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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended SEPTEMBER 30, 2002
-------------------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File No. 0-15291
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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 November 14, 2002, 4,958,081 shares of the Registrant's Common Stock were
outstanding.
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ARLINGTON HOSPITALITY, INC.
FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002
INDEX
PART I: Financial Information Page
----------------------------- ----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 4
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2002 and 2001 6
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 26
Item 4. Controls and Procedures 26
PART II: Other Information
--------------------------
Item 4. Submission of Matters to a Vote of Securities Holders 27
Item 6. Exhibits and Reports on Form 8-K 27
Signatures and Certifications 28
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
==================================================================================================================
September 30, December31,
2002 2001
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 2,379,390 $ 4,748,156
Accounts receivable, less an allowance of $150,000 at
September 30, 2002 and December 31, 2001 (including
approximately $210,000 and
$126,000 from related parties) 2,111,700 2,343,423
Notes receivable, current portion 15,000 518,499
Prepaid expenses and other current assets 458,837 998,559
Refundable income taxes 914,482 -
Costs and estimated earnings in excess of billings on
uncompleted contracts with related parties 1,187,821 1,079,137
--------------- --------------
Total current assets 7,067,230 9,687,774
--------------- --------------
Investments in and advances to unconsolidated
hotel joint ventures (Note 8) 6,598,715 5,404,744
--------------- --------------
Property and equipment:
Land 13,914,819 12,454,360
Buildings 81,716,449 68,095,453
Furniture, fixtures and equipment 27,083,778 24,189,969
Construction in progress 2,925,966 5,973,890
Leasehold improvements 2,781,336 2,899,179
Assets held for sale - 2,187,822
--------------- --------------
128,422,348 115,800,673
Less accumulated depreciation and amortization 26,650,860 22,905,635
--------------- --------------
101,771,488 92,895,038
--------------- --------------
Notes receivable, less current portion 435,000 1,000,000
Deferred income taxes (Note 5) 2,104,000 3,247,000
Other assets, net of accumulated amortization of
$1,153,000 and $986,000 2,736,907 2,939,900
--------------- --------------
5,275,907 7,186,900
$ 120,713,340 $ 115,174,456
=============== ==============
(continued)
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
==================================================================================================================
September 30, December 31,
2002 2001
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,526,392 $ 2,467,704
Bank line-of-credit 5,981,287 6,793,702
Accrued payroll and related expenses 910,249 784,533
Accrued real estate and other taxes 2,323,781 1,952,875
Other accrued expenses and current liabilities 409,722 452,086
Current portion of long-term debt 7,584,938 2,110,652
Income taxes payable - 286,670
--------------- --------------
Total current liabilities 19,736,369 14,848,222
--------------- --------------
Long-term debt, net of current portion 70,884,468 70,088,269
--------------- --------------
Deferred income (Note 9) 10,457,758 10,714,735
--------------- --------------
Commitments and contingencies
Minority interests 346,264 456,631
--------------- --------------
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 September 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 6,529,536 6,307,533
19,725,356 19,503,474
Less:
Stock subscriptions receivable (436,875) (436,875)
19,288,481 19,066,599
$ 120,713,340 $ 115,174,456
=============== ==============
See notes to consolidated financial statements.
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
==================================================================================================================
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- -------------------------------
2002 2001 2002 2001
--------------- --------------- --------------- ----------------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 12,737,246 $ 12,939,843 $ 33,582,408 $ 35,057,658
Other hotels 3,242,781 3,121,609 8,475,959 8,259,870
Development and construction 1,060,605 847,745 6,279,915 954,920
Hotel sales and commissions - 4,231,045 4,748,348 10,089,113
Management services 266,931 257,808 763,640 729,706
Employee leasing 929,164 1,157,587 2,649,339 3,887,603
Other 153,254 - 471,242 -
--------------- --------------- --------------- ---------------
18,389,981 22,555,637 56,970,851 58,978,870
--------------- --------------- --------------- ---------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 8,271,494 8,505,417 23,675,045 25,197,975
Other hotels 2,534,850 2,392,241 7,634,132 6,666,418
Development and construction 944,824 251,607 5,568,717 839,031
Hotel sales and commissions - 3,118,210 3,528,680 6,835,678
Management services 165,628 195,742 504,455 547,654
Employee leasing 916,318 1,152,710 2,593,120 3,849,491
Other 71,297 1,618 116,918 1,618
--------------- --------------- --------------- ---------------
12,904,411 15,617,545 43,621,067 43,937,865
--------------- --------------- --------------- ---------------
5,485,570 6,938,092 13,349,784 15,041,005
Depreciation and amortization 1,324,173 1,129,657 4,054,003 3,399,005
Leasehold rents - hotels 1,305,386 1,611,347 4,124,038 5,072,486
Corporate general and administrative 755,036 451,520 1,528,630 1,476,952
--------------- --------------- --------------- ---------------
Operating income 2,100,975 3,745,568 3,643,113 5,092,562
Other income (expense):
Interest expense (1,446,107) (1,207,437) (4,320,883) (4,004,484)
Interest income 151,538 233,891 409,760 503,920
Other income 452,170 507,836 489,530 614,224
Gain on sale of property and equipment - 295,893 327,076 886,338
Equity in net income and (losses)
of affiliates 61,697 (122,329) (59,886) (394,869)
--------------- --------------- --------------- ---------------
Income before minority
interests and income taxes 1,320,273 3,453,422 488,710 2,697,691
Minority interests in (income) loss of
consolidated subsidiaries and partnerships (55,586) (304,300) (92,707) (335,091)
--------------- --------------- --------------- ---------------
Income before income taxes 1,264,687 3,149,122 396,003 2,326,600
Income tax expense 519,000 1,292,000 174,000 973,000
--------------- --------------- --------------- ---------------
Net income $ 745,687 $ 1,857,122 $ 222,003 $ 1,389,600
=============== =============== =============== ===============
Net income per share - Basic $ 0.15 $ 0.37 $ 0.04 $ 0.28
Net income per share - Diluted $ 0.14 $ 0.35 $ 0.04 $ 0.25
See notes to consolidated financial statements.
