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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 2002
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File No. 0-15291
ARLINGTON HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3312434
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 S. ARLINGTON HEIGHTS RD., SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 228-5400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
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NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.005 per share
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(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) of the Act) Yes___ No |X|
While it is difficult to determine the number of shares owned by non-affiliates
(within the meaning of the term under the applicable regulations of the
Securities and Exchange Commission), the registrant estimates that the aggregate
market value of the registrant's Common Stock held by non-affiliates on March
27, 2003 (based upon an estimate that 75.04% of the shares are so owned by
non-affiliates and upon the closing price for the Common Stock of $3.33) was
$12,542,448.
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As of March 27, 2003, 5,019,588 shares of the Registrant's Common Stock were
outstanding.
The following documents are incorporated into this Form 10-K by reference: None
PART I
ITEM 1. BUSINESS.
GENERAL
Arlington Hospitality, Inc. and its subsidiaries (collectively, where
appropriate, the "Company") is engaged in the development and construction of
AmeriHost Inn hotels, and the ownership, operation, management and sale of both
AmeriHost Inn hotels and other hotels. The AmeriHost Inn brand was created by
the Company in 1989 to provide consistent, cost-effective development and
operation of mid-price, limited-service hotels in various markets. After
developing and operating the AmeriHost Inn brands for approximately 10 years,
the Company sold the AmeriHost Inn brands and franchising rights to Cendant
Corporation ("Cendant") in September 2000. Cendant is the world's largest
franchising company with hotel brands such as Super 8, Days Inn, Ramada and
Wingate. To date, all the Company's AmeriHost Inn hotels have been developed and
constructed using a two- or three-story prototype, featuring 60 to 120 rooms,
interior corridors and an indoor pool area and generally have been located in
smaller town markets. The Company also has designed a four-story AmeriHost Inn &
Suites prototype for larger markets.
Upon the sale of the AmeriHost Inn brands and franchising rights to Cendant, the
Company simultaneously entered into franchise agreements with Cendant for its
AmeriHost Inn hotels. The terms of the sale called for an initial payment to the
Company by Cendant of approximately $5.5 million upon closing (of which the
Company recorded a gain of approximately $5.2 million, net of closing costs, in
2000), plus three subsequent annual payments of $400,000 (two of which were
received and recognized in September 2001 and September 2002 with the final
payment to be received in September 2003). The sale transaction with Cendant
also provided for additional payments and incentives to the Company as the
AmeriHost Inn hotel franchise system is expanded. These additional payments and
incentives include, for certain time periods and subject to certain limitations
as described in Item 7 below, a development incentive fee when a hotel developed
and owned by the Company is sold to an operator who enters into an AmeriHost Inn
franchise agreement with Cendant and the sharing with the Company of royalty
fees paid to Cendant by all other AmeriHost Inn franchisees. In addition, the
Company enjoys the benefits of operating hotels under the Amerihost Inn brands
under favorable franchise agreements. In conjunction with this transaction, the
Company changed its name to Arlington Hospitality, Inc. from Amerihost
Properties, Inc. in May 2001.
Since 1993, the Company's growth strategy has focused on the expansion of the
AmeriHost Inn brand through development and construction. Currently, more than
85% of the Company's hotels are Amerihost Inn-branded properties. The Company's
AmeriHost Inn hotels generally have achieved a revenue per available room
("RevPAR") higher than that realized by the Company's other owned hotels,
including those operated under national franchise affiliations. The Company
primarily focuses on expanding this brand, rather than acquiring or developing
hotels under other brand affiliations, and is rewarded for this AmeriHost Inn
brand development under the Cendant agreement.
As of December 31, 2002, the Company owned, operated or managed 72 hotels
located in 17 states, including 62 AmeriHost Inn hotels.
-2-
The table below sets forth information regarding the Company's hotels at
December 31, 2002.
Open Under
Hotels Construction Total
---------------- ---------------- ---------------
Hotels Rooms Hotels Rooms Hotels Rooms
------- ------ ------ ------- ------ ------
Consolidated (1):
AmeriHost Inn hotels 53 3,385 3 230 56 3,615
Other brands 8 1,045 - - 8 1,045
------- ------ ------ ------- ------ ------
61 4,430 3 230 64 4,660
------- ------ ------ ------- ------ ------
Unconsolidated:
AmeriHost Inn hotels 9 610 1 96 10 706
Other brands 2 228 - - 2 228
------- ------ ------ ------- ------ ------
11 838 1 96 12 934
------- ------ ------ ------- ------ ------
Totals:
AmeriHost Inn hotels 62 3,995 4 326 66 4,321
Other brands 10 1,273 - - 10 1,273
------- ------ ------ ------- ------ ------
72 5,268 4 326 76 5,594
======= ====== ====== ======= ====== ======
(1) Consolidated hotels are those in which the Company has a 100% or
controlling ownership interest or a leasehold interest.
Unaffiliated third parties also operated 30 AmeriHost Inn hotels under franchise
agreements with Cendant as of December 31, 2002, nearly all of which were
previously owned and operated by the Company. As of December 31, 2002, according
to a franchise system report provided by Cendant, there were a total of 92
AmeriHost Inn hotels with 6,502 rooms in 20 states, including those owned,
operated or managed by the Company and by other franchisees.
The other brand hotels operated by the Company are franchised through Days Inn,
Howard Johnson Express or Ramada Inn, except for one hotel which is operated
independently, without a franchise brand.
As of December 31, 2002, the Company had four additional AmeriHost Inn hotels
under construction, three of which are 100% owned by the Company and one of
which is minority-owned.
The Company offers complete operational and financial management services,
including sales, marketing, quality control, training, purchasing and
accounting. This expertise is used for the Company's own account, as well as for
joint ventures pursuant to written management contracts. However, under certain
management contracts, the Company's joint venture partners or co-managers are
responsible for the day-to-day operational management, while the Company
provides full financial management and operational consulting and assistance. As
of December 31, 2002, the Company managed or co-managed all of the hotels in
which it had an ownership interest.
Company-managed hotels in which the Company has a minority ownership interest
are managed under contracts ranging from one to 10 years, with optional renewal
periods of equal length, and which contain provisions under which the Company is
paid fees equal to a percentage of total gross revenues for its services. The
Company has developed centralized systems and procedures which it believes allow
it to manage the hotels effectively and efficiently. The Company may pursue
management contracts with additional third parties, including Cendant
franchisees, while continuing to manage hotels for current, as well as future,
joint ventures.
As of December 31, 2002, the Company had 15 projects (one under construction)
with joint venture partners, including multiple projects with certain joint
venture partners. The Company's joint ventures have taken various forms,
including general partnerships, limited partnerships, and limited liability
companies. Each joint venture has been formed with respect to a particular hotel
project and reflects the characteristics of that project, including the relative
contributions, in cash, property or services, of its partners. In most
instances, the joint venture has taken the form of a limited partnership or a
limited liability company, with a wholly-owned subsidiary of the Company as a
general partner or managing member with sole or joint management authority. The
Company's subsidiary, as general partner or managing member,
-3-
has typically received an ownership interest ranging from 1% to 30% for
contributing the Company's expertise. In certain cases, the subsidiary also has
contributed a minimal amount of cash. The limited partners or members (which may
include the Company or its affiliates in some instances) have typically
contributed the cash equity required to fund the project and have received
interests proportionate to their contributions. A typical joint venture
agreement provides that the profits and losses of the entity will be allocated
among the partners in proportion to their respective interests. However, the
distribution of operating cash flow and asset sale proceeds to the Company in
proportion to its ownership interest is often subordinate to the prior return of
capital and other distributions payable to the other joint venture partners. In
addition, in two joint venture arrangements, the equity interests held by the
joint venture partners, including equity interests held by a Director of the
Company (see Item 13), are exchangeable into shares of the Company's common
stock, and the Company has guaranteed minimum annual distributions to the joint
venture partners. As the general partner or managing member, the Company's
subsidiary generally has significant management authority with respect to the
day-to-day operations of the joint venture. In certain instances, the joint
venture agreement or applicable law provides to the other joint venture partners
the right to amend the joint venture agreement, approve or prevent a transfer of
the general partner's partnership interest, remove the general partner for
cause, approve significant transactions or dissolve the joint venture.
Furthermore, in certain cases, the Company is obligated and/or has funded
operating shortfalls on behalf of the joint ventures, usually in the form of
interest-bearing loans. The joint venture agreements do not typically restrict
the right of the Company or its affiliates to engage in related or competitive
business activities
The Company also provides employee leasing services to hotels in which the
Company has a minority ownership interest and to hotels owned by unaffiliated
third parties, which are managed by the Company. Under its employee leasing
program, the Company employs all of the personnel working at the participating
hotels and leases them to the hotel owners pursuant to written agreements.
