Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended JUNE 30, 2002
---------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 0-15291
-------
ARLINGTON HOSPITALITY, INC.
---------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3312434
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 S. ARLINGTON HEIGHTS ROAD, SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005
- ---------------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 228-5400
--------------
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No
-- --
As of August 13, 2002, 4,958,056 shares of the Registrant's Common Stock were
outstanding.
================================================================================
ARLINGTON HOSPITALITY, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2002
INDEX
PART I: Financial Information Page
----------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2002
and December 31, 2001 4
Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2002 and 2001 6
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II: Other Information
--------------------------
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 24
Page 2
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
Page 3
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
==================================================================================================================
June 30, December 31,
2002 2001
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,415,730 $ 4,748,156
Accounts receivable, less an allowance of $150,000 at
June 30, 2002 and December 31, 2001 (including
approximately $106,000 and
$126,000 from related parties) 1,975,083 2,343,423
Notes receivable, current portion 518,499 518,499
Prepaid expenses and other current assets 454,277 998,559
Refundable income taxes 1,122,853 -
Costs and estimated earnings in excess of billings on
uncompleted contracts with related parties 1,738,937 1,079,137
--------------- --------------
Total current assets 9,225,379 9,687,774
--------------- --------------
Investments in and advances to unconsolidated
hotel joint ventures (Note 8) 5,849,430 5,404,744
--------------- --------------
Property and equipment:
Land 13,911,841 12,454,360
Buildings 81,589,861 68,095,453
Furniture, fixtures and equipment 26,247,133 24,189,969
Construction in progress 2,286,988 5,973,890
Leasehold improvements 2,772,836 2,899,179
Assets held for sale - 2,187,822
--------------- --------------
126,808,659 115,800,673
Less accumulated depreciation and amortization 25,407,549 22,905,635
--------------- --------------
101,401,110 92,895,038
--------------- --------------
Notes receivable, less current portion 993,279 1,000,000
Deferred income taxes (Note 5) 2,302,000 3,247,000
Other assets, net of accumulated amortization of
$1,072,000 and $986,000 2,782,243 2,939,900
--------------- --------------
6,077,522 7,186,900
$ 122,553,441 $ 115,174,456
=============== ==============
(continued)
Page 4
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
==================================================================================================================
June 30, December 31,
2002 2001
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,941,621 $ 2,467,704
Bank line-of-credit 7,156,287 6,793,702
Accrued payroll and related expenses 786,717 784,533
Accrued real estate and other taxes 2,384,376 1,952,875
Other accrued expenses and current liabilities 352,924 452,086
Current portion of long-term debt 6,382,654 2,110,652
Income taxes payable - 286,670
--------------- --------------
Total current liabilities 20,004,579 14,848,222
--------------- --------------
Long-term debt, net of current portion 73,289,190 70,088,269
--------------- --------------
Deferred income (Note 9) 10,335,945 10,714,735
--------------- --------------
Commitments and contingencies
Minority interests 380,933 456,631
--------------- --------------
Shareholders' equity:
Preferred stock, no par value; authorized 100,000 shares;
none issued - -
Common stock, $.005 par value; authorized 25,000,000 shares;
issued and outstanding 4,958,056 shares at June 30, 2002
and 4,958,081 shares at December 31, 2001 24,790 24,790
Additional paid-in capital 13,171,030 13,171,151
Retained earnings 5,783,849 6,307,533
--------------- --------------
18,979,669 19,503,474
Less:
Stock subscriptions receivable (436,875) (436,875)
--------------- --------------
18,542,794 19,066,599
--------------- --------------
$ 122,553,441 $ 115,174,456
=============== ==============
See notes to consolidated financial statements.
Page 5
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
==================================================================================================================
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
2002 2001 2002 2001
--------------- ---------------- --------------- ----------------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 11,685,235 $ 12,251,152 $ 20,845,162 $ 22,117,815
Other hotels 2,976,625 2,963,923 5,233,178 5,138,261
Development and construction 3,154,027 42,018 5,219,310 107,175
Hotel sales and commissions 1,540,451 93,373 4,748,348 5,858,068
Management services 262,772 242,090 496,709 471,898
Employee leasing 867,814 1,370,134 1,720,175 2,730,016
Other 156,318 - 317,988 -
--------------- --------------- --------------- ---------------
20,643,242 16,962,690 38,580,870 36,423,233
--------------- --------------- --------------- ---------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 7,824,102 8,507,534 15,403,551 16,692,558
Other hotels 2,504,103 2,098,862 5,099,282 4,274,177
Development and construction 2,626,326 211,256 4,623,893 587,424
Hotel sales and commissions 1,497,732 - 3,528,680 3,717,468
Management services 184,297 159,455 338,827 351,912
Employee leasing 856,165 1,341,867 1,676,802 2,696,781
Other 28,798 - 45,621 -
--------------- --------------- --------------- ---------------
15,521,523 12,318,974 30,716,656 28,320,320
--------------- --------------- --------------- ---------------
5,121,719 4,643,716 7,864,214 8,102,913
Depreciation and amortization 1,406,141 1,148,002 2,729,830 2,269,348
Leasehold rents - hotels 1,336,840 1,705,280 2,818,652 3,461,139
Corporate general and administrative 386,435 411,804 773,594 1,025,432
--------------- --------------- --------------- ---------------
Operating income 1,992,303 1,378,630 1,542,138 1,346,994
Other income (expense):
Interest expense (1,451,102) (1,389,474) (2,874,776) (2,797,047)
Interest income 134,392 122,163 258,222 270,029
Other income (22,650) 63,143 37,360 106,388
Gain on sale of property - 275,207 327,076 590,445
Equity in net income and (losses)
of affiliates (208,551) (159,767) (121,583) (272,540)
--------------- --------------- --------------- ---------------
Income (loss) before minority
interests and income taxes 444,392 289,902 (831,563) (755,731)
Minority interests in (income) loss of
consolidated subsidiaries and partnerships (50,324) (34,306) (37,121) (30,791)
--------------- --------------- --------------- ---------------
Income (loss) before income taxes 394,068 255,596 (868,684) (786,522)
Income tax expense (benefit) 160,000 103,000 (345,000) (319,000)
--------------- --------------- --------------- ---------------
Net income (loss) $ 234,068 $ 152,596 $ (523,684) $ (467,522)
=============== =============== =============== ===============
Net income (loss) per share - Basic $ 0.05 $ 0.03 $ (0.11) $ (0.09)
Net income (loss) per share - Diluted $ 0.05 $ 0.03 $ (0.11) $ (0.10)
See notes to consolidated financial statements.