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
==================================================================================================================
2002 2001
--------------- ----------------
Cash flows from operating activities:
Cash received from customers $ 58,211,613 $ 60,044,114
Cash paid to suppliers and employees (44,903,006) (42,230,699)
Interest received 446,142 543,012
Interest paid (4,339,151) (4,004,818)
Income taxes paid (232,152) (305,936)
--------------- ---------------
Net cash provided by operating activities 9,183,446 14,045,673
--------------- ---------------
Cash flows from investing activities:
Distributions, and collections on advances,
from affiliates 954,088 978,021
Purchase of property and equipment (14,054,498) (12,907,470)
Purchase of investments in, and advances
to, minority owned affiliates (1,418,212) (2,412,326)
Acquisitions of partnership interests,
net of cash acquired (Note 7) (796,786) (795,384)
(Advances) collections on notes receivable (18,279) 188,057
Proceeds from sale of assets (6,700) 2,500
--------------- ---------------
Net cash used in investing activities (15,340,387) (14,946,602)
--------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 9,660,858 8,435,866
Principal payments on long-term debt (4,856,883) (7,732,627)
Net (repayments) proceeds from line of credit (812,415) 3,387,569
Distributions to minority interest (203,074) (90,255)
(Purchase) issuance of common stock (311) 13,141
Other - 117,000
--------------- ---------------
Net cash provided by financing activities 3,788,175 4,128,694
--------------- ---------------
Net (decrease) increase in cash (2,368,766) 3,227,766
Cash and cash equivalents, beginning of year 4,748,156 1,728,869
--------------- ---------------
Cash and cash equivalents, end of period $ 2,379,390 $ 4,956,635
=============== ===============
(continued)
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
(UNAUDITED)
==================================================================================================================
2002 2001
--------------- ----------------
Reconciliation of net income to net
cash provided by operating activities:
Net income $ 222,003 $ 1,389,600
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,054,003 3,399,004
Equity in net (income) loss of affiliates and
amortization of deferred income 59,886 394,869
Interest from unconsolidated joint ventures (62,910) -
Minority interests in net income of subsidiaries 92,707 335,091
Amortization of deferred gain (801,320) (714,955)
Deferred income taxes 1,143,000 45,000
Issuance of common stock 190 -
Gain on sale of property and equipment (327,076) (886,338)
Proceeds from sale of hotels 4,830,870 9,039,507
Income from sale of hotels (927,401) (2,141,769)
Changes in assets and liabilities, net of effects
of acquisition:
Decrease (increase) in accounts receivable 46,573 (522,207)
Decrease in prepaid expenses and
other current assets 579,255 683,254
(Increase) decrease in refundable income taxes (1,201,152) 622,064
(Increase) decrease in costs and estimated earnings
in excess of billings (108,684) 13,222
Increase in other assets (177,903) (161,511)
Increase in accounts payable 35,048 162,571
Increase in accrued payroll and other accrued
expenses and current liabilities 441,752 483,109
Decrease in accrued interest (18,268) (335)
Increase in deferred income 1,302,873 1,905,498
--------------- ----------------
Net cash provided by operating activities $ 9,183,446 $ 14,045,673
=============== ================
See notes to consolidated financial statements.
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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
September 30, 2002 and December 31, 2001, and the results of its
operations for the three and nine months ended September 30, 2002 and
2001, and cash flows for the nine months ended September 30, 2002. The
results of operations for the three and nine months ended September 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
controlling 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 and we do not believe any of our properties meet
all of the criteria necessary to classify assets as held for sale as of
September 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 September 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. The calculations of basic and diluted earnings (loss)
per share are as follows:
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
================================================================================
4. EARNINGS (LOSS) PER SHARE (CONTINUED):
--------------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------- ---------------------------------
2002 2001 2002 2001
------------- ------------- -------------- ---------------
Net income $ 745,687 $ 1,857,122 $ 222,003 $ 1,389,600
Impact of convertible
partnership interests 9,248 (18,385) (6,695) (76,389)
------------- ------------- -------------- --------------
Net income available to
common shareholders $ 754,935 $ 1,838,737 $ 215,308 $ 1,313,211
============= ============= ============== ==============
Weighted average common
shares outstanding 4,958,056 4,980,731 4,958,072 4,979,844
Dilutive effect of:
Common stock equivalents 199,974 53,947 69,847 54,098
Convertible partnership interests 84,975 168,100 84,975 168,100
------------- ------------- -------------- --------------
Dilutive common shares outstanding 5,243,005 5,202,778 5,112,894 5,202,042
============= ============= ============== ==============
Net income per share - Basic $ 0.15 $ 0.37 $ 0.04 $ 0.28
============= ============= =============== ===============
Net income per share - Diluted $ 0.14 $ 0.35 $ 0.04 $ 0.25
============= ============= =============== ===============
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 during 2002, based on the final determination of the
appropriate tax treatment for certain fees.
The income tax expense (benefit) for the three and nine months ended
September 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 September 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. The
aggregate purchase price for the remaining two leased hotels was
approximately $7,000,000 as of September 30, 2002.
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 18, 2000, the Company
finalized the terms of an agreement to purchase the remaining ownership
interests in these partnerships at a specified price. 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 April 30, 2003 for approximately
$800,000.
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
============= =============
The Company has provided approximately $16.7 million in guarantees as of
September 30, 2002 on mortgage loan obligations for ten joint ventures in
which the Company holds a minority equity interest, which expire at
various dates through March 2021. 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 has provided additional loan guarantees for joint ventures in
which the Company holds a minority equity interest in the amount of $3.1
million during 2002, and has been released from approximately $1.6 million
in loan guarantees during 2002 as a result of the sale of the related
hotel property by the joint venture.
During the second quarter of 2002, one of the Company's hotel joint
ventures wrote down its hotel asset by $100,000, to its estimated realized
value as it was determined to be permanently impaired. This adjustment was
included in equity in net income and (losses) of affiliates in the
accompanying consolidated financial statements.
