.76 $ 2.90
Options issued below market - - 4.96
Weighted average exercise prices:
Options issued at market $ 3.47 $ 5.72 $ 6.37
Options issued below market - - 1.53
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 5.17% 5.74% 6.14%
Expected stock price volatility 0.40 0.41 0.37
Expected dividend payout n/a n/a n/a
Expected option life (years) (a) 6.00 6.00 5.63
Net income (loss):
As reported $ 200,591 $ (2,796,074) $ (966,443)
Pro forma $ (30,927) $ (3,422,385) $ (1,626,473)
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
12. STOCK BASED COMPENSATION (CONTINUED):
1999 1998 1997
-------------- -------------- ----------------
Net income (loss) per share - Basic:
As reported $ 0.04 $ (0.45) $ (0.15)
Pro forma $ (0.01) $ (0.55) $ (0.26)
Net income (loss) per share - Diluted:
As reported $ 0.02 $ (0.45) $ (0.19)
Pro forma $ (0.02) $ (0.55) $ (0.29)
(a) The expected option life considers historical option exercise
patterns and future changes to those exercise patterns
anticipated at the date of grant.
The following table summarizes information about employee stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 1.53 to 4.38 986,625 6.46Years $ 3.51 883,625 $ 3.51
$ 5.75 to 7.81 619,433 7.71 6.15 594,333 6.16
-------------- ------- ---- ---- ------- ----
$ 1.53 to 7.81 1,606,058 6.94 $ 4.52 1,477,958 $ 4.58
============== ========= ==== ======== ========= ========
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
Office lease:
-------------
The Company entered into an operating lease for its existing office
facilities which expires December 2011. The lease provides for monthly
payments of approximately $28,500 plus common area maintenance and real
estate tax prorations beginning in Janaury 2002. The lease also
provides for an exclusive, two-year option to purchase the building for
$6,400,000.
Sale/leaseback of hotels:
-------------------------
On June 30, 1998, the Company completed the sale of 26 AmeriHost Inn(R)
hotels to PMC Commercial Trust ("PMC") for $62.2 million. The Company
completed the sale of four additional AmeriHost Inn(R) hotels to PMC in
March 1999. Upon the respective sales to PMC, the Company entered into
agreements to lease back the hotels for an initial term of ten years,
with two five year renewal options. The lease payments are fixed at 10%
of the sale price for the first three years. Thereafter, the lease
payments are subject to a CPI increase with a 2% annual maximum. In
1998, the Company recorded an extraordinary loss of $333,000, net of
income tax benefit of approximately $231,000, relating to the early
extinguishment of mortgage debt on hotels sold in connection with the
sale/leaseback transaction.
F-24
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
Hotel leases:
-------------
Including the sale/leaseback hotels, the Company leases 34 hotels as of
December 31, 1999, the operations of which are included in the
Company's consolidated financial statements. All of these leases are
triple net and provide for monthly base rent payments ranging from
$14,000 to $27,000. The Company leases or subleases two of these hotels
from partnerships in which the Company owns equity interests, up to
16.33%. These two leases also provide for additional rent payments
ranging from $36,000 to $72,000 per annum, plus percentage rents equal
to 10% of room revenues in excess of stipulated amounts. The leases and
sub-leases expire through March 2009, except for the two leases from
partnerships in which the Company owns an equity interest which expired
December 31, 1999. The Company is continuing to operate these hotels
under the same terms as provided in the original leases.
The four leases, other than the PMC leases, provide for an option to
purchase the hotel. Some of the purchase prices are based upon a
multiple of gross room revenues for the preceding twelve months with a
specified maximum, and the others are based on a fixed amount. At
December 31, 1999, the aggregate purchase price for these leased hotels
was approximately $14,030,000. During 1997, the Company exercised
options to purchase two hotels previously under lease.
Total rent expense for all operating leases was approximately
$7,542,000, $4,407,000 and $1,939,000 in 1999, 1998 and 1997,
respectively, including approximately $811,038, $993,000 and $1,103,000
in 1999, 1998 and 1997, respectively, to entities in which the Company
has a minority ownership interest. Minimum future rent payments under
all operating leases are as follows:
Year Ending December 31,
------------------------
2000 $ 8,217,650
2001 8,227,400
2002 8,390,808
2003 8,462,934
2004 8,449,259
Thereafter 33,724,960
--------------
$ 75,473,011
=============
Limited partnership guaranteed distributions:
---------------------------------------------
The Company is a general partner in three partnerships where the
Company has guaranteed minimum annual distributions to the limited
partners in the amount of 10% of their original capital contributions.
F-25
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
Guarantees:
-----------
The Company has provided approximately $16.0 million in guarantees as
of December 31, 1999 on mortgage loan obligations for 11 joint ventures
in which the Company holds a minority equity interest, which expire at
various dates through February 2019. Other partners have also
guaranteed portions of the same obligations. The partners of one of the
partnerships have entered into a cross indemnity agreement whereby each
partner has agreed to indemnify the others for any payments made by any
partner in relation to the guarantee in excess of their ownership
interest.
The Company is secondarily liable for the obligations and liabilities
of the limited partnerships and limited liability corporations in which
it holds a general partnership or managing member ownership interest as
described in Note 4.
Construction in progress:
-------------------------
As of December 31, 1999, the Company had entered into non-cancelable
sub-contracts for approximately $2.4 million in connection with the
construction of four hotels, representing a portion of the total
estimated construction costs for these hotels. These commitments will
be funded through construction and long-term mortgage financing
currently in place.
Employment agreements:
----------------------
The Company has entered into an employment agreement with an executive
officer expiring December 31, 2003, providing for an annual base salary
of $325,000. The employment agreement provides for a cash bonus based
upon financial performance, franchising growth, and hotel operations
performance; stock options, a portion of which vest only if the Company
achieves certain financial performance criteria; and severance pay
should the officer be terminated without cause.
Legal matters:
--------------
The Company and certain of its subsidiaries are defendants in various
litigation matters arising in the ordinary course of business. In the
opinion of management, the ultimate resolution of all such litigation
matters is not likely to have a material effect on the Company's
financial condition, results of operation or liquidity.
F-26
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
================================================================================
14. SUPPLEMENTAL CASH FLOW DATA:
The following represents the supplemental schedule of noncash investing
and financing activities for the years ended December 31, 1999, 1998
and 1997:
1999 1998 1997
-------------- --------------- ---------------
Notes receivable received from
sale of hotel $ 100,000
=============
Reduction of notes receivable and related
interest in exchange for common stock $ 3,779 $ 1,181,831
============== =============
Reduction of notes payable assumed by
buyer upon sale of hotel $ 62,141
=============
Liabilities assumed in connection with
acquisition of hotel partnership interests $ 1,655,422 $ 31,093,530
============ ==============
15. NON-RECURRING EXPENSES:
The Company expensed $1,697,448 in 1997 in costs associated with (i)
the termination of a consulting agreement with a company owned by the
former Chairman of the Board of Directors and a former director, and
(ii) the termination of an employment agreement with this former
director. In addition, the Company expensed $177,044 in costs
associated with a potential merger or acquisition which was not
consummated. The Company considers these costs non-operational costs
which are non-recurring in nature.