Page 6
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
=================================================================================================================
2002 2001
--------------- ---------------
Cash flows from operating activities:
Cash received from customers $ 39,145,568 $ 37,508,895
Cash paid to suppliers and employees (30,134,918) (28,816,393)
Interest received 281,545 101,262
Interest paid (2,893,044) (2,798,308)
Income taxes paid (119,523) (276,353)
--------------- ---------------
Net cash provided by operating activities 6,279,628 5,719,103
--------------- ---------------
Cash flows from investing activities:
Distributions, and collections on advances,
from affiliates 263,836 475,409
Purchase of property and equipment (12,066,782) (5,569,952)
Purchase of investments in, and advances
to, minority owned affiliates (1,268,212) (1,847,326)
Acquisitions of partnership interests,
net of cash acquired (Note 7) (796,786) (795,384)
Collections on notes receivable 6,721 13,089
Proceeds from sale of assets (6,700) -
--------------- ---------------
Net cash used in investing activities (13,867,923) (7,724,164)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 9,660,858 3,500,162
Principal payments on long-term debt (3,654,444) (4,266,789)
Net proceeds from line of credit 362,585 3,185,569
Distributions to minority interest (112,819) -
(Purchase) issuance of common stock (311) 13,711
Other - 117,000
--------------- ---------------
Net cash provided by financing activities 6,255,869 2,549,653
--------------- ---------------
Net increase (decrease) in cash (1,332,426) 544,592
Cash and cash equivalents, beginning of year 4,748,156 1,728,869
--------------- ---------------
Cash and cash equivalents, end of period $ 3,415,730 $ 2,273,461
=============== ===============
(continued)
Page 7
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
=================================================================================================================
2002 2001
--------------- ---------------
Reconciliation of net loss to net cash provided by operating activities:
Net loss $ (523,684) $ (467,522)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 2,729,830 2,269,348
Equity in net (income) loss of affiliates and
amortization of deferred income 121,583 272,540
Interest from unconsolidated joint ventures (43,053) -
Minority interests in net income of subsidiaries 37,121 30,791
Amortization of deferred gain (527,304) (431,588)
Deferred income taxes 360,000 314,000
Issuance of common stock 190 -
Gain on sale of property and equipment (327,076) (590,445)
Proceeds from sale of hotels 4,456,081 4,724,468
Income from sale of hotels (927,401) (986,189)
Changes in assets and liabilities, net of effects of acquisition:
Decrease (increase) in accounts receivable 366,110 (255,169)
Decrease (increase) in prepaid expenses and
other current assets 570,756 (23,008)
Increase in refundable income taxes (824,523) (909,353)
(Increase) decrease in costs and estimated earnings
in excess of billings (659,800) 286,057
Increase in other assets (141,615) (292,228)
Increase in accounts payable 450,277 569,250
Increase in accrued payroll and other accrued
expenses and current liabilities 322,016 261,026
Decrease in accrued interest (18,268) (1,261)
Increase in deferred income 858,388 948,386
--------------- ---------------
Net cash provided by operating activities $ 6,279,628 $ 5,719,103
=============== ================
See notes to consolidated financial statements.
Page 8
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
================================================================================
1. BASIS OF PREPARATION:
---------------------
The financial statements included herein have been prepared by the
Company, without audit. In the opinion of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments, which
consist only of recurring adjustments necessary to present fairly the
financial position of Arlington Hospitality, Inc. and subsidiaries as of
June 30, 2002 and December 31, 2001, and the results of its operations for
the three and six months ended June 30, 2002 and 2001, and cash flows for
the six months ended June 30, 2002. The results of operations for the
three and six months ended June 30, 2002, are not necessarily indicative
of the results to be expected for the full year. It is suggested that the
accompanying consolidated financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in
the Company's 2001 Annual Report on Form 10-K. Certain reclassifications
have been made to the 2001 financial statements in order to conform with
the 2002 presentation.
2. PRINCIPLES OF CONSOLIDATION:
----------------------------
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries, and entities in which the Company has a
majority ownership interest. Significant intercompany accounts and
transactions have been eliminated.
3. CRITICAL ACCOUNTING POLICIES:
-----------------------------
We defined critical accounting policies as those accounting policies that
require our management to exercise subjective and complex judgment. Our
critical accounting policies are described in our 2001 Form 10-K.
On January 1, 2002 we adopted Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). The statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. SFAS 144 requires a
long-lived asset to be sold to be classified as "held for sale" in the
period in which certain criteria are met, including that the sale of the
asset within one year is probable. Based on historical experience and our
business strategy, we generally do not assess a sale as probable before
the transaction closes. We do not believe any of our properties meet all
of the criteria necessary to classify assets as held for sale as of June
30, 2002. SFAS 144 also requires that the results of operations of a
component of an entity that either has been disposed of or is classified
as held for sale be reported in discontinued operations if the operations
and cash flows of the component have been or will be eliminated from our
ongoing operations. We do not include the sales or operations of AmeriHost
Inn hotels in discontinued operations because we retain ongoing royalty
fees from those hotels after their sale. The operations of all other
long-lived assets sold or classified as held for sale are reflected as
discontinued operations. As of June 30, 2002, we have no identifiable
discontinued operations.
4. EARNINGS (LOSS) PER SHARE:
--------------------------
Basic earnings per share ("EPS") is calculated by dividing the income
(loss) available to common shareholders by the weighted average number of
common shares outstanding for the period, without consideration of common
stock equivalents. Diluted EPS gives effect to all dilutive potential
common shares outstanding for the period. The Company excluded stock
options which had an anti-dilution effect on the EPS computations in all
periods presented and excluded the impact of a convertible partnership
interest for the three months ended June 30, 2002 as its effect was also
anti-dilutive. The calculations of basic and diluted earnings (loss) per
share are as follows:
Page 9
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
================================================================================
4. EARNINGS (LOSS) PER SHARE (CONTINUED):
--------------------------------------
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------------
2002 2001 2002 2001
------------- ------------- -------------- ---------------
Net income (loss) $ 234,068 $ 152,596 $ (523,684) $ (467,522)
Impact of convertible
partnership interests - (18,391) (15,943) (58,681)
------------- ------------- -------------- --------------
Net income (loss) available to
common shareholders $ 234,068 $ 134,205 $ (539,627) $ (526,203)
============= ============= ============== ==============
Weighted average common
shares outstanding 4,958,077 4,980,484 4,958,079 4,979,953
Dilutive effect of convertible
partnership interests and
common stock equivalents 75,514 248,771 84,975 168,100
------------- ------------- -------------- --------------
Dilutive common shares outstanding 5,033,591 5,229,255 5,043,054 5,148,053
============= ============= ============== ==============
Net income (loss) per share - Basic $ 0.05 $ 0.03 $ (0.11) $ (0.09)
============= ============= ============== ==============
Net income (loss) per share - Diluted $ 0.05 $ 0.03 $ (0.11) $ (0.10)
============= ============= ============== ==============
5. INCOME TAXES:
-------------
Deferred income taxes are provided on the differences in the bases of the
Company's assets and liabilities determined for tax and financial
reporting purposes and relate principally to depreciation of property and
equipment and deferred income. A valuation allowance has not been recorded
to reduce the deferred tax assets, as the Company expects to realize all
components of the deferred tax asset in future periods. Approximately
$595,000 was reclassified into refundable income taxes from deferred
income taxes at June 30, 2002, based on the final determination of the
appropriate tax treatment for certain fees.