The Company exchanged a note and related interest receivable from the
principals of Diversified Innkeepers, Inc. in the amount of approximately
$1.2 million on September 1, 2002, for a 50% ownership interest in a hotel
joint venture. This transaction was accounted for at fair value resulting
in no gain or loss recognized. The remaining 50% ownership interest is
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.
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
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
================================================================================
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 September 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.
9. SALE/LEASEBACK OF HOTELS (CONTINUED):
-------------------------------------
The REIT sold one of its hotels to an unrelated third party during the
nine months ended September 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.
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 three and nine months
ended September 30, 2002 and 2001, for each business segment, which is the
information utilized by the Company's decision makers in managing the
business:
Three months ended September 30, Nine months ended September 30,
Revenues 2002 2001 2002 2001
-------- --------------- ------------ ------------- -------------
Hotel operations $ 15,980,027 $ 16,061,452 $ 42,058,367 $ 43,317,528
Hotel development and construction 1,060,605 847,745 6,279,915 954,920
Hotel sales and commissions - 4,231,045 4,748,348 10,089,113
Hotel management 266,931 257,808 763,640 729,706
Employee leasing 929,164 1,157,587 2,649,339 3,887,603
Other (office building) 153,254 - 471,242 -
------------ ---------------- ------------- -------------
$ 18,389,981 $ 22,555,637 $ 56,970,851 $ 58,978,870
============ ================ ============= =============
Operating costs and expenses
Hotel operations $ 10,806,344 $ 10,897,658 $ 31,309,177 $ 31,864,393
Hotel development and construction 944,824 251,607 5,568,717 839,031
Hotel sales and commissions - 3,118,210 3,528,680 6,835,678
Hotel management 165,628 195,742 504,455 547,654
Employee leasing 916,318 1,152,710 2,593,120 3,849,491
Other (office building) 71,297 1,618 116,918 1,618
------------ ---------------- ------------- -------------
$ 12,904,411 $ 15,617,545 $ 43,621,067 $ 43,937,865
============ ================ ============== =============
Operating income
Hotel operations $ 2,646,155 $ 2,448,040 $ 2,850,798 $ 3,083,336
Hotel development and construction 114,440 595,775 706,852 102,743
Hotel sales and commissions - 1,112,836 1,219,668 3,253,435
Hotel management 88,284 49,479 219,576 140,664
Employee leasing 12,277 4,103 54,467 35,744
Other (office building) 41,506 (1,618) 236,253 (1,618)
Corporate (801,687) (463,047) (1,644,501) (1,521,742)
------------ ---------------- ------------- -------------
$ 2,100,975 $ 3,745,568 $ 3,643,113 $ 5,092,562
============ ================ ============= =============
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
================================================================================
10. BUSINESS SEGMENTS (CONTINUED):
------------------------------
Capital expenditures
Hotel operations $ 1,966,237 $ 7,309,159 $ 13,754,704 $ 12,783,412
Hotel development and construction - - - 5,975
Hotel management 1,813 18,781 9,811 62,503
Employee leasing - - - -
Other (office building) 17,933 - 273,605 -
Corporate 1,733 9,578 16,378 55,580
------------ ---------------- ------------- -------------
$ 1,987,716 $ 7,337,518 $ 14,054,498 $ 12,907,470
============ ================ ============= =============
Depreciation/Amortization
Hotel operations $ 1,222,142 $ 1,104,407 $ 3,774,354 $ 3,297,312
Hotel development and construction 1,341 361 4,346 13,147
Hotel management 13,019 12,588 39,609 41,388
Employee leasing 568 774 1,752 2,368
Other (office building) 40,451 - 118,071 -
Corporate 46,652 11,527 115,871 44,790
------------ ---------------- ------------- -------------
$ 1,324,173 $ 1,129,657 $ 4,054,003 $ 3,399,005
============ ================ ============= =============
September 30,September 30,
Identifiable assets 2002 2001
------------------- ------------- -------------
Hotel operations $ 105,445,693 $ 98,148,598
Hotel development and construction 2,034,119 1,299,724
Hotel management 241,122 (689,533)
Employee leasing (228,958) 103,536
Other (office building) 6,752,250 -
Corporate 6,469,114 7,376,704
------------- -------------
$ 120,713,340 $ 106,239,029
============= =============
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.
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
================================================================================
12. PRESIDENT/CEO SEVERANCE:
------------------------
On August 15, 2002, the Company's President/Chief Executive Officer
delivered six months' advance notice of intent to resign, to be effective
February 15, 2003. The President/Chief Executive Officer's employment
agreement provided for certain benefits upon resignation with a six-month
notice. On November 7, 2002, the Company agreed to pay the President/Chief
Executive Officer a severance of $325,000, plus certain expenses, in full
satisfaction of the severance obligations under the employment agreement.
As a provision of the severance agreement, the President/Chief Executive
Officer has also agreed to provide consulting services for a period of one
year for which he will be paid the cash equivalent value of certain fringe
benefits currently available under his employment (including health, life,
dental and disability insurance). As of September 30, 2002, the Company
has accrued $383,000 for these severance benefits, which has been included
in corporate general and administrative expense in the accompanying
consolidated financial statements.