Employee leasing allows individual hotel owners with minimal employees to
benefit from economies of scale on personnel-related costs that result from the
Company's employee population of more than 1,300 hotel employees. The Company's
employee leasing agreements typically provide for one-year terms, with automatic
one-year renewals. The Company generally receives fees from each participating
hotel in an amount equal to the gross payroll costs for the leased employees,
including all related taxes and benefits, plus a percentage of the gross
payroll.
All revenues attributable to development, construction, management and employee
leasing services with respect to hotels in which the Company has a 100% or
controlling ownership or leasehold interest have been eliminated in
consolidation. Additionally, all revenues attributable to development,
construction, management and employee leasing services with respect to
unconsolidated hotels in which the Company has a minority ownership interest and
are accounting for under the equity method, have been eliminated to the extent
of the Company's ownership percentage.
AMERIHOST INN HOTELS
All of the Company's AmeriHost Inn hotels are operated pursuant to 20-year
franchise agreements with Cendant. Pursuant to these agreements, the Company has
access to the system's reservation system, Internet and global distribution
systems, marketing plans and trademarks. The franchise agreements require the
Company to maintain both the quality and condition of the hotel, as well as
specific operating procedures.
The Company's AmeriHost Inn hotels have been designed and constructed using a
two- or three-story prototype, featuring 60 to 120 rooms, interior corridors and
an indoor pool area. The AmeriHost Inn hotel's amenities and services include a,
whirlpool in the indoor pool area, exercise room, meeting room and extensive
exterior lighting for added security. The standard AmeriHost Inn guest room
features an electronic card-key lock, in-room safe, in-room coffee maker,
telephone with data port for personal computer, a work area and a 25" color
television with premium cable service or movies on demand. In addition, each
AmeriHost Inn hotel typically contains two to 12 whirlpool suites which, in
addition to the standard amenities, provide in-room whirlpools, microwave ovens,
compact refrigerators and an expanded sitting area. These whirlpool suites
generate higher rates than those of a standard room and may build customer
loyalty via a room "upgrade." AmeriHost Inn hotels do not contain food and
beverage facilities normally associated with full-service hotels. Food service
for hotel guests is generally available from adjacent or nearby free-standing
restaurants which are independently owned and operated.
-4-
The Company's AmeriHost Inn hotels are operated or managed in accordance with
strict guidelines designed to provide guests with a consistent lodging
experience. The Company believes the quality and consistency of the amenities
and services provided by the AmeriHost Inn hotels increase guest satisfaction
and repeat business. In addition, the AmeriHost Inn brand maintains its
Commitment Plus 100% guest satisfaction guarantee program. This program
guarantees that every guest will leave satisfied. All AmeriHost Inn employees
have the unconditional authority to correct any oversight to the guest's
satisfaction, or the guest's money will be refunded, up to 100%. This 100%
satisfaction guarantee assists the brand in maintaining its quality and
consistency.
The Company currently targets smaller town markets with established demand
generators such as major traffic arteries, office complexes, industrial parks,
shopping malls, colleges and universities or tourist attractions, as the
principal location for the development and construction of AmeriHost Inn hotels.
An AmeriHost Inn hotel typically is positioned to attract both business and
leisure travelers seeking consistent amenities and quality rooms at reasonable
rates, generally ranging from $50 to $80 per night.
The Company believes its in-house design staff, centralized purchasing program,
strict cost controls and experience gained with the construction of more than
100 hotels all contribute to a favorable cost structure for developing and
constructing new AmeriHost Inn hotels. Furthermore, due to the centralization of
all accounting, purchasing, payroll and other administrative functions, the
Company believes each hotel is operated efficiently and effectively with minimal
on-site staff. These factors assist the Company in maximizing its return on
invested capital, while offering an excellent value to its guests.
As part of the Company's overall strategy to expand the AmeriHost Inn hotel
brand, the Company has sold 26 of its AmeriHost Inn hotels to Cendant
franchisees and intends to pursue the sale of additional AmeriHost Inn hotels in
2003 and beyond. The Company sold three AmeriHost Inn hotels to franchisees in
1999. During 2000, the Company sold four AmeriHost Inn hotels to franchisees,
and three joint ventures in which the Company was a partner sold their AmeriHost
Inn hotels to franchisees. During 2001, nine AmeriHost Inn hotels operated by
the Company were sold to franchisees, and in 2002, seven AmeriHost Inn hotels
operated by the Company were sold to franchisees. The net proceeds (after
payment of related indebtedness) from such sales have primarily been used by the
Company to develop additional AmeriHost Inn hotels.
OTHER OWNED HOTELS
The Company primarily acquired its non-AmeriHost Inn hotels through joint
ventures prior to 1993. These hotels are owned, operated and managed principally
as part of a national franchise system under such brands as Days Inn, Howard
Johnson Express or Ramada Inn. The Company believes that franchises in smaller
markets are important in maintaining occupancy levels, which are supported by
the franchisor's national reservation systems, marketing efforts and brand name
recognition.
The Company's non-AmeriHost Inn hotels generally are located in smaller town
markets, with nearby demand generators. The non-AmeriHost Inn hotels contain 64
to 215 rooms, generate average daily rates ranging from $40 to $65 per night and
offer a variety of amenities and services. The non-AmeriHost Inn hotels include
limited- and full-service hotels. The full-service hotels primarily contain food
and beverage facilities, many of which are operated through lease arrangements
with non-affiliated restaurant operators.
As part of the Company's strategy to focus primarily on ownership of AmeriHost
Inn hotels, the Company intends to pursue sales of most of these non-AmeriHost
Inn hotels. During 1999, the Company sold one wholly-owned, non-AmeriHost Inn
hotel, and two joint ventures in which the Company was a partner sold their
non-AmeriHost Inn hotels. During 2000, the Company sold one wholly-owned
non-AmeriHost Inn hotel. During 2002, a joint venture in which the Company was a
partner sold its non-AmeriHost Inn hotel. The net proceeds from these sales were
primarily used by the Company to develop additional AmeriHost Inn hotels.
-5-
HOTEL PROPERTIES
At December 31, 2002, the Company owned and/or managed 72 hotels in 17 states,
concentrated in the midwestern and southern United States. The Company had 4
additional hotels under construction located generally in the same geographical
areas.