The income tax expense (benefit) for the three and six months ended June
30, 2002 and 2001 was based on the Company's estimate of the effective tax
rate expected to be applicable for the full year. The Company expects the
effective tax rate to approximate the Federal and state statutory rates.
6. HOTEL LEASES:
-------------
The Company leases 24 hotels as of June 30, 2002 (including 22
sale/leaseback hotels - Note 9), the operations of which are included in
the Company's consolidated financial statements. All of these leases are
triple net and provide for monthly base rent payments ranging from $14,000
to $27,000. The leases expire through March 2014.
Two of these leases provide for an option to purchase the hotel. The
purchase prices are based upon a fixed amount approximating the fair value
at the lease commencement, subject to increases in the CPI index. During
the three months ended June 30, 2002, the Company exercised its option to
purchase one leased hotel from a partnership in which the Company has an
ownership interest for $4.5 million. The aggregate purchase price for the
remaining two leased hotels was approximately $7,000,000 as of June 30,
2002.
Page 10
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
================================================================================
7. LIMITED PARTNERSHIP GUARANTEED DISTRIBUTIONS:
---------------------------------------------
The Company was a general partner in two partnerships where the Company
had guaranteed minimum annual distributions to the limited partners,
including a Director of the Company, in the amount of 10% of their
original capital contributions. On May 10, 2002, the Company acquired the
remaining ownership interest in one of the joint ventures for $815,000 and
anticipates completing the acquisition of the second joint venture on or
before December 31, 2002.
8. INVESTMENTS:
------------
Effective January 1, 2001, the Company acquired the remaining ownership
interest in one hotel joint venture. Effective May 1, 2002, the Company
acquired the remaining ownership interest in another hotel joint venture.
The following is a summary of these acquisitions:
2002 2001
------------- -------------
Property and equipment acquired $ 2,279,309 2,100,058
Other assets acquired 38,400 37,023
Long-term debt assumed (1,466,510) (1,238,763)
Other liabilities assumed (54,413) (102,934)
------------- -------------
Cash paid, net of cash acquired $ 796,786 $ 795,384
============= =============
During the second quarter of 2002, one of the Company's hotel joint
ventures wrote down its hotel asset by $100,000 based upon its estimated
realized value. This adjustment was included in equity in net income and
(losses) of affiliates in the accompanying consolidated financial
statements.
9. SALE/LEASEBACK OF HOTELS:
-------------------------
In 1998 and 1999, the Company completed the sale of 30 AmeriHost Inn
hotels to a Real Estate Investment Trust ("REIT") for $73 million. Upon
the sales to the REIT, the Company entered into agreements to lease back
the hotels for an initial term of ten years, with two five year renewal
options. The lease payments are fixed at 10% of the sale price for the
first three years. Thereafter, the lease payments are subject to a CPI
increase with a 2% annual maximum. The Company has deferred the gain on
the sale of these hotels pursuant to sale/leaseback accounting. The
deferred gain is being recognized on a straight-line basis over the
remaining term of the lease, as extended, as a reduction of leasehold rent
expense. In January 2001, the Company amended the master lease with the
REIT to provide for the sale of eight hotels by the lessor under specified
terms, and to extend the initial lease term by five years. The amendment
provides for four increases in rent payments of 0.25% each, if these
hotels are not sold to an unrelated third party or to the Company by the
dates specified. As of June 30, 2002, the Company is obligated under the
terms of the amendment to either facilitate the sale to a third party, or
purchase from the REIT, one hotel prior to June 5, 2003, or the 0.25% rent
increase becomes effective.
The REIT sold one of its hotels to an unrelated third party during the six
months ended June 30, 2002. Consequently, the Company has terminated the
lease with the REIT for this hotel and recognized a commission from the
sale of this hotel, which is classified as hotel sales and commissions in
the accompanying consolidated financial statements. The unamortized
deferred gain related to the initial sale of this hotel was recognized
upon termination of the respective lease.
Page 11
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
================================================================================
10. 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 controlling ownership or leasehold interest, (2)
hotel development and construction, consisting of development,
construction and renovation of hotels for unconsolidated joint ventures
and unrelated third parties, (3) hotel sales and commissions, resulting
from the sale of AmeriHost Inn hotels, (4) hotel management, consisting of
hotel management activities and (5) employee leasing, consisting of the
leasing of employees to various hotels. 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, as of and for the six months ended June 30,
2002 and 2001, for each business segment, which is the information
utilized by the Company's decision makers in managing the business:
Revenues 2002 2001
-------- ------------- -------------
Hotel operations $ 26,078,340 $ 27,256,076
Hotel development and construction 5,219,310 107,175
Hotel sales and commissions 4,748,348 5,858,068
Hotel management 496,709 471,898
Employee leasing 1,720,175 2,730,016
Other (office building) 317,988 -
------------- -------------
$ 38,580,870 $ 36,423,233
============= =============
Operating costs and expenses
----------------------------
Hotel operations $ 20,502,833 $ 20,966,735
Hotel development and construction 4,623,893 587,424
Hotel sales and commissions 3,528,680 3,717,468
Hotel management 338,827 351,912
Employee leasing 1,676,802 2,696,781
Other (office building) 45,621 -
------------- -------------
$ 30,716,656 $ 28,320,320
============= =============
Operating income
----------------
Hotel operations $ 204,643 $ 635,297
Hotel development and construction 592,411 (493,034)
Hotel sales and commissions 1,219,668 2,140,600
Hotel management 131,292 91,185
Employee leasing 42,190 31,641
Other (office building) 194,747 -
Corporate (842,813) (1,058,695)
------------- -------------
$ 1,542,138 $ 1,346,994
============= =============
Page 12
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
================================================================================
10. BUSINESS SEGMENTS (CONTINUED):
------------------------------
Identifiable assets 2002 2001
------------------- ------------- -------------
Hotel operations $ 105,567,673 $ 96,073,082
Hotel development and construction 2,176,523 534,644
Hotel management 52,689 (167,925)
Employee leasing (99,161) 176,593
Other (office building) 6,694,182 -
Corporate 8,161,535 5,463,475
------------- -------------
$ 122,553,441 $ 102,079,869
============= =============
Capital expenditures
--------------------
Hotel operations $ 11,788,467 $ 5,474,253
Hotel development and construction - 5,975
Hotel management 7,998 43,722
Employee leasing - -
Other (office building) 255,672 -
Corporate 14,645 46,002
------------- -------------
$ 12,066,782 $ 5,569,952
============= =============
Depreciation/Amortization
-------------------------
Hotel operations $ 2,552,212 $ 2,192,905
Hotel development and construction 3,005 12,786
Hotel management 26,590 28,800
Employee leasing 1,184 1,594
Other (office building) 77,620 -
Corporate 69,219 33,263
------------- -------------
$ 2,729,830 $ 2,269,348
============= =============
11. BANK LINE OF CREDIT:
---------------------
At December 31, 2001, the Company had a $7,500,000 bank operating
line-of-credit. The operating line-of-credit was collateralized by a
security interest in certain of the Company's assets, including its
interests in various joint ventures, was subject to interest at an annual
rate equal to the bank's base lending rate plus one-half of one percent,
and matured February 28, 2002. Prior to its expiration in February 2002,
the Company replaced its line-of-credit with another lender. The new
operating line-of-credit has a limit of $8.5 million, is collateralized by
substantially all the assets of the Company, subject to first mortgages
from other lenders on hotel assets, bears interest at a rate based on
either the prime rate or LIBOR as chosen quarterly by the Company, plus a
spread adjusted quarterly based on the Company's leverage ratio, ranging
from zero to 0.5% (if Prime based) or 3.0% (if LIBOR based), and matures
February 19, 2003. The new line-of-credit agreement also provides for the
maintenance of certain financial covenants, including minimum tangible net
worth, a maximum leverage ratio, and a minimum debt service coverage
ratio. The Company was not in compliance with the maximum leverage ratio
covenant as of June 30, 2002; however, the lender has waived this
violation and adjusted the covenant for future periods.