In connection with the severance, the President/Chief Executive Officer
has formed affiliates which have entered into agreements to purchase two
hotels from the Company for a total purchase price of approximately $5.2
million, to close no later than February 15, 2003. The sale of the hotels
is expected to close in December 2002, and is contingent upon satisfactory
appraisals demonstrating sale of the hotels at a price not less than
appraised value, financing commitments, and the successful transfer of a
land lease on one of the hotels. The Company expects to record pretax
income from the sale of these hotels of approximately $550,000 upon
closing. In addition, the Company will be entitled to a five-year
contingent purchase price participation in a percentage of the
appreciation of the hotels above certain pre-determined break points,
which would be triggered on sale or certain refinancing of the hotels, or
if not yet sold, in all events based on appraised value on the fifth
anniversary of the closing; provided however, under certain circumstances,
the hotel purchasers can prepay this participation amount for $340,000 if
prepaid prior to the five year anniversary of the closing. The Company
will also be entitled to a fee from Cendant Finance Holding Corporation
pursuant to their Development Agreement dated September 30, 2000 upon the
closing of the hotel sales. The closing of the severance agreement and
other agreements referenced above is contingent upon the successful
closing of the hotel sale transactions. If the hotel sale transactions do
not close by February 15, 2003, the severance agreements will be void. In
the event the transactions close prior to February 15, 2003, the
President/Chief Executive Officer will also receive additional severance
and fringe benefits based upon his current salary from the closing through
February 15, 2003. At closing the parties will deliver mutual releases
(save for those actions for which indemnification would not be permitted
under Delaware law) and the President/Chief Executive Officer will
immediately resign as an officer and director of the Company. There can be
no assurance that these hotel sale transactions, and the severance
agreement, will be consummated.
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
================================================================================
13. LONG-TERM DEBT:
---------------
Approximately $7.6 million is classified as current portion of long-term
debt, including three 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 is currently under
contract to sell one of these hotels with an outstanding mortgage balance
of $2.7 million as of September 30, 2002. The remaining two mortgages bear
interest at the fixed rates of 8.23% and 7.24% per annum. The Company
expects to refinance these mortgages at similar interest rates.
ARLINGTON HOSPITALITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
================================================================================
14. FIRE LOSS:
----------
On July 4, 2002, a hotel under construction caught fire and completely
burned down. At the time of the fire, the Company had recorded
approximately $1.7 million in construction in progress. The Company has
submitted a claim to its insurance provider which is currently being
reviewed. The Company has received $1.5 million from the insurance company
as a partial settlement, which ws recorded as a reduction of construction
in progress. Upon final settlement, the Company expects to receive a total
amount at least equal to the total construction cost incurred on the
project.
15. SUPPLEMENTAL CASH FLOW DATA:
----------------------------
The following represents the supplemental schedule of noncash investing
and financing activities for the nine months ended September 30:
2002 2001
----------------- -----------------
Liabilities assumed in connection with
acquisition of hotel partnership interests $ 1,520,923 $ 1,341,697
================= ==================
Exchange of note receivable and accrued
interest for an investment in a hotel
partnership $ 1,214,087
=================
Reclassification of deferred gain against
basis of acquired assets (Note 9) $ 347,989 $ 511,943
================= ==================
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 September 30,
2002, the Company had 65 AmeriHost Inn hotels open, of which 54 were
wholly-owned or leased, one was majority-owned, and 10 were minority-owned. The
Company opened three 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 September 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 5.6% during the third quarter of 2002, compared to the third
quarter of 2001, attributable to a 9.4% increase in occupancy, partially offset
by a decrease of $2.05 in average daily rate. These results relate to the 60
AmeriHost Inn hotels that were operating for at least thirteen full months
during the three months ended September 30, 2002.
The table below sets forth information regarding the hotels at September 30,
2002.
Open Under
Hotels Construction Total
---------------- ---------------- ---------------
Hotels Rooms Hotels Rooms Hotels Rooms
------ ----- ------ ----- ------ -----
100% or majority owned or leased:
AmeriHost Inn hotels 55 3,544 3 230 58 3,774
Other brands 8 1,051 - - 8 1,051
------- ------ ------ ------- ------ ------
63 4,595 3 230 66 4,825
------- ------ ------ ------- ------ ------
Minority ownership interest:
AmeriHost Inn hotels 10 684 1 96 11 780
Other brands 3 350 - - 3 350
------- ------ ------ ------- ------ ------
13 1,034 1 96 14 1,130
------- ------ ------ ------- ------ ------
Totals:
AmeriHost Inn hotels 65 4,228 4 326 69 4,554
Other brands 11 1,401 - - 11 1,401
------- ------ ------ ------- ------ ------
76 5,629 4 326 80 5,955
======= ====== ====== ======= ====== ======
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 1.6% and 4.2% to $12.7
million and $33.6 million during the three and nine months ended September 30,
2002, from revenues of $12.9 million and $35.1 million during the three and nine
months ended September 30, 2001 respectively, due primarily to the sale of
hotels to franchisees, offset by increases in same room revenues. Same room
revenues for all Consolidated AmeriHost Inn hotels owned and operated by the
Company increased approximately 5.0% during the third quarter of 2002, compared
to the third quarter of 2001, attributable to a 9.5% increase in occupancy,
partially offset by a decrease of $2.49 in average daily rate. These results
relate to the 51 Consolidated AmeriHost Inn hotels that were operating for at
least thirteen full months during the three months ended September 30, 2002.
Same room revenues for all Consolidated AmeriHost Inn hotels owned and operated
by the Company increased approximately 3.7% during the first nine months of
2002, compared to the first nine months of 2001, attributable to a 7.9% increase
in occupancy, partially offset by a decrease of $2.20 in average daily rate.
These results relate to the 54 Consolidated AmeriHost Inn hotels that were
operating for at least thirteen full months during the nine months ended
September 30, 2002. Revenues from the development segment increased 25.1% and
558% to $1.1 million and $6.3 million during the three and nine months ended
September 30, 2002, from $847,745 and $954,920 for the three and nine months
ended September 30, 2001, respectively, due to the increase in hotel development
activity for minority owned and third party entities. Revenues from hotel sales
and commissions was $4.7 million during the nine months ended September 30,
2002, as a result of the sale of three AmeriHost Inn hotels. Revenues from hotel
management and employee leasing segments decreased by 15.5% and 26.1% in total
during the three and nine months ended September 30, 2002, respectively, due
primarily to the sale or termination of hotels under management contracts.