The following is a list of hotel properties under the Company's management at
December 31, 2002, by state:
Date
State Hotel (1) Rooms Operations Began
- ----- --------- ------- ----------------
California AmeriHost Inn Fontana 80 02/02/02
------
Florida Howard Johnson Express Inn Ft. Myers 124 09/30/92
------
Georgia AmeriHost Inn Eagles Landing, Stockbridge 60 08/08/95
AmeriHost Inn LaGrange 59 03/01/95
AmeriHost Inn Smyrna 60 12/21/95
Days Inn Northwest, Atlanta 104 11/01/91
------
283
------
Illinois AmeriHost Inn Jacksonville 60 06/14/96
AmeriHost Inn Macomb 60 05/19/95
AmeriHost Inn Players Riverboat Hotel, Metropolis 120 02/25/94
AmeriHost Inn Rochelle 61 03/07/97
AmeriHost Inn Sycamore 58 05/31/96
Days Inn Niles 150 01/01/90
------
509
------
Indiana AmeriHost Inn & Suites Columbia City 60 03/05/99
AmeriHost Inn & Suites Decatur 60 08/30/98
AmeriHost Inn Hammond 86 03/29/96
AmeriHost Inn & Suites Huntington 62 08/21/98
AmeriHost Inn Plainfield 60 09/01/92
Days Inn Plainfield 64 05/01/90
Ramada Inn Lafayette 144 02/02/94
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536
------
Iowa AmeriHost Inn & Suites Boone 60 08/21/98
AmeriHost Inn & Suites Le Mars 63 01/07/98
AmeriHost Inn & Suites Mt. Pleasant 63 07/02/97
AmeriHost Inn & Suites Pella 60 11/02/01
AmeriHost Inn Storm Lake 61 08/13/97
------
307
------
Kentucky AmeriHost Inn Murray 60 11/01/96
------
-6-
Date
State Hotel (1) Rooms Operations Began
- ----- ----- ------- ----------------
Michigan AmeriHost Inn & Suites Battle Creek (4) 62 03/19/99
AmeriHost Inn Coopersville 60 12/31/95
AmeriHost Inn & Suites Dowagiac 64 09/28/01
AmeriHost Inn Grand Rapids North, Walker 60 07/05/95
AmeriHost Inn Grand Rapids South 61 06/11/97
AmeriHost Inn & Suites Howell 75 01/18/02
AmeriHost Inn Hudsonville 61 11/24/97
AmeriHost Inn & Suites Monroe 63 09/19/97
AmeriHost Inn Port Huron 61 07/01/97
------
567
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Mississippi AmeriHost Inn Batesville 60 04/26/96
AmeriHost Inn Tupelo 61 07/25/97
Howard Johnson Express Inn Tupelo 124 12/31/01
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245
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Missouri AmeriHost Inn Fulton 62 01/21/99
AmeriHost Inn Mexico 61
AmeriHost Inn Warrenton 63 11/07/97
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186
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Ohio AmeriHost Inn Ashland 62 08/09/96
AmeriHost Inn & Suites Athens (2) 100 11/04/89
AmeriHost Inn & Suites Cambridge 71 02/06/98
AmeriHost Inn & Suites Columbus Southeast (2) 60 04/17/98
AmeriHost Inn & Suites East Liverpool (3) 66 10/20/00
AmeriHost Inn Jeffersonville North 61 07/20/96
AmeriHost Inn Jeffersonville South 60 10/14/94
AmeriHost Inn Kenton 60 08/02/96
AmeriHost Inn Lancaster 60 09/04/92
AmeriHost Inn Logan 60 04/16/93
AmeriHost Inn Marysville 78 06/01/90
AmeriHost Inn & Suites Newark (4) 72 01/29/99
AmeriHost Inn & Suites Oxford (3) 61 12/04/00
AmeriHost Inn St. Marys 61 11/25/97
AmeriHost Inn & Suites Toledo/Maumee (3) 85 07/24/02
AmeriHost Inn Upper Sandusky 60 04/12/95
AmeriHost Inn & Suites Wilmington 61 02/21/97
AmeriHost Inn Wooster East 57 01/18/94
AmeriHost Inn Wooster North 60 10/20/95
AmeriHost Inn Zanesville 60 07/30/96
Days Inn New Philadelphia 104 06/04/92
Ramada Inn Dayton Mall 215 01/20/92
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1,634
------
-7-
Date
State Hotel (1) Rooms Operations Began
- ----- ----- ------- ----------------
Oklahoma AmeriHost Inn & Suites Enid 60 06/11/98
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Pennsylvania Days Inn Altoona 139 08/31/92
Arlington Hotel Oil City 105 12/02/92
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244
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Tennessee AmeriHost Inn Jackson 60 04/01/98
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Texas AmeriHost Inn McKinney 61 01/07/97
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West Virginia AmeriHost Inn New Martinsville 60 05/03/96
AmeriHost Inn Parkersburg North 78 06/26/95
AmeriHost Inn Parkersburg South 61 12/30/96
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199
------
Wisconsin AmeriHost Inn & Suites Lomira 60 06/08/01
AmeriHost Inn Mosinee 53 04/30/93
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113
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TOTAL ROOMS 5,268
TOTAL PROPERTIES 72
(1) Unless otherwise noted, the Company owns a direct or indirect
equity or leasehold interest in the hotel.
(2) Indicates properties which are currently co-managed with an
unaffiliated third party.
(3) Indicates properties which are currently managed by an
unaffiliated third party.
(4) Indicates properties which were sold subsequent to December
31, 2002.
HOTEL REVENUE RESULTS
The table below shows the average occupancy percentage, average daily rate
("ADR") and RevPAR experienced by the Company in 2002 in various locations.
These statistics include all hotels open and operating for a period of more than
13 months as of December 31, 2002.
Average Average Revenue Per
Occupancy Daily Rate Available Room
--------- ---------- --------------
Ohio (21 hotels) 52.5% $60.72 $31.85
Illinois, Iowa and Wisconsin (13 hotels) 60.8% $54.40 $33.06
Michigan and Pennsylvania (10 hotels) 53.8% $57.56 $30.94
Georgia, Mississippi and West Virginia (9 hotels) 59.5% $51.39 $30.59
Indiana and Kentucky (8 hotels) 51.5% $53.20 $27.38
Texas (1 hotel) 57.8% $55.38 $31.99
Other hotels (6 hotels located in Tennessee, Florida,
Missouri and Oklahoma) 57.6% $54.35 $31.29
All hotels (68 hotels) 55.4% $56.32 $31.17
-8-
The table below shows the same room average occupancy, ADR and RevPAR
experienced by the Company in 2002 for its AmeriHost Inn hotels and for its
other non-AmeriHost Inn hotels. These statistics include the AmeriHost Inn
hotels and the non-AmeriHost Inn hotels open and operating for a period of more
than 13 months as of December 31, 2002.
Average Average Revenue Per
Occupancy Daily Rate Available Room
--------- ---------- --------------
AmeriHost Inn (59 hotels) 58.9% $57.19 $33.68
Non-AmeriHost Inn (9 hotels) 44.4% $52.30 $23.22
All hotels 55.4% $56.25 $31.17
The above charts do not include four hotels which were open, or owned, less than
12 months as of December 31, 2002.
DEVELOPMENT AND CONSTRUCTION
The Company pursues new business utilizing its in-house development and
construction staff. The Company builds for itself and for joint venture entities
in which a wholly-owned subsidiary retains an equity position in the hotel. The
Company also offers turnkey services to unaffiliated third parties under a
general contractor agreement, which include development, construction,
architectural/engineering, interior design and FF&E (furniture, fixtures and
equipment) purchasing.
The Company either hires a general contractor to construct the hotel for a fixed
price, or acts as the general contractor and enters into all subcontracts
directly. In order to minimize its risk associated with any cost overruns, the
Company usually enters into fixed contracts with the general contractor, if any,
as well as any subcontractors, prior to the commencement of construction. The
Company's project superintendents or managers oversee each phase of construction
in order to assure the quality and timing of the construction. With few
exceptions, such as the interior color scheme, each AmeriHost Inn hotel is the
same in every detail, including the overall layout, room sizes and indoor pool
area. The replication of its prototype design allows for accurate budgeting of
construction and overhead costs. The Company has an interdisciplinary staff
composed of architects, an escrow agent and construction professionals to
perform many tasks in-house, thereby reducing costly outsourced services. By
administering the building process with its own staff, the Company is often able
to offer a competitive advantage in terms of pricing, compared to other
developers.
-9-
LODGING INDUSTRY
The United States lodging industry's performance is strongly correlated to
economic activity, with changes in gross national product growth affecting both
room supply and demand, resulting in cyclical changes in average occupancy
rates, average daily rates, and revenue per available room. After the recession
of the early 1990s, the United States lodging industry showed significant
improvement throughout the mid and late 1990s in terms of aggregate RevPar and
profitability results. In 2000, the industry had its most profitable year ever,
$22.5 billion, and the growth in hotel room demand peaked. In 2001, the United
States lodging industry was severely impacted by the economic downturn, the
September 11th terrorist attacks and excess supply. Although, the rate of
decline of industry-wide profitability slowed in 2002 versus 2001, the industry
remained in a stagnant-to-downward trend, as indicated by the following
statistics from PricewaterhouseCoopers:
2002 2001
--------- --------
Percentage change in industry-wide
profitability per available room -2.4% -29.3%
Decrease in industry-wide occupancy
from prior year -1.0% -5.8%
Decrease in industry-wide RevPAR
from prior year -2.6% -6.9%
In 2002, according to a report by PricewaterhouseCoopers, both international and
domestic travel slowed for the first time in 18 years. Furthermore, according to
this same report, the last time occupancies were lower than the occupancies
achieved during the period of 2000-2002 was during the period of 1969-1971. For
all of these reasons, 2002 remained a difficult year for the industry despite
many predictions of a turnaround.
The Company's hotels' operating results have been affected by the downward
economic and industry trends in 2001 and 2002, but to a lesser degree, due to
their size and location in smaller towns, which are not as dependent on air
travel and large conventions/group business as larger city hotels. For 2002,
same room RevPAR for the Company's AmeriHost Inn hotels increased 3.7%,
significantly outpacing the overall lodging industry and the limited-service
sector. According to Smith Travel Research, RevPAR declined 0.6% for the
mid-scale without food and beverage segment for the lodging industry in 2002.
GROWTH STRATEGY
The Company's core strategy is to migrate its business to more recurring cash
flow and income streams with less investment in physical assets and less
indebtedness. The Company intends to achieve this core growth strategy for the
future through the following steps: (i) accelerate the development of AmeriHost
Inn hotels primarily via joint ventures and for third parties, (ii) sell all, or
most, of its non-AmeriHost Inn hotels, (iii) accelerate the sale of AmeriHost
Inn hotels and the reinvestment of net proceeds in new development, (iv) expand
the relationship with Cendant to increase the flow of franchise royalty sharing
and development fees from Cendant to the Company, and (v) improve operations at,
and returns from, existing hotels.