Page 13
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002
================================================================================
12. SUBSEQUENT EVENT:
-----------------
The Company anticipates exchanging a note receivable from the principals
of Diversified Innkeepers, Inc. in the amount of $1,136,779 at June 30,
2002, for a 50% ownership interest in a hotel joint venture. The remaining
50% ownership interest will be held by the principals of Diversified
Innkeepers, Inc. Under the terms of the partnership agreement, the Company
is entitled to preferred operating distributions, as well as a preferred
distribution upon the sale or refinancing of the hotel.
Page 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
GENERAL
The Company is engaged in the development and sale of AmeriHost Inn hotels, and
the ownership, operation and management of AmeriHost Inn hotels and other
mid-price hotels. Since the Company's inception, the Company has constructed
over 100 hotels. In addition, the Company has acquired other brand hotels, or
has formed joint ventures to acquire other brand hotels. As of June 30, 2002,
the Company had 65 AmeriHost Inn hotels open, of which 53 were wholly-owned or
leased, one was majority-owned, and 11 were minority-owned. The Company opened
four AmeriHost Inn hotels during the past twelve months. The Company intends to
use the AmeriHost Inn brand when expanding its hotel operations segment. As of
June 30, 2002, three wholly-owned AmeriHost Inn hotels were under construction.
Same room revenues for all AmeriHost Inn hotels owned and operated by the
Company, including minority owned hotels, increased approximately 5.3% during
the second quarter of 2002, compared to the second quarter of 2001, attributable
to a 9.5% increase in occupancy, partially offset by a decrease of $2.24 in
average daily rate. These results relate to the 60 AmeriHost Inn hotels that
were operating for at least thirteen full months during the six months ended
June 30, 2002.
Revenues from hotel operations consist of the revenues from all hotels in which
the Company has a 100% or controlling ownership or leasehold interest
("Consolidated" hotels). Development and construction revenues consist of fees
for new construction and renovation activities performed by the Company for
unconsolidated minority-owned hotels and unrelated third parties. The Company
records commissions and revenue from the sale of its Consolidated AmeriHost Inn
hotels, based upon the net sale price, as these sales are considered part of the
Company's strategy of building and selling hotels, and therefore expanding the
AmeriHost Inn brand. The Company also receives revenue from management and
employee leasing services provided to unconsolidated minority-owned hotels and
unrelated third parties.
Revenues from Consolidated AmeriHost Inn hotels decreased 4.6% and 5.8% to $11.7
million and $20.8 million during the three and six months ended June 30, 2002,
from revenues of $12.3 million and $22.1 million during the three and six months
ended June 30, 2001, respectively, due primarily to the sale of hotels. Revenues
from the development segment increased to $3.2 million and $5.2 million during
the three and six months ended June 30, 2002, from $42,018 and $107,175 for the
three and six months ended June 30, 2001, respectively, due to the increase in
hotel development activity for minority-owned and third party entities. Revenues
from hotel sales and commissions decreased 18.9% to $4.7 million during the six
months ended June 30, 2002, from $5.9 million for the six months ended June 30,
2001, as a result of the sale of three AmeriHost Inn hotels during the first six
months of 2002, including one in the second quarter, versus the sale of five
AmeriHost Inn hotels during the first six months of 2001. Revenues from hotel
management and employee leasing segments decreased by 29.9% and 30.8% in total
during the three and six months ended June 30, 2002, respectively, due primarily
to the sale or termination of hotels under management contracts. Revenues from
Consolidated non-AmeriHost Inn hotels increased 0.4% and 1.8% during the three
and six months ended June 30, 2002, respectively, compared to 2001, as a result
primarily of the acquisition of one non-AmeriHost Inn hotel during December
2001. Total revenues increased 21.7% and 5.9% to $20.6 million and $38.6 million
during the three and six months ended June 30, 2002, from $17.0 million and
$36.4 million during the three and six months ended June 30, 2001. The Company
recorded net income of $234,068 for the second quarter of 2002, or $0.05 per
diluted share, compared to net income of $152,596 or $0.03 per diluted share in
2001. The Company recorded a net loss of ($523,684) for the six months ended
June 30, 2002, or ($0.11) per diluted share, compared to net loss of ($467,522),
or ($0.10) per diluted share, for the six months ended June 30, 2001.
On September 30, 2000, the Company sold the AmeriHost Inn and AmeriHost Inn &
Suites brand names and franchising rights to Cendant Corporation. The agreement
with Cendant provides for favorable royalty payment terms and additional
long-term incentives to the Company as the AmeriHost Inn brands are expanded,
including royalty sharing and a hotel development incentive fee each time a
hotel owned by the Company is sold to an operator who becomes a Cendant
franchisee.
The Company uses Cash Flow, defined as net income plus depreciation and
amortization, as a supplemental performance measure, along with net income, to
report its operating results. Net income plus depreciation and amortization is
not defined by Generally Accepted Accounting Principles ("GAAP"), however the
Company believes it provides relevant information about its operations and is
Page 15
necessary for an understanding of the Company's operations, given its
significant investment in real estate. Cash Flow, as defined, 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. Cash Flow, as defined, increased 26.1% and 22.4% to $1.6
million and $2.2 million during the three and six months ended June 30, 2002,
from $1.3 million and $1.8 million during the three and six months ended June
30, 2001.
Excluding hotels under construction, the Company had an ownership interest in 75
hotels at June 30, 2002, versus 77 hotels at June 30, 2001. The increased
ownership from the development of AmeriHost Inn hotels for the Company's own
account and the acquisition of a non-AmeriHost Inn hotel was offset by the sale
of AmeriHost Inn hotels to Cendant franchisees. Total Consolidated hotels
decreased slightly to 62 hotels at June 30, 2002, versus 63 hotels at June 30,
2001.