Revenues from Consolidated non-AmeriHost Inn hotels increased 3.9% and 2.6%
during the three and nine months ended September 30, 2002, respectively,
compared to 2001, as a result primarily of the consolidation of one hotel which
was previously accounted for by the equity method. Total revenues decreased
18.5% and 3.4% to $18.4 million and $57.0 million during the three and nine
months ended September 30, 2002, from $22.6 million and $59.0 million during the
three and nine months ended September 30, 2001. The Company recorded net income
of $745,687 for the third quarter of 2002, or $0.14 per diluted share, compared
to net income of approximately $1.9 million or $0.35 per diluted share in 2001.
The Company recorded net income of $222,003 for the nine months ended September
30, 2002, or $0.04 per diluted share, compared to net income of approximately
$1.4 million, or $0.25 per diluted share, for the nine months ended September
30, 2001. The third quarter of 2002 included a pretax charge of $383,000 for
severance benefits in connection with the resignation of the Company's
President/CEO.
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 both short-term and long-term incentives to the
Company as the AmeriHost Inn brands are expanded, including (i) for the 25 year
term of the agreement, favorable royalty payment terms on any AmeriHost Inn
hotels owned/leased and operated by the Company, including hotels owned through
joint ventures with prior approval from Cendant, (ii) for the 25 year term of
the agreement, the sharing of royalties received by Cendant from all AmeriHost
Inn franchisees (excluding those owned/leased and operated by the Company), and
(iii) for the 15 year term of the agreement, a hotel development incentive fee
each time an AmeriHost Inn hotel owned/leased and operated by the Company is
sold to an operator who becomes a Cendant franchisee.
Excluding hotels under construction, the Company had an ownership interest in 76
hotels at September 30, 2002, versus 75 hotels at September 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 increased slightly to 63 hotels at September 30, 2002,
versus 61 hotels at September 30, 2001.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are defined as those accounting policies that
require management to exercise subjective and complex judgment. The Company's
critical accounting policies are described in its 2001 Form 10-K.
In addition, on January 1, 2002 the Company 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 the
Company's business strategy, the Company does not generally assess a sale as
probable before the transaction closes, and does not believe any of its
properties meet all of the criteria necessary to classify assets as held for
sale as of September 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. The Company does not include the sales or operations of
AmeriHost Inn hotels in discontinued operations because it retains 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 September 30, 2002, there were no identifiable
discontinued operations.
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002
COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001
Revenues decreased 18.5% and 3.4% to $18.4 million and $57.0 million during the
three and nine months ended September 30, 2002, respectively, from $22.6 million
and $59.0 million during the three and nine months ended September 30, 2001. The
decrease in revenue was primarily due to decreases in revenues from the sale of
AmeriHost Inn hotels and hotel operating revenues, partially offset by an
increase in hotel development and construction revenues.
Hotel operations revenue decreased 0.5% and 2.9% to $16.0 million and $42.1
million during the three and nine months ended September 30, 2002 respectively,
from $16.1 million and $43.3 million during the three and nine months ended
September 30, 2001. Revenues from Consolidated AmeriHost Inn hotels decreased
1.6% and 4.2% to $12.7 million and $33.6 million during the three and nine
months ended September 30, 2002, respectively, from $12.9 million and $35.1
million during the three and nine months ended September 30, 2001. These
decreases were attributable primarily to the sale of nine Consolidated AmeriHost
Inn hotels during 2001 and three Consolidated AmeriHost Inn hotels during 2002,
offset by increases of 5.0% and 3.7% in Consolidated AmeriHost Inn hotel same
room revenues during the three and nine months ended September 30, 2002.
Revenues from Consolidated other brand hotels increased 3.9% and 2.6% to $3.2
million and $8.5 million during the three and nine months ended September 30,
2002, respectively. These increases were primarily the result of the
consolidation beginning in the fourth quarter of 2001 of one non-AmeriHost Inn
hotel which was previously accounted for by the equity method. The hotel
operations segment included the operations of 63 Consolidated hotels (including
55 AmeriHost Inn hotels) comprising 4,595 rooms at September 30, 2002, compared
to 61 Consolidated hotels (including 55 AmeriHost Inn hotels) comprising 4,329
rooms at September 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 in certain
markets. Nevertheless, same room revenues for all AmeriHost Inn hotels owned and
operated by the Company, including minority owned hotels, increased
approximately 5.6% and 5.4% during the third quarter and first nine months of
2002, compared to the same periods in 2001. During the third quarter of 2002,
same room occupancy increased 9.4%, while same room average daily rate decreased
by $2.05, compared to the same period in 2001. During the first nine months of
2002, same room occupancy increased 9.3% while same room average daily rate
decreased by $2.01, compared to the same period in 2001. In addition, the
Company typically builds new hotels in growing markets where it anticipates a
certain level of additional hotel development. The Company believes that as the
number of AmeriHost Inn hotels operated by both the Company and others
increases, the greater the benefits will be at all AmeriHost Inn locations from
marketplace recognition and repeat business. In addition, as the revenue
increases from AmeriHost Inn hotels not operated by the Company, the Company's
royalty stream from Cendant is also enhanced.
Hotel development revenue increased 25.1% and 558% to $1.1 million and $6.3
million during the three and nine months ended September 30, 2002, respectively,
from $847,745 and $954,920 during the three and nine months ended September 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 not constructing any hotels for minority-owned entities
or unrelated third parties during the first nine months of 2001, however was
close to breaking ground on two such projects at the end of the third quarter.
During the first nine months of 2002, two hotels were being constructed for
minority-owned entities, including one which was completed during the third
quarter and one which was started during the third quarter. In addition, the
Company built an AmeriHost Inn hotel for an operator who was referred to the
Company by Cendant, the franchisor of the AmeriHost Inn brand, which was
completed during the second quarter of 2002. The Company also had several
additional projects in various stages of pre-construction development during
both nine-month periods.
The Company recorded $0 and $4.7 million in hotel sales and commission revenue
during the three and nine months ended September 30, 2002, respectively. The
Company and the REIT which owns certain of the Company's leased hotels, closed
on the sale of four AmeriHost Inn hotels during the first nine months of 2001,
including one in the third quarter. The Company and the REIT closed on the sale
of three AmeriHost Inn hotels during the first nine months of 2002. 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.