DEVELOPMENT AND CONSTRUCTION GROWTH STRATEGY
Having developed more than 100 hotels throughout the continental United States,
the Company believes it has a strong reputation in construction and development
that enables it to effectively market these services to unaffiliated entities.
The association with Cendant in franchise development and brand growth affords
the Company an opportunity to offer and provide these services for a fee to
potential Cendant franchisees. The Company anticipates increasing its efforts to
grow such third-party income streams.
The Company intends to continue using its hotel development and management
expertise to build and operate hotels for itself, as well as for future joint
ventures in which the Company holds a minority ownership interest and in some
-10-
instances, for other Cendant franchisees. Cendant has designated the Company as
a preferred developer for the AmeriHost Inn brands, whereby Cendant will refer
potential AmeriHost Inn franchisees to the Company when they seek expertise in
hotel development and construction. In addition, the Company is pursuing
development contracts with unaffiliated entities.
During 2002, the Company completed construction on four AmeriHost Inn hotels
which were started in 2001 and began construction on four additional AmeriHost
Inn hotels. Two of the four hotels, which started construction in 2002, opened
in the first quarter of 2003, and the other two are scheduled to open in the
second quarter of 2003. In addition, the Company is currently in due diligence
and negotiation on five potential developments of AmeriHost Inn hotels. In 2003,
the Company will place renewed emphasis on working with existing and new joint
venture partners, and with non-affiliated parties in developing and providing
"turnkey" completed AmeriHost Inn hotels. Under the Company's franchise
agreements with Cendant, the Company can claim exclusive rights to certain
geographic markets for a period of time, allowing it to build a strong presence
in that market to achieve economies of scale and competitive advantages.
Historically, the Company has financed its hotel development and construction
through a combination of equity and debt or lease financing, with the equity
typically provided by the Company and/or its joint venture partners, debt
financing typically provided by local or regional banks, and leasing
arrangements provided by a real estate investment trust ("REIT"). The Company
also has secured a $20 million new construction loan facility, which has
typically renewed annually, and provides for construction financing that
converts to permanent financing upon opening. The Company has approximately $8.5
million outstanding under this facility as of December 31, 2002, relating to
three AmeriHost Inn hotels, which is, or will be, converted to, long-term
permanent financing. The availability for new projects under this facility
increases as hotels, which have been financed with the facility, are sold, and
the related mortgage is paid off. The Company has until May 31, 2003, to utilize
this loan facility, subject to lender's approval of each project. The Company is
in the process of renewing this credit facility with the lender. All of the
AmeriHost Inn hotels under construction at December 31, 2002, were being
financed through a combination of debt and equity.
The Company believes that it can develop and operate additional AmeriHost Inn
hotels that can achieve occupancies and average daily rates similar to those the
Company has achieved at its existing AmeriHost Inn hotels. Moreover, the Company
believes that the development of additional AmeriHost Inn hotels, through the
Company as well as through additional AmeriHost Inn franchise sales by Cendant,
and the expanded geographic diversity will continue to enhance the awareness of
the AmeriHost Inn brand, improving revenues and market penetration at existing,
as well as future, AmeriHost Inn hotels. The Company believes that leveraging
its expertise in hotel development and management by providing these services to
unaffiliated parties and Cendant franchisees will also assist the Company in
reaching its financial objectives.
SALES OF AMERIHOST INN AND NON-AMERIHOST INN HOTELS
As a part of the Company's overall strategy to expand the AmeriHost Inn hotel
brand, the Company plans to sell a portion of its current hotel portfolio, which
includes both AmeriHost Inn and non-AmeriHost Inn hotels. It is the Company's
goal to reinvest a significant portion of the net proceeds from the sales back
into the AmeriHost Inn brand in new development projects primarily through joint
ventures. The Company will use its current development staff and also the
services of regional and national hotel brokerage firms to assist in the
accelerated sale of hotels, as market conditions permit, with the aim to grow
the AmeriHost Inn brand and the flow of royalty sharing and development
incentive fees from Cendant to the Company. A main focus in 2003 also will be to
sell off many non-core assets (non-AmeriHost Inn hotels), subject to market
conditions. This will allow more of the Company's resources to be allocated
toward the Company's goal of increasing AmeriHost Inn brand distribution through
the development of new AmeriHost Inn hotels.
HOTEL OPERATIONS
The Company's operating goal is to provide its customers with a consistent
lodging experience by offering a set of amenities and services which meet and/or
exceed the customer's expectations. The Company has developed a set of standards
and procedures for all aspects of building and operating an AmeriHost Inn hotel,
including site selection, development, construction, management, accounting,
marketing and purchasing.
-11-
The Senior Vice President of Operations is responsible for establishing
strategic objectives for all hotel operations with a goal of maximizing RevPAR
and profitability. In pursuit of such goals, the Senior Vice President of
Operations supervises the Regional Directors of Operations, who in turn oversee
the General Managers of the hotels. The General Managers, in turn, train,
develop and oversee their hotel's operational teams. Each Regional Director of
Operations is responsible for eight to 12 hotels, depending on size and the
geographic dispersion of the properties. The Company also has corporate sales
and marketing personnel who provide support for national, regional and local
marketing efforts, as directed by the Vice President of Sales and Marketing. The
Company's internal auditors perform audits of each hotel, typically twice a
year. Their responsibilities include a review of financial reports, cash,
receivables, operational standards, security and Federal and State compliance
matters. This department also provides on-site training for General Managers and
other on-site personnel.
The Company uses a marketing strategy, which seeks active involvement in the
local community in which the hotels are located. The local business and
residential community is often the hotels' best referral source. Visitors to
these communities often seek hotel referrals from family, friends and business
associates. The General Managers are expected to devote time to participate in
activities with local businesses and the community. The General Managers are
expected to be involved in local civic groups and sponsor special events in an
effort to promote community awareness and build relationships with business
leaders and local residents. The hotels sponsor local social and community
events and open their facilities to local clubs and civic organizations. The
community involvement and local and regional marketing programs showcase the
hotel to both the corporate and leisure markets.
The Company's corporate and regional sales/marketing personnel, and its general
managers, also will continue to utilize Cendant's reservation system, the
Internet and other distribution channels in its efforts to increase hotel
revenues. The franchisor, Cendant, maintains a toll-free reservation number for
the AmeriHost Inn system, which allows guests to make reservations at any one of
the AmeriHost Inn hotels nationwide. In addition, the AmeriHost Inn web site is
capable of accepting reservations on-line, further improving guests' ability to
easily reserve rooms. The Company also participates in the Global Distribution
System (GDS) and Cendant's Internet distribution channels. GDS is the airline
reservation system utilized by travel agents to make hotel bookings. The
franchise system also periodically implements local and regional marketing
campaigns using radio, newspaper, direct mail and other marketing/sales
initiatives. As part of its franchise agreements with Cendant, all franchisees,
including the Company, contribute to the marketing fund used to promote the
brand on a national level.
The Company has developed a centralized financial management system, which
includes cash management, accounts payable, the generation of daily financial
and operational information and monthly financial statements. This reporting
system allows property, regional and senior management to closely monitor
operating results. The Company provides standard operating procedures to
maximize uniform and efficient financial reporting. These efficiencies allow the
property management to focus on the operation and marketing of the hotel. The
centralized financial management reporting system also enhances the quality and
reporting of internal financial reports. In addition, since the Company's
employee leasing subsidiary employs all of the approximately 1,300 hotel
personnel, the costs of certain payroll and related expense are lower than if
each hotel maintained its own employees. Similarly, this system allows the
Company to offer more attractive health insurance programs to its employees.
COMPETITION
There is significant competition in the mid-price, limited- and full-service
segments of the lodging industry. There are numerous hotel chains that operate
on a national or regional basis, as well as other hotels, motor inns and other
independent lodging establishments throughout the United States. Competition is
primarily in the areas of price, location, age and quality of product, services,
amenities, and the quantity and quality of sales and marketing and of franchisor
reservation and other distribution channels to bring guests to the hotel. Many
of the Company's competitors have recognized trade names, greater resources and
longer operating histories than the Company or Cendant. However, the Company
believes that its management is sufficiently experienced, and that the continued
development of its sales and marketing efforts and the efforts of Cendant for
the Company's AmeriHost Inn hotels should enable the Company to continue to
compete successfully, as evidenced by the Company's RevPAR results for its
AmeriHost Inn hotels, versus its mid-price without food and beverage
competitors, per Smith Travel Research.
-12-
There are a number of companies which develop, construct and renovate hotels.