CRITICAL ACCOUNTING POLICIES
We define critical accounting policies as those accounting policies that require
our management to exercise subjective and complex judgment. Our critical
accounting policies are described in our 2001 Form 10-K.
In addition, on January 1, 2002 we adopted Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). The statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. SFAS 144 requires a
long-lived asset to be sold to be classified as "held for sale" in the period in
which certain criteria are met, including that the sale of the asset within one
year is probable. Based on historical experience and our business strategy, we
generally do not assess a sale as probable before the transaction closes. We do
not believe any of our properties meet all of the criteria necessary to classify
assets as held for sale as of June 30, 2002. SFAS 144 also requires that the
results of operations of a component of an entity that either has been disposed
of or is classified as held for sale be reported in discontinued operations if
the operations and cash flows of the component have been or will be eliminated
from our ongoing operations. We do not include the sales or operations of
AmeriHost Inn hotels in discontinued operations because we retain ongoing
royalty fees from those hotels after their sale. The operations of all other
long-lived assets sold or classified as held for sale are reflected as
discontinued operations. As of June 30, 2002, we have no identifiable
discontinued operations.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED
TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2001
Revenues increased 21.7% and 5.9% to $20.6 million and $38.6 million during the
three and six months ended June 30, 2002, respectively, from $17.0 million and
$36.4 million during the three and six months ended June 30, 2001. The increase
in revenue was primarily due to increases in hotel development revenues during
2002 and hotel sales and commissions during the three months ended June 30,
2002.
Hotel operations revenue decreased 3.6% and 4.3% to $14.7 million and $26.1
million during the three and six months ended June 30, 2002, respectively, from
$15.2 million and $27.3 million during the three and six months ended June 30,
2001. Revenues from Consolidated AmeriHost Inn hotels decreased 4.6% and 5.8% to
$11.7 million and $20.8 million during the three and six months ended June 30,
2002, respectively, from $12.3 million and $22.1 million during the three and
six months ended June 30, 2001. These decreases were attributable primarily to
the sale of seven Consolidated AmeriHost Inn hotels to Cendant franchisees,
partially offset by the opening of four newly constructed AmeriHost Inn hotels.
Revenues from Consolidated other brand hotels increased 0.4% and 1.8% to $3.0
million and $5.2 million during the three and six months ended June 30, 2002,
respectively. These increases were primarily the result of the acquisition of
one non-AmeriHost Inn Consolidated hotel during December 2001. The hotel
operations segment included the operations of 62 Consolidated hotels (including
54 AmeriHost Inn hotels) comprising 4,535 rooms at June 30, 2002, compared to 63
Consolidated hotels (including 57 AmeriHost Inn hotels) comprising 4,446 rooms
at June 30, 2001. 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 hotels increases, the
greater the benefits will be at all locations from marketplace recognition and
Page 16
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 revenue increased to $3.2 million and $5.2 million during the
three and six months ended June 30, 2002, respectively, from $42,018 and
$107,175 during the three and six months ended June 30, 2001. 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 two hotels for minority-owned entities or unrelated third
parties during the first six months of 2002, compared to none during the first
six months of 2001. However, the Company also had several additional projects in
various stages of pre-construction development during both six-month periods. In
addition, Cendant pays the Company a development incentive fee every time the
Company sells one of its existing AmeriHost Inn hotels to a buyer who executes
an AmeriHost Inn franchise agreement with Cendant. The Company received
approximately $535,000 and $771,000 in development incentive fees from the sale
of AmeriHost Inn hotels during the second quarter and first six months of 2002,
respectively. These fees are deferred and recognized as revenue over a 76-month
period. Approximately $91,000 and $162,000 was recognized as hotel development
revenue in the second quarter and first six months of 2002. Cendant also pays
the Company a portion of all royalty fees Cendant receives from all of its
AmeriHost Inn franchisees. Generally, Cendant receives royalty fees from each of
their franchisees based upon a percentage of guest room revenue, ranging from 4%
to 5%. In turn, Cendant will pay the Company a portion of this fee as stipulated
in the agreement. The Company recorded approximately $50,000 and $87,000 in
royalty sharing payments during the second quarter and first six months of 2002,
respectively. The Company generally records this royalty sharing fee as hotel
development segment revenue when the related royalty fee is received.
The Company recorded $1.5 million and $4.7 million in hotel sales and commission
revenue during the three and six months ended June 30, 2002, respectively,
compared to $93,373 and $5.9 million during the three and six months ended June
30, 2001. The Company and the REIT which owns certain of the Company's leased
hotels, closed on the sale of three AmeriHost Inn hotels during the first six
months of 2002, including one in the second quarter of 2002, versus five
AmeriHost inn hotels during the first six months of 2001, including one during
the second quarter of 2001. The Company intends to continue to build and sell
AmeriHost Inn hotels in order to maximize the value inherent in the Cendant
transaction while enhancing net income and cash flow. The AmeriHost Inn hotel
that was sold during the second quarter of 2001 was owned by the REIT;
therefore, the revenues from this segment only included a commission on the sale
of this hotel.
Hotel management revenue increased 8.5% and 5.3% to $262,772 and $496,709 during
the three and six months ended June 30, 2002, respectively, from $242,090 and
$471,898 during the three and six months ended June 30, 2001. The number of
hotels managed for third parties and minority-owned entities was 15 hotels,
representing 1,212 rooms, at June 30, 2002, versus 16 hotels, representing 1,318
rooms, at June 30, 2001. The decrease from the elimination of management fees
from a minority-owned hotel upon its consolidation during the fourth quarter of
2001, was offset by the increase in same room revenues, which is the basis for
the management fee revenue.
Employee leasing revenue decreased 36.7% and 37.0% to $867,814 and $1.7 million
during the three and six months ended June 30, 2002, respectively, from $1.4
million and $2.7 million during the three and six months ended June 30, 2001,
due primarily to the reduction in rooms managed for minority-owned entities and
unrelated third parties as described above, a concerted effort to decrease
payroll costs which is the basis for the employee leasing revenue, and the
treatment of workers compensation insurance cost in 2002.
Other revenue, consisting of leasing revenue from the Company's office building
was $156,318 and $317,988 during the three and six months ended June 30, 2002.
On October 1, 2001, the Company purchased the office building in which its
headquarters is located. The building contains approximately 50,000 rentable
square feet, of which the Company occupies approximately 19,000 square feet.
Nearly all of the remaining space is leased to unrelated third parties pursuant
to long-term leases.