Hotel management revenue increased 3.5% and 4.7% to $266,931 and $763,640 during
the three and nine months ended September 30, 2002, respectively, from $257,808
and $729,706 during the three and nine months ended September 30, 2001. The
number of hotels managed for third parties and minority-owned entities was 16
hotels, representing 1,318 rooms, at September 30, 2001 versus 13 hotels,
representing 1,034 rooms, at September 30, 2002. The increase in revenues was
primarily due to the addition of two minority-owned AmeriHost Inn hotels,
partially offset by the termination of two management contracts as a result of
the consolidation or buyout of minority owned AmeriHost Inn hotels. In addition,
one minority-owned AmeriHost Inn hotel was sold, and another management
agreement was terminated later in the third quarter which will impact future
revenues for this segment.
Employee leasing revenue decreased 19.7% and 31.9% to $929,164 and $2.6 million
during the three and nine months ended September 30, 2002, respectively, from
$1.2 million and $3.9 million during the three and nine months ended September
30, 2001, due primarily to the reduction in rooms 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.
Other revenue, consisting of leasing revenue from the Company's office building
was $153,254 and $471,242 during the three and nine months ended September 30,
2002. On October 1, 2001, the Company purchased the office building in which its
headquarters is located. The office building contained approximately 50,000
rentable square feet when acquired, and has been subsequently increased to
approximately 56,000 rentable square feet through various building improvements.
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 decreased 17.4% and 0.7% to $12.9 million
(70.2% of total revenues) and $43.6 million (76.6% of total revenues) during the
three and nine months ended September 30, 2002, respectively, from $15.6 million
(69.2% of total revenues) and $43.9 million (74.5% of total revenues) during the
three and nine months ended September 30, 2001, primarily due to decreases in
operating costs and expenses from the hotel operations and sale of hotel
segments as described below, offset by an increase in operating costs from hotel
development. Operating costs and expenses in the hotel operations segment
decreased 0.8% and 1.7% to $10.8 million and $31.3 million during the three and
nine months ended September 30, 2002, respectively. An increase in operating
costs associated with the greater number of hotels included in this segment (63
hotels at September 30, 2002, versus 61 hotels at September 30, 2001), was
offset by the sale of AmeriHost Inn hotels and decreases in energy costs. Hotel
operations segment operating costs and expenses as a percentage of segment
revenue decreased to 67.6% during the three months ended September 30, 2002,
from 67.8% during the same period in 2001, and increased to 74.4% during the
nine months ended September 30, 2002, from 73.6% during the same period in 2001.
Operating costs and expenses as a percentage of revenues for the Consolidated
AmeriHost Inn hotels decreased to 64.9% and 70.5% during the three and nine
months ended September 30, 2002, from 65.7% and 71.9% during the three and nine
months ended September 30, 2001.
Operating costs and expenses for the hotel development and construction segment
increased 276%, to $944,824 during the three months ended September 30, 2002,
from $251,607 during the three months ended September 30, 2001, as a result of
increased hotel construction activity for minority owned entities during the
third quarter of 2002 compared to the third quarter of 2001. Operating costs and
expenses for the hotel development and construction segment increased 564%, to
$5.6 million during the nine months ended September 30, 2002, from $839,031
during the nine months ended September 30, 2002, consistent with the 558%
increase in hotel development revenues for the nine months ended September 30,
2002. Operating costs and expenses in the hotel development segment as a
percentage of segment revenue increased during the three and nine months ended
September 30, 2002, due to the increase in hotel construction activity.
Hotel management segment operating costs and expenses decreased 15.4% and 7.9%
to $165,628 and $504,455 during the three and nine months ended September 30,
2002, respectively, from $195,742 and $547,654 during the three and nine months
ended September 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
20.5% and 32.6% to $916,318 and $2.6 million during the three and nine months
ended September 30, 2002, respectively, from $1.2 million and $3.8 million
during the three and nine months ended September 30, 2001, which is consistent
with the 19.7% and 31.9% decrease in segment revenue for the three and nine
months ended September 30, 2002.
Other operating costs and expenses of $71,297 and $116,918 during the three and
nine months ended September 30, 2002, consisted of expenses related to the
management of the Company's office building which was purchased on October 1,
2001.
Depreciation and amortization expense increased 17.2% and 19.3% to $1.3 million
and $4.1 million during the three and nine months ended September 30, 2002,
respectively, from $1.1 million and $3.4 million during the three and nine
months ended September 30, 2001. The increases were primarily attributable to
the opening or acquisition of five hotels during 2001, and three hotels during
2002, offset by the sale of three owned consolidated hotels that closed in 2002.
Leasehold rents - hotels decreased 19.0% and 18.7% to $1.3 million and $4.1
million during the three and nine months ended September 30, 2002, respectively,
compared to $1.6 million and $5.1 million during the three and nine months ended
September 30, 2001. The decreases were primarily attributable to the termination
of six leased hotels during 2001 and the first nine months of 2002 as a result
of the lessor selling these hotels, offset by the extension of the hotel leases
with a REIT.
Corporate general and administrative expense increased 67.2% and 3.5% to
$755,036 and $1.5 million during the three and nine months ended September 30,
2002, respectively, from $451,520 and $1.5 million during the three and nine
months ended September 30, 2001, and can be attributed primarily to the accrual
of $383,000 in severance benefits in connection with the resignation of the
Company's President/CEO during the third quarter of 2002, the overall growth of
the Company, offset by the recognition of expenses during 2001 related to the
issuance of stock options and transitional accounting fees.