Some of these companies perform these services only for their own account, while
others actively pursue contracts for these services with third-party owners. The
Company believes that it can develop, construct and renovate hotels at costs
which are competitive. The Company believes that its use of a well-designed
prototype, significant experience (the Company has managed the development and
construction of more than 100 hotels) and volume purchasing of furniture and
amenities results in development costs which are lower than those experienced by
many competitors building comparable hotels. The Company also believes that its
ability to offer additional services, such as hotel management, provides
competitive advantages.
There are many hotel management companies which provide management services to
hotels similar to the services provided by the Company. While the quantity of
competition may be high, the Company believes that the quality of its services,
including its information and management systems and employee leasing
operations, will enable the Company to compete successfully. The Company
believes that its focus on smaller town markets also lessens competition for the
types of services provided by the Company.
The Company believes that the relationship between the development and
construction costs and the average daily rates achieved by the AmeriHost Inn
hotels is more favorable than that experienced by many of the Company's
competitors. In addition, a significant portion of the purchasing and accounting
functions related to the hotels is handled centrally, thus enabling the local
general managers and their staff to focus their efforts on marketing and sales.
The centralization of many functions also assists in keeping costs lower due to
certain economies of scale. This allows the AmeriHost Inn hotels to operate
efficiently and compete effectively.
FRANCHISE AGREEMENTS
At December 31, 2002, the Company had franchise agreements (collectively, the
"Franchise Agreements") with AmeriHost Inn Franchise Systems, Inc. for its
AmeriHost Inn hotels, and with Days Inn of America, Inc., Howard Johnson's
Franchise Systems, Inc. and Ramada Franchise Systems, Inc. for its non-AmeriHost
Inn hotels. Although the terms of the various Franchise Agreements differ, each
requires the Company to pay a monthly fee for the right to operate the hotel
under the "flag" of that Franchisor and to have access to the other benefits
provided by such Franchisor, including access to reservation systems, marketing
plans and use of trademarks. The fees, including the marketing and reservation
system assessments, typically range between 4% and 10% of gross revenues
attributable to room rentals. In addition, the Company and/or the joint venture,
which owns a hotel operated pursuant to a Franchise Agreement, will have ongoing
obligations to maintain the quality and condition of the hotel to the standards
required by the Franchisor. The term of a Franchise Agreement typically is
between 10 and 20 years, with a substantial penalty for early termination by the
Company. The Company believes that it is in compliance with its Franchise
Agreements, and the loss of any one of the Franchise Agreements would not have a
material impact on the Company.
-13-
EMPLOYEES
As of December 31, 2002, the Company and its subsidiaries had 1,421 full and
part-time employees:
Hotel Management:
Operations 28
Accounting and finance 15
Property general managers 82
Hotel Development: 12
Hotel Operations: 958
Corporate:
General and administrative 9
Officers 2
Employee Leasing:
General and administrative 3
Operations 312
-----
1,421
=====
To date, the Company has not experienced any work stoppages or significant
employee-related problems. The Company believes that its relationship with its
employees is good.
WEB SITE ACCESS TO COMPANY REPORTS
The Company makes available free of charge through its web site,
www.arlingtonhospitality.com, its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, and all amendments to those reports
as soon as reasonably practicable after such material is electronically filed
with the Securities Exchange Commission. The Company's Internet web site and the
information contained therein or incorporated therein are not intended to be
incorporated into this Annual Report on Form 10-K.
ITEM 2. PROPERTIES.
The Company owns the office building in which its corporate offices and the
offices of its wholly-owned subsidiaries are located at 2355 South Arlington
Heights Road, Suite 400, Arlington Heights, Illinois 60005. The five-story
building contains approximately 56,000 rentable square feet, of which the
Company occupies approximately 19,000 square feet. Nearly all of the additional
space is leased to various tenants under long-term agreements. This office
building is pledged to secure related long-term mortgage debt.
At December 31, 2002, the Company had a 100% or controlling ownership or
leasehold interest in 61 operating hotels located in 17 states. The land,
building, furniture, fixtures and equipment and construction in progress for
these hotels are reflected in the Company's Consolidated Balance Sheet at
December 31, 2002. These assets were substantially pledged to secure related
long-term mortgage debt. See Item 1 and Notes 6 and 7 to the Consolidated
Financial Statements under Item 15.
In addition to the foregoing, the Company has an equity interest in partnerships
which own and/or lease property. See Note 4 to the Consolidated Financial
Statements under Item 15.
-14-
ITEM 3. LEGAL PROCEEDINGS.
The Company is subject to claims and suits in the ordinary course of business.
In management's opinion, currently pending legal proceedings and claims against
the Company will not, individually or in the aggregate, have a material adverse
effect on the Company's financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders of the Company during
the fourth quarter of the fiscal year ended December 31, 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol HOST. As of March 27, 2003, there were 1,237 holders of record of the
Company's Common Stock. The following table shows the range of reported high and
low closing prices per share.
High($) Low($)
------- ------
FISCAL 2001
First quarter 3.75 2.75
Second quarter 4.24 3.01
Third quarter 3.90 2.10
Fourth quarter 3.49 1.95
FISCAL 2002
First quarter 3.00 1.92
Second quarter 4.80 2.74
Third quarter 4.30 3.30
Fourth quarter 4.00 2.90
FISCAL 2003
First quarter (through March 27, 2003) 3.53 3.05
The Company has not declared or paid any cash dividends on its Common Stock. The
Company currently intends to retain any earnings for use in its business and,
therefore, does not anticipate paying any cash dividends in the foreseeable
future. However, from time to time, the Company may utilize cash to purchase its
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 its Common
Stock under certain conditions. Under this authorization, to date the Company
has not repurchased a significant number of shares. Any future determination to
pay cash dividends or to purchase Common Stock will be made in light of the
Company's earnings, financial position, capital requirements and such other
factors as the Board of Directors deems relevant.
The Board of Directors has the authority to issue up to 100,000 shares of
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions granted to or imposed upon any unissued shares of
Preferred Stock, including without limitation, dividend rates, conversion
rights, voting rights, redemption and sinking fund provisions, and liquidation
provisions, and to fix the number of shares constituting any series and the
designations of such series, without any further vote or action by the
shareholders. The Board of Directors, without shareholder approval, may issue
Preferred Stock with voting and conversion rights which could adversely affect
the voting power of the holders of Common Stock. The issuance of Preferred
Stock, while providing flexibility in connection with possible acquisitions and
other corporate purposes, could, among other things, adversely affect the voting
power of the holders of Common Stock and could have the effect of delaying,
deferring or preventing a change in control of the Company. The Company has no
present plans to issue any Preferred Stock.
-15-
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below has been derived from
the Company's consolidated financial statements. The consolidated financial
statements for all years presented have been audited by the Company's
independent certified public accountants, whose reports on such consolidated
financial statements for each year of the three-year period ended December 31,
2002, is included herein under Item 15. The information set forth below should
be read in conjunction with the consolidated financial statements and notes
thereto under Item 15 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
(in thousands, except per share data)
(this presentation not covered by independent auditors' report)
Fiscal Year Ended December 31,
------------------------------------------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Revenue $ 76,531 $ 77,153 $ 76,151 $76,058 $ 68,618
Operating costs and expenses 60,871 58,500 58,736 57,868 54,286
Depreciation and amortization expense 5,516 4,676 4,542 4,567 5,487
Leasehold rents - hotels 5,411 6,510 6,525 7,307 4,192
Corporate general and administrative 2,199 1,908 1,695 1,537 1,569
Impairment provision 542 - - - -
Operating income 1,992 5,559 4,653 4,780 3,084
Interest expense, net 5,025 4,332 4,819 5,155 5,592
Gain on sale of fixed assets 727 1,286 6,663 553 305
Income (loss), before extraordinary item and
cumulative effect of change in accounting principle(1) $ (1,710) $ 755 $ 4,010 $ 201 $ (1,167)
======== ======== ======== ======== ========
Net income (loss) $ (1,710) $ 755 $ 4,010 $ 201 $ (2,796)
======== ======== ======== ======== ========
Income (loss) per share, before extraordinary item
and cumulative effect of
change in accounting principle(1):
Basic $ (0.34) $ 0.15 $ 0.81 $ 0.04 $ (0.19)
======= ======== ======== ======== =======
Diluted $ (0.34) $ 0.13 $ 0.74 $ 0.02 $ (0.20)
======= ======== ======== ======== =======
Net income (loss) per share:
Basic $ (0.34) $ 0.15 $ .0.81 $ 0.04 $ (0.45)
======= ======== ======== ======== =======
Diluted $ (0.34) $ 0.13 $ 0.74 $ 0.02 $ (0.45)
======= ======== ======== ======== =======
Weighted average shares outstanding:
Basic 4,958 4,975 4,976 5,567 6,180
======== ======== ======== ======== ========
Diluted 4,958 5,182 5,272 5,857 6,513
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Total assets $119,934 $114,888 $ 98,143 $103,108 $115,281
Long-term debt, including current portion 76,242 72,199 58,604 60,349 71,841
Working capital (deficiency) (8,995) (4,575) (4,172) (6,817) (6,924)
Shareholders' equity 17,370 19,067 18,266 14,181 18,316
Deferred income 10,867 10,715 12,196 14,001 13,164
OTHER DATA:
Cash provided by (used in) operating activities 14,330 15,507 1,218 (885) 5,408
Cash (used in) provided by investing activities (17,073) (27,105) 2,728 12,344 15,555
Cash provided by (used in) financing activities 1,964 14,617 (5,983) (12,187) (18,819)
Capital expenditures 18,578 25,400 10,434 2,103 42,183
(1) The Company recorded an extraordinary loss of $333,000 in 1998, net of
income taxes, relating to the early extinguishment of mortgage debt on
hotels sold in connection with a sale/leaseback transaction. The
Company recorded a cumulative effect of a change in accounting
principle of $1,296,000 in 1998, net of income taxes, relating to the
adoption of Statement of Position No. 98-5, "Reporting on the Costs of
Start-up Activities."