Total operating costs and expenses increased 26.0% and 8.5% to $15.5 million
(75.2% of total revenues) and $30.7 million (79.6% of total revenues) during the
three and six months ended June 30, 2002, respectively, from $12.3 million
(72.6% of total revenues) and $28.3 million (77.8% of total revenues) during the
three and six months ended June 30, 2001, primarily due to increases in
operating costs and expenses from the hotel development and sale of hotel
segments as described below. Operating costs and expenses in the hotel
operations segment decreased 2.6% and 2.2% to $10.3 million and $20.5 million
during the three and six months ended June 30, 2002, respectively. A decrease in
Page 17
operating costs associated with the fewer number of hotels included in this
segment (62 hotels at June 30, 2002, versus 63 hotels at June 30, 2001), and the
decrease in energy costs during the first six months of 2002 compared to 2001,
were partially offset by the acquisition of one non-AmeriHost Inn hotel and the
consolidation of another non-AmeriHost Inn hotel which was previously accounted
for by the equity method. Hotel operations segment operating costs and expenses
as a percentage of segment revenue increased to 70.4% and 78.6% during the three
and six months ended June 30, 2002, from 69.7% and 76.9% during the three and
six months ended June 30, 2001. Operating costs and expenses as a percentage of
revenues for the Consolidated AmeriHost Inn hotels decreased to 67.0% and 73.9%
during the three and six months ended June 30, 2002, from 69.4% and 75.5% during
the three and six months ended June 30, 2001. Operating costs and expenses as a
percentage of revenues from the other Consolidated hotels increased to 84.1% and
97.4% during the three and six months ended June 30, 2002, from 70.8% and 83.2%
during the three and six months ended June 30, 2001, due primarily to the
acquisition and consolidation of the two non-AmeriHost Inn hotels and the
associated operating costs therefrom.
Operating costs and expenses for the hotel development segment increased to $2.6
million and $4.6 million during the three and six months ended June 30, 2002,
from $211,256 and $587,424 during the three and six months ended June 30, 2001,
consistent with increase in hotel development revenues for the three and six
months ended June 30, 2002. Operating costs and expenses in the hotel
development segment as a percentage of segment revenue decreased during the
three and six month periods ended June 30, 2002 due to the increase in hotel
construction activity from third parties and minority-owned entities.
Hotel management segment operating costs and expenses increased 15.6% and
decreased 3.7% to $184,297 and $338,827 during the three and six months ended
June 30, 2002, respectively, from $159,445 and $351,912 during the three and six
months ended June 30, 2001. These decreases were primarily due to the decrease
in the number of hotel rooms operated and managed for unrelated third parties
and minority-owned entities. Employee leasing operating costs and expenses
decreased 36.2% and 37.8% to $856,165 and $1.7 million during the three and six
months ended June 30, 2002, respectively, from $1.3 million and $2.7 million
during the three and six months ended June 30, 2001, which is consistent with
the 36.7% and 37.0% decrease in segment revenue for the three and six months
ended June 30, 2002.
Other operating costs and expenses of $28,798 and $45,621 during the three and
six months ended June 30, 2002, consisted of expenses related to the management
of the Company's office building. On October 1, 2001, the Company purchased the
office building in which its headquarters is located and assumed the landlord
duties for the other tenants.
Depreciation and amortization expense increased 22.5% and 20.3% to $1.4 million
and $2.7 million during the three and six months ended June 30, 2002,
respectively, from $1.1 million and $2.3 million during the three and six months
ended June 30, 2001. The increases were primarily attributable to the
acquisition of the office building, the opening of newly constructed hotels, and
the acquisition or consolidation of existing hotels, offset by the sale of
consolidated hotels during the last twelve months.
Leasehold rents - hotels decreased 21.6% and 18.6% to $1.3 million and $2.8
million during the three and six months ended June 30, 2002, respectively,
compared to $1.7 million and $3.5 million during the three and six months ended
June 30, 2001. The decrease was due to the sale of five leased AmeriHost Inn
hotels during the last 18 months, and the acquisition of three hotels pursuant
to lease-purchase options during the past twelve months.
Corporate general and administrative expense decreased 6.2% and 24.6% to
$386,435 and $773,594 during the three and six months ended June 30, 2002,
respectively, from $411,804 and $1.0 million during the three and six months
ended June 30, 2001, and can be attributed primarily to the expense related to
stock options issued to consultants and transitional accounting fees incurred
during the first quarter of 2001.
The Company's operating income increased 44.5% and 14.5% to $2.0 million and
$1.5 million during the three and six months ended June 30, 2002, respectively,
from $1.4 million and $1.3 million during the three and six months ended June
30, 2001. The following discussion of operating income by segment is exclusive
of any corporate general and administrative expense. Operating income from
Consolidated AmeriHost Inn hotels increased 19.8% and 48.3% to $1.7 million and
$1.2 million during the three and six months ended June 30, 2002, respectively,
from $1.5 million and $782,398 during the three and six months ended June 30,
2001. These increases in operating income were due to the increase in same room
revenues and decreases in certain hotel operating expenses including energy
Page 18
costs. Operating income from the hotel development segment increased to $526,343
and $592,411 during the three and six months ended June 30, 2002, from
($175,630) and ($493,034) during the three months ended June 30, 2001. The
increases in hotel development operating income were due to the increase in
hotels developed and constructed for third parties and minority-owned entities
during the second quarter and first six months of 2002, compared with the second
quarter and first six months of 2001. Operating income from hotel sales and
commissions decreased to $42,719 and $1.2 million during the three and six
months ended June 30, 2002, from $93,373 and $2.1 million during the three and
six months ended June 30, 2001. These decreases were due to the sale of three
AmeriHost Inn hotels during the first six months of 2002, versus the sale of
five during the six months ended June 30, 2001. The hotel management segment had
operating income of $65,394 and $131,292 during the three and six months ended
June 30, 2002, compared to operating income of $68,235 and $91,185 during the
three and six months ended June 30, 2001. The increase during the six months
ended June 30, 2002, was due primarily to a reduction in hotel management
operating expenses. Employee leasing operating income decreased to $11,081
during the three months ended June 20, 2002, from $27,470 during the three
months ended June 30, 2001, and increased to $42,190 during the six months ended
June 30, 2002, from $31,641 during the six months ended June 30, 2001, due
primarily to the decrease in employee leasing operating expenses. Other
operating income of $86,465 and $194,747 during the three and six months ended
June 30, 2002, was attributable to the acquisition in 2001 of the office
building in which the Company's headquarters is located.
Interest expense increased slightly to $1.5 million and $2.9 million during the
three and six months ended June 30, 2002, respectively, from $1.4 million and
$2.8 million during the three and six months ended June 30, 2001. The decrease
attributable to sale of AmeriHost Inn hotels, whereby the Company does not incur
any interest expense on sold hotels after the sale dates, the decrease from
lower interest on floating rate debt, and the reduction of fixed interest rates
pursuant to loan modifications executed in 2001, was offset by the mortgage
financing of newly constructed or acquired Consolidated hotels. The Company
capitalizes interest expense incurred during the pre-opening construction period
of a Consolidated hotel project, as part of the total development cost. The
amount capitalized includes both interest charges from a direct construction
loan, plus interest computed at the Company's incremental borrowing rate on the
total costs incurred to date in excess of the construction loan funding.