The Company's operating income decreased 43.9% and 28.5% to $2.1 million and
$3.6 million during the three and nine months ended September 30, 2002,
respectively, from $3.7 million and $5.1 million during the three and nine
months ended September 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 8.5% and 18.9%
to $2.4 million and $3.5 million during the three and nine months ended
September 30, 2002, respectively, from $2.2 million and $3.0 million during the
three and nine months ended September 30, 2001. These increases in operating
income were due to an increase in same room revenues, and decreases in certain
hotel operating expenses including energy costs. Operating income from the hotel
development segment decreased to $114,440 during the three months ended
September 30, 2002, from $595,776 during the three months ended September 30,
2001 and increased to $706,852 during the first nine months of 2002 from
$102,743 during the first nine months of 2001. The fluctuations in hotel
development operating income were due to the timing of hotels developed and
constructed for third parties and minority-owned entities during the third
quarter and first nine months of 2002, compared with the third quarter and first
nine months of 2001, and the overall increase in the number of hotels developed
and constructed for third parties and minority-owned entities during 2002.
Operating income from the sale of AmeriHost Inn hotels was $0 and $1.2 million
during the three and nine months ended September 30, 2002, compared to $1.1
million and $3.3 million during the three and nine months ended September 30,
2001, as a result of the sale of eight AmeriHost Inn hotels during the first
nine months of 2001, including three during the third quarter, compared to the
sale of three AmeriHost Inn hotels during the first nine months of 2002, with
none during the third quarter. The hotel management segment had operating income
of $88,284 and $219,576 during the three and nine months ended September 30,
2002, compared to operating income of $49,478 and $140,664 during the three and
nine months ended September 30, 2001. These increases were due primarily to
improvements in operational efficiencies. Employee leasing operating income
increased to $12,277 during the three months ended September 30, 2002, from
$4,103 during the three months ended September 30, 2001, and increased to
$54,467 during the nine months ended September 30, 2002, from $35,744 during the
nine months ended September 30, 2001, due primarily to operational efficiencies
and the allocation of certain costs.
Interest expense increased 19.8% and 7.9% to $1.4 million and $4.3 million
during the three and nine months ended September 30, 2002, respectively, from
$1.2 million and $4.0 million during the three and nine months ended September
30, 2001. These increases were primarily attributable to the overall increase in
outstanding debt during this period from the mortgage financing of newly
constructed Consolidated hotels, partially offset by the sale of hotels whereby
the Company does not incur any interest expense on the sold hotels after the
sale dates and the reduction of interest rates on certain floating rate loan
agreements.
The Company's share of equity in income (loss) of affiliates increased to
$61,697 during the three months ended September 30, 2002, from ($122,329) during
the three months ended September 30, 2001. The Company's share of equity in
income (loss) of affiliates improved to ($59,886) during the nine months ended
September 30, 2002, from ($394,869) during the nine months ended September 30,
2001. The increase in equity of affiliates during the third quarter and first
nine months of 2001 was primarily attributable to the sale of a minority-owned
property in the third quarter 2002 at a significant gain, offset by an
impairment adjustment of $100,000 during the second quarter of 2002. The Company
exchanged a note receivable from the principals of Diversified Innkeepers, Inc.
in the amount of approximately $1.2 million at September 30, 2002, for a 50%
ownership interest in a hotel joint venture. The Company had previously managed
this hotel for Diversified Innkeepers, Inc. pursuant to a management contract.
Since the Company does not control the major decisions of this joint venture,
this investment has been accounted for by the equity method. Distributions from
affiliates were $10,768 during the nine months ended September 30, 2002,
compared to $14,173 during the nine months ended September 30, 2001.
The Company recorded gains from the sale of assets of $0 and $327,076 during the
three and nine months ended September 30, 2002, compared to $295,893 and
$886,338 during the three and nine 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. Three
hotels were sold by the REIT during the first nine months of 2001, and one hotel
was sold by the REIT during the first nine 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 $519,000 and $174,000 during the
three and nine months ended September 30, 2002, respectively, and income tax
expense of $1,292,000 and $973,000 during the three and nine months ended
September 30, 2001, respectively, which are directly related to the pre-tax
income during the third quarter of 2002 and 2001, and the first nine months of
2002 and 2001.
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 (such as
direct billings to local companies using the hotel and third party hotel room
brokers) 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 simultaneous closing of the Company's sale of an
AmeriHost Inn hotel and the execution by the buyer of a franchise agreement with
Cendant, including all proper documentation. Royalty sharing payments from
Cendant are received quarterly, based on the actual royalty payments received by
Cendant from all AmeriHost Inn hotel franchisees, except for those operated by
the Company.
During the first nine months of 2002, the Company provided cash from operations
of $9.2 million, compared to $14.0 million the first nine months of 2001, or a
decrease in cash provided by operations of approximately $4.8 million. The
decrease in cash flow from operations during the first nine months of 2002, when
compared to 2001, can be attributed primarily to the decrease in sale of hotel
activity, partially offset by the increase in hotel development activity for a
third party and minority-owned entities and the increase in operating income
from operating its portfolio of 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. Currently, the Board of Directors has
authorized the Company to buy back, at any time and without notice, up to
1,000,000 shares of it own common stock under certain conditions.
Pursuant to an amendment to the master lease agreement with a 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 on all of the REIT hotels 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). During 2002, 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, and facilitated the sale of one hotel by 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 prices. 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.
During the first nine months of 2002, the Company used $15.3 million in
investing activities compared to using $14.9 million during the first nine
months of 2001. During the first nine months of 2002, the Company bought out the
partners' interests in one joint venture for $796,786, used $14.1 million to
purchase property and equipment for Consolidated AmeriHost Inn hotels, and used
$464,124 for investments in and advances to affiliates, net of distributions and
collections on advances from affiliates. During the first nine months of 2001,
the Company bought out the partners' interests in one joint venture for
$795,384, used $12.9 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 $3.8 million during the first nine
months of 2002 compared to $4.1 million during the first nine months of 2001. In
2002, the primary factors were $9.7 million in proceeds from the mortgage
financing of Consolidated hotels, offset by net repayments of $812,415 on the
Company's operating line-of-credit, and principal repayments of $4.9 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 $8.4 million in proceeds from the mortgage financing of
Consolidated hotels, net proceeds of $3.4 million on the Company's operating
line-of-credit, offset by principal repayments of $7.7 million on the mortgage
financing of Consolidated hotels, including the repayments of mortgages in
connection with the sale of hotels. Approximately $7.6 million is classified as
current portion of long-term debt, including three 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 is
currently under contract to sell a hotel with one of these mortgages with an
outstanding balance of $2.7 million as of September 30, 2002. The remaining two
mortgages bear interest at the fixed rates of 8.23% and 7.25% per annum. The
Company expects to refinance these mortgages at similar interest rates.