-16-
ITEM 7. 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. As of December 31, 2002, the Company had 62 AmeriHost Inn
hotels open, of which 52 were wholly-owned or leased, one was majority-owned,
and nine were minority-owned. The Company opened three AmeriHost Inn hotels in
which the Company has an ownership interest during the past twelve months. In
addition, the Company completed construction of an AmeriHost Inn hotel for an
unaffiliated third party in 2002. As of December 31, 2002, three wholly-owned
AmeriHost Inn hotels and one hotel in which the Company has a minority ownership
interest were under construction. For all of 2002, same room revenue for all
AmeriHost Inn hotels owned and operated by the Company, including minority-owned
hotels, increased approximately 3.7%, attributable to a 6.3% increase in
occupancy offset by a decrease of $1.37 in average daily rate. These results
relate to the 66 AmeriHost Inn hotels that have been operating for at least 13
full months during 2002. Same room revenues for all AmeriHost Inn hotels owned
and operated by the Company decreased approximately 0.8% during the fourth
quarter of 2002, compared to the fourth quarter of 2001, attributable to a
decrease of 1.3% in occupancy offset by an increase of $0.32 in average daily
rate. These results relate to the 62 AmeriHost Inn hotels that have been
operating for at least 13 full months during the three months ended December 31,
2002.
Revenues from hotel operations consist of the revenues from all Consolidated
hotels. Consolidated hotels are those hotels in which the Company has a 100% or
controlling ownership or leasehold interest, and are consolidated in the
Company's financial statements. Unconsolidated hotels are those hotels in which
the Company has a minority or non-controlling ownership or leasehold interest,
and are accounted for by the equity method. Non-core hotels are those hotels
operated as independent of a franchise affiliation (one hotel as of December 31,
2002), or under a national franchise affiliation other than the AmeriHost Inn
brand, such as Days Inn, Ramada Inn, and Howard Johnson Express (nine hotels as
of December 31, 2002). Development and construction revenues consist of fees for
new construction and renovation activities performed by the Company for
unconsolidated 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 receives revenue from management and employee
leasing services provided to unconsolidated hotels and unrelated third parties.
Incentive and royalty sharing fees consist of the amortization of one-time
development incentive fees received upon the sale of an AmeriHost Inn hotel to a
third party who enters into an AmeriHost Inn franchise agreement, and the
Company's portion of the franchise royalty fees paid by all AmeriHost Inn hotels
to Cendant Corporation ("Cendant"), the franchisor and owner of the AmeriHost
Inn brand. Finally, the Company also owns the office building in which its
headquarters is located, and receives revenues as landlord from the third-party
tenants in the building.
Revenues from Consolidated AmeriHost Inn hotels decreased 4.1% to $43.2 million
during 2002, from revenues of $45.1 million during 2001, due primarily to the
reduction in the number of owned hotels from their sale to third parties, offset
by increases in same room revenues. Same room revenues for all Consolidated
AmeriHost Inn hotels owned and operated by the Company increased approximately
2.9% during 2002, compared to 2001, attributable to a 5.5% increase in
occupancy, partially offset by a decrease of $1.42 in average daily rate. These
results relate to the 55 Consolidated AmeriHost Inn hotels that were operating
for at least thirteen full months during 2002. Revenues from Consolidated
non-core hotels decreased 5.9% during 2002, compared to 2001, as a result
primarily of the 15.4% decrease in same room revenue. Revenues from hotel sales
and commissions decreased to $10.0 million during 2002, compared to $12.9
million in 2001, as a result of the sale of five hotels (four wholly-owned and
one leased AmeriHost Inn hotels) versus the sale of nine hotels (five
wholly-owned and four leased AmeriHost Inn hotels). Total revenues decreased
0.8% to $76.5 million during 2002, from $77.2 million during 2001. The Company
recorded a net loss of ($1.7) million for 2002, or ($0.34) per diluted share,
compared to net income of $755,100 or $0.13 per diluted share in 2001. The net
loss for 2002 included (i) a gain of $298,000, pretax, from an insurance
settlement, (ii) certain one-time expenses of approximately $683,000, pretax,
related to the resignation and replacement of the Company's President/CEO, and
(iii) non-cash charges of approximately $642,000, pretax, for an impairment
provision on primarily non-core hotels.
-17-
On September 30, 2000, the Company sold the AmeriHost Inn brands and franchising
rights to Cendant. 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 hotels in the franchise system (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. The Company received $1.8 million in development incentive
fees in 2002 which were deferred and are being amortized over a 76-month period.
Revenues from development incentive and royalty sharing fees, including the
amortization of deferred development incentive fees, nearly tripled to
approximately $589,000 in 2002 compared to 2001.
Excluding hotels under construction, the Company had an ownership interest in 72
hotels at December 31, 2002, versus 76 hotels at December 31, 2001. The
increased ownership from the development of AmeriHost Inn hotels for the
Company's own account and the acquisition of an AmeriHost Inn hotel from a joint
venture was offset by the sale of AmeriHost Inn hotels to Cendant franchisees
and the sale of one non-AmeriHost Inn hotel. Total Consolidated hotels decreased
slightly to 61 hotels at December 31, 2002, versus 63 hotels at December 31,
2001.
OPERATING RISKS
The Company's revenues and investments are nearly all in a single industry, the
lodging industry. As a result, the Company's operations and results have been,
and will be, adversely affected by one or more of the risks inherent in the
lodging industry. These risks, include, but are not limited to: competition and
seasonality (as described under "Seasonality" below); cyclical overbuilding; the
results and operations of franchisors utilized by the Company's hotels,
primarily Cendant; changing levels of demand for hotel rooms and related
services, as currently evidenced since the downturn in economic conditions and
the September 11, 2001 terrorist attacks; unexpected or ongoing increases in
hotel expenses, such as insurance, energy and the costs of wages and benefits;
demographic and other market changes which impact customer preferences; changes
in governmental regulations that impact the hotel's cost of doing business; the
inability to fully reduce hotel expenditures to cover hotel revenue shortfalls;
the recurring and extraordinary costs of necessary renovations and refurbishment
of hotels; and the impact of geopolitical events.
If the present economic and lodging industry slowdown or concerns over
geopolitical events worsens significantly, or continues for a protracted period
of time, declines in the occupancy levels or average daily rates of the
Company's hotels could have a material adverse effect on the Company's operating
results.
CRITICAL ACCOUNTING POLICIES
Consolidation Policy
- --------------------
A joint venture project will be consolidated if the Company has a majority
(i.e., greater than 50%) ownership interest, or when the Company has a minority
ownership interest (i.e., less than 50%) and can exercise control over the
critical decisions of the joint venture. The Company will evaluate several
factors in determining whether or not it has control over the joint venture to
warrant consolidation. These factors include the nature of the Company's
ownership (for example, the sole general partner in a limited partnership, the
sole managing member of a limited liability company, etc.), oversight of the
daily operations, and the ability to make major decisions such as to refinance
or sell the hotel asset without the consent of the other partners, among others.
Minority-owned joint ventures in which the Company maintains a non-controlling
ownership interest are accounted for by the equity method. Under this method,
the Company maintains an investment account, which is increased by contributions
made and its share of the joint venture's income, and decreased by distributions
received and its share of the joint venture's losses, in accordance with the
terms of the joint venture agreement. The Company's share of each joint
venture's income or loss, including gains and losses from capital transactions,
is reflected on the Company's consolidated statement of operations as "Equity in
income and (losses) from unconsolidated joint ventures."