The Company's share of equity in income (loss) of affiliates decreased to
($208,551) during the three months ended June 30, 2002, from ($159,767) during
the three months ended June 30, 2001. The Company's share of equity in income
(loss) of affiliates increased to ($121,583) during the six months ended June
30, 2002, from ($272,540) during the six months ended June 30, 2001. The
fluctuations in equity of affiliates during the second quarter and first six
months of 2002, compared to 2001, were primarily attributable to the write down
to net realizable value of property in a hotel partnership by $100,000 during
the second quarter of 2002, and the recognition of the Company's share of the
operations in excess of the Company's ownership interest as a result of its
position as general partner. Distributions from affiliates were $10,310 during
the six months ended June 30, 2002, compared to $10,059 during the six months
ended June 30, 2001.
The Company anticipates exchanging a note receivable from the principals of
Diversified Innkeepers, Inc. in the amount of $1,136,779 at June 30, 2002, for a
50% ownership interest in a hotel joint venture. The remaining 50% ownership
interest will be held by the principals of Diversified Innkeepers, Inc. Under
the terms of the partnership agreement, the Company is entitled to preferred
operating distributions, as well as a preferred distribution upon the sale or
refinancing of the hotel.
The Company recorded gains from the sale of assets of $0 and $327,076 during the
three and six months ended June 30, 2002, compared to $275,207 and $590,445
during the three and six months ended June 30, 2001. These gains were comprised
primarily of the unamortized deferred gains remaining from the original sale of
these hotels to the REIT, which were recognized upon the consummation of the
sales of these hotels by the REIT to unrelated third parties and the
simultaneous termination of the Company's leases with the REIT. Two hotels were
sold by the REIT during the first six months of 2001, and one hotel was sold by
the REIT during the first six months of 2002. The Company expects to continue
recognizing the unamortized deferred gain from the future sale of REIT owned
hotels.
The Company recorded income tax expense of $160,000 and $103,000 during the
three and six months ended June 30, 2002 and 2001, respectively, and an income
tax benefit of $345,000 and $319,000 during the three and six months ended June
30, 2002 and 2001, respectively, which are directly related to the pre-tax
income during the second quarter of 2002 and 2001, and the pre-tax losses
incurred during the first six months of 2002 and 2001.
Page 19
The Company reported a net income of $234,068 and $152,596 during the three
months ended June 30, 2002 and 2001, respectively, and a net loss of ($523,684)
and ($467,522) during the first six months of 2002 and 2001, primarily due to
the factors discussed above.
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 hotel development incentive fees and royalty
sharing pursuant to the Cendant transaction, (iii) revenues from the sale of
hotel assets; (iv) fees from management contracts; and (v) fees from employee
leasing services. 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 typically is
received as of or prior to the pay date. The Company typically receives an
earnest money deposit from the buyer of a hotel when a sales contract is
executed. The remaining proceeds from the sale of hotel assets are received at
the time of closing. The development incentive fee from Cendant is typically
received within 20 days of the closing. Royalty sharing payments from Cendant
are received quarterly, based on the actual royalty payments received by Cendant
from the AmeriHost Inn franchisees.
During the first six months of 2002, the Company provided cash from operations
of $6.3 million, compared to $5.7 million the first six months of 2001, or an
increase in cash provided by operations of approximately $560,000. The increase
in cash flow from operations during the first six months of 2002, when compared
to 2001, can be attributed primarily to the increase in hotel development
activity for a third party and a minority-owned entity and the increase in
operating income from AmeriHost Inn hotels.
The Company invests cash in three principal areas: (i) the purchase of property
and equipment through the construction and renovation of Consolidated hotels;
(ii) the purchase of equity interests in hotels; and (iii) the making of loans
to affiliated and non-affiliated hotels for the purpose of construction,
renovation and working capital. From time to time, the Company may also utilize
cash to purchase its own common stock.
Pursuant to an amendment to the Master lease agreement with the REIT, the
Company can facilitate the sale of up to eight leased hotels by the REIT. When
the REIT sells a leased hotel to a buyer who becomes an AmeriHost Inn franchisee
of Cendant, the Company receives: (i) a commission from the REIT for
facilitating the transaction which is based upon the sale price, (ii) an
incremental fee from Cendant, and (iii) long-term royalty sharing fees from
Cendant from the future royalties paid to Cendant. Both the Company and the REIT
choose which properties are sold. For each hotel chosen by the Company, one
hotel is also chosen by the REIT. The Company's choice is final when the sale
transaction closes. The REIT makes their corresponding choice at this time. If
the Company and the REIT are not successful in selling the REIT's choice, then
the Company is obligated under the agreement to purchase the hotel from the
REIT. If the Company does not complete the purchase of the hotel within the
specified time period, then the Company's rent payment shall be increased by
0.25% each time. The Company cannot close on the sale of its third and fourth
choice until the first and second REIT choices have been sold (or purchased by
the Company), respectively. During 2001, the Company facilitated the sale of two
hotels by the REIT (the Company's first and second choices), and purchased one
hotel from the REIT (the REIT's first choice). The Company purchased the REIT's
second choice during the second quarter of 2002, using approximately $700,000 in
cash, plus mortgage financing already committed from an affiliate of the REIT.
The Company must facilitate the sale or purchase the REIT's third choice by June
5, 2003.
On September 18, 2000, the Company finalized the terms of an agreement to
purchase the remaining ownership interests in three existing joint ventures at a
specified price. One of these acquisitions was completed in 2001, one was
completed during the second quarter of 2002 using approximately $800,000, and
the remaining one must be completed before December 31, 2002. The Company
expects to use approximately $800,000 for the purchase of the remaining joint
venture interests.
Page 20
During the first six months of 2002, the Company used $13.9 million in investing
activities compared to using $7.7 million during the first six months of 2001.
During the first six months of 2002, the Company bought out the partners'
interests in one joint venture for $796,786, used $12.1 million to purchase
property and equipment for Consolidated AmeriHost Inn hotels, and used $1.0
million for investments in and advances to affiliates, net of distributions and
collections on advances from affiliates. During the first six months of 2001,
the Company bought out the partners' interests in one joint venture for
$795,384, used $5.6 million to purchase property and equipment for Consolidated
AmeriHost Inn hotels, and used $1.4 million for investments in and advances to
affiliates, net of distributions and collections on advances from affiliates.
Cash provided by financing activities was $6.3 million during the first six
months of 2002 compared to $2.5 million during the first six months of 2001. In
2002, the primary factors were $9.7 million in proceeds from the mortgage
financing of Consolidated hotels and net proceeds of $362,585 on the Company's
operating line-of-credit, offset by principal repayments of $3.7 million on the
mortgage financing of Consolidated hotels, including the repayment of mortgages
in connection with the sale of hotels. In 2001, the contributing factors were
$3.5 million in proceeds from the issuance of long-term debt, and $3.2 million
in net proceeds from the Company's operating line-of-credit, offset by principal
repayments of $4.3 million on the mortgage financing of Consolidated hotels,
including the repayment of mortgages in connection with the sale of hotels.