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 September 30, 2002,
these joint ventures had $33.6 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 September 30, 2002 since it is
from joint ventures in which the Company has a majority or controlling ownership
interest, leaving approximately $26.1 million in off balance sheet mortgage debt
with unconsolidated joint ventures. Of this amount, the Company has also
provided approximately $16.7 million in guarantees to the lenders. Other
partners have also guaranteed portions of this amount. One unconsolidated joint
venture sold its hotel subsequent to September 30, 2002. Upon the sale, this
joint venture repaid its mortgage loan in the amount of $1.6 million at
September 30, 2002. One unconsolidated joint venture mortgage loan in the amount
of $1.8 million at September 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 $6.6 million at September 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 September 30, 2002.
At September 30, 2002, the Company had $6.0 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 in compliance with these covenants
as of September 30, 2002. The Company is evaluating financing options that would
replace all or part of this line-of-credit with financing of longer duration
that would better match the Company's business plan of developing, building and
selling AmeriHost Inn hotels. As a result, the Company has begun discussions
with its current operating line-of-credit lender regarding an extension of the
maturity of this facility, while pursuing longer term financing options with
this lender and others. However, there can be no assurance that the Company will
obtain an extension of the current line-of-credit or an alternative credit
facility of longer duration under terms and conditions that the Company deems
satisfactory. In that event, the Company believes that cash flow from operations
and proceeds from the sale of hotels will be sufficient to make all necessary
payments on its maturing debt. 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.
In June 2002, the financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability for costs associated with an exit or disposal activity be recognized
when the liability is incurred rather than when a company commits to such an
activity and also establishes fair value as the objective for initial
measurement of the liability. SFAS 146 is effective for exit or disposal
activities that are initiated after December 31, 2002. The Company has not yet
fully assessed the impact of SFAS 146 on the consolidated financial statements,
but does not anticipate it to be material.
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, including the Company's ability to refinance
existing debt when due; 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.
The Company's severance agreement with its President/Chief Executive Officer is
scheduled to be effective upon the simultaneous closings of the sale of two
hotels to affiliates of the President/Chief Executive Officer; should such
closings not occur by February 15, 2003, the agreements shall be void. The
closing of the Agreements is contingent upon procurement of appraisals
demonstrating sale of the hotels at a price not less than appraised value,
closing of financing commitments (subject to normal and customary contingencies)
and procurement of a release of the Company from its guaranty of the land lease
underlying one of the hotels. There can be no assurances that such contingencies
can be met or that other events may impede the successful closing of the
contemplated transactions.
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 September 30, 2002. The carrying amounts reflected
approximate the estimated fair values. As the table incorporates only those
exposures that existed as of September 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 $ 5,981,287 5.50%
Mortgage debt - fixed rate $ 46,036,288 7.51%
Mortgage debt - variable rate $ 32,433,118 6.19%
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days of the filing date of this
report, that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of the previously mentioned evaluation.
PART II: OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS:
-----------------------------------------------------
The annual shareholders' meeting was held on August 15, 2002. One matter was
voted with the following results:
Matter 1: Election of Directors
Director For Authority Withheld Abstain/Non-Votes
--------------------- ---------------- ---------------------- --------------------
Michael P. Holtz 4,021,832 4,449 794
Russell J. Cerqua 4,022,607 3,674 794
Salomon J. Dayan 4,022,207 4,190 678
Thomas J. Romano 4,008,136 18,261 678
Gerald T. LaFlamme 4,007,911 18,486 678
Kenneth M. Fell 3,338,219 3,283 130
Steven J. Belmonte 3,329,469 12,033 130
Reno J. Bernardo 682,663 2,471 664
Jon K. Haahr 668,417 16,833 548
In accordance with the bylaws of the Company, the election of Directors requires
the affirmative vote of a plurality of voting power represented at the annual
shareholder meeting. Since the shareholders were voting on a seven member Board
of Directors, the seven members were elected as follows: Messrs. Holtz, Cerqua,
Dayan, Romano, LaFlamme, Fell, and Belmonte.
On August 15, 2002, after the annual shareholder meeting, Mr. Cerqua resigned
from the Board of Directors, and Mr. Holtz submitted his resignation as a
Director and President/CEO with a six-month notice, agreeing to serve through
the transitional period as a replacement was found. In addition, on September 9,
2002, Mr. Andrew E. Shapiro was appointed to the Board of Directors.
The Board has appointed Kenneth Fell as "Lead Director" and effective upon Mr.
Holtz's resignation from the Board of Directors, Mr. Fell would serve as
Chairman of the Board of Directors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Reports on Form 8-K:
The Company filed a report on Form 8-K on August 15,
2002. This filing included the script from management's
presentation on the Company as presented immediately
after the Company's annual shareholder meeting.
The Company filed a report on Form 8-K on November 8,
2002. This filing included a press release regarding the
settlement arrangement with the outgoing President/Chief
Executive Officer and the sale of two of its AmeriHost
Inn hotels to the President/CEO. This filing also
includes the Settlement Agreements between the Company
and the President/CEO.
(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
revised on October 22, 2002
10.7 Form of Indemnification Agreement executed
by independent directors
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: November 14, 2002
By: /s/ James B. Dale
----------------------------
James B. Dale
Chief Financial Officer
CERTIFICATIONS
I, Michael P. Holtz, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arlington
Hospitality, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ Michael P. Holtz
----------------------------
Michael P. Holtz
Chief Executive Officer
I, James B. Dale, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Arlington
Hospitality, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002
/s/ James B. Dale
------------------------
James B. Dale
Chief Financial Officer