-18-
Revenue Recognition
- -------------------
Hotel operations
The revenue from the operation of a Consolidated hotel is recognized as part of
the hotel operations segment when earned. Typically, cash is collected from the
guest at the time of check-in or checkout, however the Company also extends
credit to selected corporate customers. The Company had a reserve for
specifically identified doubtful corporate accounts receivable in the amount of
$150,000 at December 31, 2002. The reserve for doubtful accounts is reviewed
periodically for reasonableness and is considered appropriate as of December 31,
2002.
Hotel sales and commissions
The Company's intention is to operate the Consolidated hotels until a buyer is
found at an appropriate price. The Company may actively try to sell the hotel
during the construction period, upon opening, or anytime thereafter. Once the
sale of the hotel is consummated, the Company will realize the value from its
development. Under this scenario, the Company will depreciate the hotel assets
and classify them as investment assets while it operates the hotel, since it is
not assured that a sale will ultimately be consummated. Beginning in 2001, the
Company records the hotel sale price as development revenue and the net cost
basis of the hotel asset as development expense, when the sale is consummated,
as part of the ongoing operational activity of the Company. Prior to 2001, the
sales of all hotels which had been operated for longer than 12 months, were
recorded as a "gain on sale" below the operating income line, computed as the
difference between the net sale price and the net cost basis of building the
hotel. This treatment was considered appropriate since the strategy of building
and selling had not yet been solidified until the consummation of the Cendant
transaction in the latter part of 2000. The Company recorded $10.0 million in
hotel sales and commission revenue in 2002. The REIT, which owns certain of the
Company's leased hotels, closed on the sale of one AmeriHost Inn hotel during
2002.
The Company provides hotel development, management, and staffing services to
unrelated third parties and unconsolidated, minority-owned joint ventures.
Revenues can be generated in three ways: (i) the Company will record revenue
from the development and construction of the hotel, (ii) if the Company enters
into a hotel management agreement with the owner, it will recognize revenue in
accordance with the terms of the agreement, and (iii) if the Company enters into
a hotel staffing agreement with the owner, it will recognize revenue in
accordance with the terms of the agreement as services are performed. An
unrelated third party or an unconsolidated minority-owned joint venture may
contract with the Company for any or all three services. However, the Company
will not provide employee leasing services unless it also provides hotel
management services pursuant to a written agreement.
Hotel development and construction
The Company recognizes revenue from the development and construction of hotels
for third parties and unconsolidated minority-owned entities pursuant to
development and construction contracts with the hotel ownership entity. All
contracts must be fully executed prior to the start of construction. In
addition, the Company will not begin construction on a hotel for a joint venture
or third party until it is assured that both the equity and debt financing are
in place. The Company records the total contract price as revenue over the
development and construction period, and all development and construction costs
as operating expenses in the hotel development segment.
Development fee revenue from construction/renovation projects with unaffiliated
third parties and unconsolidated joint ventures is recognized using the
percentage-of-completion method.
Construction fee revenue from construction/renovation projects with unaffiliated
third parties and unconsolidated joint ventures is recognized on the
percentage-of-completion method, generally based on the ratio of costs incurred
to estimated total contract costs. Revenue from contract change orders is
recognized to the extent costs incurred are recoverable. Profit recognition
begins when construction reaches a progress level sufficient to estimate the
probable outcome. Provision is made for anticipated future losses in full at the
time they are identified.
-19-
Hotel management services
The Company recognizes management fee revenue when it performs hotel management
services for unrelated third parties and unconsolidated joint ventures. The
management fees are computed based upon a percentage of total hotel revenues,
ranging from 4% to 8%, plus incentive fees in certain instances, in accordance
with the terms of the individual written management agreements. The Company
recognizes the management fee revenue in the hotel management segment as the
related hotel revenue is earned.
Employee leasing
The Company recognizes employee leasing revenue when it staffs hotels, and
performs related services, for unrelated third parties and unconsolidated joint
ventures. Employee leasing revenues are generally computed as the actual payroll
costs plus an administrative fee ranging from 2% to 3%, in accordance with the
terms of the individual written staffing agreements. The Company recognizes the
employee leasing revenue in the employee leasing segment as the related payroll
cost is incurred. Although the Company maintains employee leasing agreements
with the hotel ownership entities, the Company is still ultimately responsible
for its employees. In addition, the Company is responsible for maintaining and
determining staffing levels, scheduling, hiring, firing, performance reviews,
etc. through the Company's General Managers. Moreover, the Company is at risk
with regard to personnel issues and lawsuits. As such, the Company has recorded
employee leasing revenues primarily as the gross payroll cost, plus the
administrative fee.
Incentive and royalty sharing
The Company seeks not only to generate profit from the sale of a hotel, but also
to generate a development incentive fee and long-term, ongoing royalty sharing
revenues from Cendant Corporation. Cendant has agreed to pay the Company a
development incentive fee every time the Company sells one of its existing
AmeriHost Inn hotels to a buyer who executes an AmeriHost Inn franchise
agreement with Cendant. In addition, this fee also will be paid to the Company
for new hotels that the Company develops which are then sold to a franchisee of
Cendant. This fee applies to the first 370 hotels sold by the Company during the
15-year term of the agreement. The fee is computed based on the most recent
twelve months revenue, or a stipulated per room amount if the hotel has been
open less than one year. Since the Cendant agreement provides for the potential
reimbursement of this fee, from future fees earned, in the event the buyer
defaults on the franchise agreement within the first 76 months, these fees are
deferred when received, in accordance with Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements." The deferred fees are amortized
as incentive and royalty sharing segment revenue in the accompanying
consolidated financial statements on a straight-line basis over the 76-month
period, as the contingencies on the revenues are removed.
Cendant has agreed to pay the Company a portion of all royalty fees Cendant
receives from all of its AmeriHost Inn franchisees through September 2025.
Generally, Cendant receives royalty fees from each of their franchisees based
upon a percentage of guest room revenue, ranging from 4% to 5%. In turn, Cendant
will pay the Company a portion of this fee as stipulated in the agreement. The
Company includes this royalty sharing fee as incentive and royalty sharing fee
revenue in the accompanying consolidated financial statements.
Deferred Income
- ---------------
During 1998 and 1999, the Company sold 30 hotels to a Real Estate Investment
Trust ("REIT") for approximately $73 million. Upon the sale of the hotels, the
Company simultaneously entered into agreements to lease back each of the hotels
from the REIT. The leases are for an initial term of 15 years, as amended, and
provide for rent in the amount of 10% of the original sale price, increased
annually after year three by the lesser of 2% or the CPI adjustment. The gains
from the sale of the hotels in 1998 and 1999 were deferred for financial
statement reporting purposes, due to the continuing involvement with the
long-term lease agreement, and are being amortized on a straight line basis into
income as a reduction of leasehold rent expense over the 15-year initial term.
Assuming the Company leases all of the remaining REIT hotels until the end of
the term, approximately $694,000 will be amortized annually as a reduction of
leasehold rent expense. Upon the sale of a hotel, which is owned by the REIT to
an unaffiliated third party, the
-20-
remaining unamortized deferred income is recognized as gain on sale of fixed
assets in the Company's consolidated financial statements.
When the Company builds a hotel for an unconsolidated joint venture, a portion
of the profit is deferred. The deferral is computed as the Company's ownership
in the joint venture, multiplied by the development fee profit and the
construction profit (as it is recognized on the percentage of completion basis).
The deferred income is recognized by the Company over the estimated useful life
of the related hotel asset. A portion of the deferral is amortized over the same
life the joint venture is depreciating the hotel asset (generally, 39 years),
and the remaining portion is amortized over the same life the joint venture is
depreciating the furniture, fixtures & equipment (generally, 7 years). Upon the
sale of a hotel by the joint venture to an unaffiliated third party, the
remaining unamortized deferred income is recognized as equity in income and
(loss) of affiliates in the Company's consolidated financial statements.
Impairment of Long-Lived Assets
- -------------------------------
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 for sale 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 December 31, 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 its 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
December 31, 2002, there were no identifiable discontinued operations.