Approximately $6.4 million is classified as current portion of long-term debt,
including two mortgages which are due within the next twelve months. The Company
expects these loans to be repaid through the sale of the hotels or refinanced
prior to maturity.
The Company, through wholly-owned subsidiaries, is a general partner or managing
member in 18 joint ventures. As such, the Company is secondarily liable for the
obligations and liabilities of these joint ventures. As of June 30, 2002, these
joint ventures had $32.5 million outstanding under mortgage loan agreements.
Approximately $7.5 million of this amount has been included in the Company's
consolidated financial statements as of June 30, 2002 since it is from joint
ventures in which the Company has a majority or controlling ownership interest,
leaving approximately $24.9 million in off balance sheet mortgage debt with
unconsolidated joint ventures. Of this amount, the Company has also provided
approximately $13.9 million in guarantees to the lenders. Other partners have
also guaranteed portions of this amount. One unconsolidated joint venture
mortgage loan in the amount of $1.6 million at June 30, 2002, matures in 2002.
The hotel owned by this joint venture is currently under contract for sale. The
Company expects this loan to be repaid from the sale proceeds or refinanced
prior to its maturity. One unconsolidated joint venture mortgage loan in the
amount of $1.8 million at June 30, 2002 matures in 2003. The Company expects
this loan to be extended or refinanced prior to its maturity. The remaining
joint venture mortgage loans mature after 2003.
From time to time, the Company advances funds to joint ventures for working
capital and renovation projects. The Company has also provided the mortgage
financing for one unconsolidated joint venture. The advances, including the
mortgage note, bear interest at rates ranging from prime to 10% per annum and
are due upon demand. The advances were $7.2 million at June 30, 2002, and are
included in investments in and advances to unconsolidated hotel joint ventures
in the Company's consolidated financial statements. The Company expects the
joint ventures to repay these advances through cash flow generated from hotel
operations, mortgage financing, and/or the sale of the hotel.
Certain of the Company's hotel mortgage notes and the Company's office building
mortgage note contain financial covenants, principally minimum net worth
requirements, debt to equity ratios, and minimum debt service coverage ratios.
These financial covenants are typically measured annually, based upon the
Company's fiscal year end. The Company is not aware of any covenant violations
as of June 30, 2002.
At June 30, 2002, the Company had $7.2 million outstanding under its operating
line-of-credit. The operating line-of-credit has a limit of $8.5 million, is
collateralized by substantially all the assets of the Company subject to first
mortgages from other lenders on hotel assets, bears interest at a rate based on
either the prime rate or LIBOR, plus a spread adjusted quarterly based on the
Company' leverage ratio, ranging from zero to 0.5% (if prime based) or 3.0% (if
LIBOR based), and matures February 19, 2003. The line-of-credit agreement also
provides for the maintenance of certain financial covenants, including minimum
tangible net worth, a maximum leverage ratio, and a minimum debt service
coverage ratio. The Company was not in compliance with the maximum leverage
ratio covenant as of June 30, 2002; however, the lender has waived this
violation and adjusted the covenant for future periods.
Page 21
The Company expects cash from operations, including proceeds from the sale of
hotels, to be sufficient to pay all operating and interest expenses in 2002, as
well as commitments to purchase hotel assets.
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
On April 30, 2002, the FASB issued Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13 and Technical Corrections." The rescission of
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and SFAS
no. 64 "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,"
which amended SFAS No. 4, will affect income statement classification of gains
and losses from extinguishment of debt. SFAS No. 4 requires that gains and
losses from extinguishment of debt be classified as an extraordinary item, if
material. Under SFAS No. 145, extinguishment of debt is now considered a risk
management strategy by the reporting enterprise and the FASB does not believe it
should be considered extraordinary under the criteria in AP B Opinion No. 30,
"Reporting the Results of Operations-Reporting he Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," unless the debt extinguishment meets the unusual in
nature and infrequency of occurrence criteria in APB Opinion No. 30. SFAS 145
will be effective for fiscal years beginning after May 15, 2002. Upon adoption
extinguishments of debt shall be classified under the criteria in APB Opinion
No. 30. The Company does not believe the adoption of SFAS 145 will have a
material effect on its financial statements.
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
All statements contained herein that are not historical facts, including, but
not limited to, statements regarding the Company's hotels under construction and
the operation of AmeriHost Inn hotels are based on current expectations. These
statements are forward looking in nature and involve a number of risks and
uncertainties. Actual results may differ materially. Among the factors that
could cause actual results to differ materially are the following: the
availability of sufficient capital to finance the Company's business plan on
terms satisfactory to the Company; competitive factors, such as the introduction
of new hotels or renovation of existing hotels in the same markets; changes in
travel patterns which could affect demand for the Company's hotels; changes in
development and operating costs, including labor, construction, land, equipment,
and capital costs; general business and economic conditions; and other risk
factors described from time to time in the Company's reports filed with the
Securities and Exchange Commission. The Company wishes to caution readers not to
place undue reliance on any such forward looking statements, which statements
are made pursuant to the Private Securities Litigation Reform Act of 1995 and,
as such, speak only as of the date made.
Page 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations. The Company has some cash
flow exposure on its long-term debt obligations to changes in market interest
rates. The Company primarily enters into long-term debt obligations in
connection with the development and financing of hotels. The Company maintains a
mix of fixed and floating debt to mitigate its exposure to interest rate
fluctuations.
The Company's management believes that fluctuations in interest rates in the
near term would not materially affect the Company's consolidated operating
results, financial position or cash flows as the Company has limited risks
related to interest rate fluctuations.
The table below provides information about financial instruments that are
sensitive to changes in interest rates, for each interest rate sensitive asset
or liability as of June 30, 2002. The carrying amounts reflected approximate the
estimated fair values. As the table incorporates only those exposures that
existed as of June 30, 2002, it does not consider those exposures or positions
which could arise after that date. Moreover, the information presented therein
is merely an estimate and has limited predictive value. As a result, the
ultimate realized gain or loss with respect to interest rate fluctuations will
depend on the exposures that arise during future periods, hedging strategies and
prevailing interest rates at the time.
Average Nominal
Carrying Value Interest Rate
-------------- -------------
Operating line of credit - variable rate $ 7,156,287 5.50%
Mortgage debt - fixed rate $ 34,074,599 7.55%
Mortgage debt - variable rate $ 45,597,246 6.38%
Page 23
PART II: OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Reports on Form 8-K:
There were no reports on Form 8-K filed during this
period covered by this report.
(b) Exhibits:
The following are included as exhibits to this report on
Form 10-Q:
Exhibit No. Description
----------- -----------
3.2 By-laws of Arlington Hospitality, Inc. (as
amended June 27, 2002)
99.1 Certification pursuant to 18 U.S.C.
Section 1350 as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ARLINGTON HOSPITALITY, INC.
---------------------------
Registrant
Date: August 13, 2002
By: /s/ James B. Dale
-----------------------------
James B. Dale
Chief Financial Officer
Page 24