The Company periodically reviews the carrying value of certain of its long-lived
assets, including its investment in and advances to joint ventures which own
long-lived assets, in relation to historical results, current business
conditions and trends to identify potential situations in which the carrying
value of assets may not be recoverable. If such reviews indicate that the
carrying value of such assets may not be recoverable, the Company would estimate
the undiscounted sum of the expected cash flows of such assets to determine if
such sum is less than the carrying value of such assets to ascertain if an
impairment exists. If an impairment exists, the Company would determine the fair
value by using quoted market prices, if available for such assets. If quoted
market prices are not available, the Company would obtain an appraisal or
discount the expected future cash flows of such assets. During 2001, the
Company's reviews indicated that there was no permanent impairment of the
Company's long-lived assets. During 2002, the Company reduced the carrying value
of its investments in three unconsolidated joint ventures (two AmeriHost Inn
hotels and one non-core hotel) by approximately $192,000 in connection with such
review. In addition, during 2002, the Company reduced the carrying value of an
investment in one non-core Consolidated joint venture by $450,000 in connection
with such review. The impairment adjustments for the investments in the two
unconsolidated AmeriHost Inn joint ventures and one non-core Consolidated joint
venture are reflected as an impairment provision in the accompanying
consolidated financial statements. The impairment adjustment for its investment
in one non-core unconsolidated joint venture is reflected in equity in net
income (loss) from unconsolidated joint ventures in the accompanying
consolidated financial statements.
-21-
RESULTS OF OPERATIONS
The following table sets forth the percentages of revenues of the Company
represented by components of net income for 2002, 2001 and 2000.
Percentage of Total Revenue
Year Ended December 31, (unaudited)
---------------------------------------------
2002 2001 2000
--------- --------- ---------
Revenue 100.0% 100.0% 100.0%
Operating costs and expenses 79.5 75.8 77.1
------- ------ -------
20.5 24.2 22.9
Depreciation and amortization 7.2 6.1 6.0
Leasehold rents - hotels 7.1 8.4 8.6
Corporate general and administrative 2.9 2.5 2.2
Impairment provision 0.7 - -
------- ------ -------
Operating income 2.6 7.2 6.1
Interest expense (7.2) (6.7) (7.4)
Interest and other income 1.0 1.8 1.5
Equity in income and losses of affiliates (0.5) (1.2) (0.1)
Gain on sale of assets 1.0 1.1 8.8
------- ------ -------
Income (loss) before minority interests and
income taxes (3.1) 2.2 8.9
Minority interests in operations of consolidated
subsidiaries and partnerships (0.1) (0.4) (0.1)
------- ------ -------
Income (loss) before income taxes (3.2) 1.8 8.8
Income tax benefit (expense) 1.0 (0.8) (3.5)
------- ------ -------
Net income (loss) (2.2)% 1.0% 5.3%
======= ====== =======
2002 compared to 2001
Revenues decreased 0.8% to $76.5 million during 2002, from $77.2 million during
2001. The increases in the hotel development, incentive and royalty sharing and
office building rental segments were offset by decreases in the hotel
operations, hotel sales and commissions, hotel management and employee leasing
segments.
Hotel operations revenue decreased 4.5% to $53.8 million during 2002, from $56.4
million during 2001. Revenues from Consolidated AmeriHost Inn hotels decreased
4.1% to $43.2 million during 2002, from $45.1 million during 2001. This decrease
was attributable primarily to the net reduction in the number of hotels from the
sale of five Consolidated AmeriHost Inn hotels in 2002, partially offset by the
opening of two new Consolidated AmeriHost Inn hotels, and partially offset by a
2.9% increase in same room revenue from the Consolidated AmeriHost Inn hotels.
Revenues from Consolidated non-core hotels decreased 5.9% during 2002, compared
to 2001. This decrease was primarily the result of the 15.4% decrease in same
room revenue from the Consolidated non-core hotels. The hotel operations segment
included the operations of 61 Consolidated hotels (including 53 AmeriHost Inn
hotels) comprising 4,430 rooms at December 31, 2002, compared to 63 Consolidated
hotels (including 55 AmeriHost Inn hotels) comprising 4,560 rooms at December
31, 2001.
-22-
The Company typically builds new hotels in growing markets where it anticipates
a certain level of additional hotel development. 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
Consolidated and Unconsolidated hotels, increased approximately 3.7% during
2002, compared to 2001, as occupancy increased 6.3% and average daily rate
decreased $1.37. 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. As the revenue from AmeriHost Inn hotels not operated by the Company
increases, the Company's royalty sharing stream from Cendant is also enhanced.
The Company does not anticipate a significant improvement in the operations of
several of its non-core hotels, and intends to sell these assets when the terms
are considered appropriate.
Hotel development activity is summarized as follows:
2002 2001 2000
----------------------------- ------------------------------- ----------------------------
Unaffiliated & Unaffiliated & Unaffiliated &
Unconsolidated Consolidated Unconsolidated Consolidated Unconsolidated Consolidated
Hotels (1) Hotels (2) Hotels (1) Hotels (2) Hotels (1) Hotels (2)
-------------- ------------ -------------- ------------ -------------- ------------
Under construction at
beginning of year 2 3 - 2 4 -
Starts 1 2 2 4 - 3
Completions 2 2 - 3 4 1
Under construction at
--- --- ---- ---- --- ---
end of year 1 3 2 3 - 2
=== === ==== ==== === ===
(1) hotels developed/constructed for unaffiliated third parties and
entities in which the Company holds a non-controlling, minority
ownership interest
(2) hotels developed/constructed for the Company's own account and for
entities in which the Company has a controlling ownership interest
Hotel development revenue increased to $7.2 million during 2002, from $1.7
million during 2001. Hotel development revenues are directly related to the
number of hotels being developed and constructed for unconsolidated joint
ventures and unrelated third parties. During 2002, the Company was constructing
two hotels for unconsolidated joint ventures and one hotel for an unrelated
third party, which was referred to the Company by Cendant, the franchisor of the
AmeriHost Inn brand. Two of these hotels opened in 2002 and one for an
unconsolidated joint venture was under construction at December 31, 2002, with a
projected opening date in April 2003. In 2001, two hotels were under
construction during the year, both of which were completed in 2002. The Company
also had several additional projects in various stages of pre-construction
development during these periods.
The Company recorded $10.0 million in 2002 and $12.9 million in 2001 in hotel
sales and commission revenue. The Company and the REIT, which owns certain of
the Company's leased hotels, closed on the sale of five Consolidated AmeriHost
Inn hotels during 2002 and nine Consolidated AmeriHost Inn hotels during 2001.
The Company intends to continue to build and sell AmeriHost Inn hotels in order
to maximize the value inherent in the Cendant transaction while enhancing net
income and cash flow.
Hotel management revenue decreased 10.2% to $1.0 million during 2002, from $1.1
million in 2001. The number of hotels managed for third parties and
minority-owned entities decreased from 15 hotels, representing 1,211 rooms, at
December 31, 2001, to 11 hotels, representing 838 rooms, at December 31, 2002.
Employee leasing revenue decreased 30.2% to $3.3 million during 2002, from $4.7
million during 2001, due primarily to the reduction in hotels managed for
unconsolidated joint ventures and unrelated third parties as described above.
Development incentive and royalty sharing revenue increased to approximately
$589,000 in 2002, compared to approximately $210,000 in 2001, as a result of the
Company's sale of additional AmeriHost Inn hotels and the increase
-23-
in the number of non-Company owned AmeriHost Inn hotels franchised with Cendant.
The Company received $1.8 million in 2002 and $1.6 million in 2001 in
development incentive fees from the sale of AmeriHost Inn hotels, with
approximately $367,000 and $148,000 recognized in 2002 and 2001, respectively,
from the amortization of this deferred income. In addition, the Company recorded
approximately $222,000 and $62,000 in royalty sharing fees in 2002 and 2001,
respectively.
Office building rental and other revenue, consisting primarily of leasing
activities from the Company's office building in 2002 and 2001, increased to
approximately $670,000 in 2002, from approximately $170,000 during 2001. On
October 1, 2001, the Company purchased the office building in which its
headquarters is located. The 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 increased 4.1% to $60.9 million (79.5% of
total revenues) in 2002, from $58.5 million (75.8% of total revenues) during
2001, primarily due to an increase in operating costs from hotel development,
partially offset by decreases in operating costs and expenses from hotel
operations, sale of hotel and commissions, and employee leasing segments as
described below. Operating costs and expenses in the hotel operations segment
decreased 1.4% to $41.5 million during 2002, from $42.1 million in 2001. A
decrease in operating costs associated with the fewer number of hotels included
in this segment (61 hotels at December 31, 2002, versus 63 hotels at December
31, 2001), was partially offset by significant increases in operating costs for
the Consolidated non-core hotels. Hotel operations segment operating costs and
expenses as a percentage of segment revenue increased to 77.1% during 2002, from
74.7% during 2001, due primarily to the inflationary increases and higher energy
costs for the Consolidated non-core hotels. Operating costs and expenses as a
percentage of revenues for the Consolidated AmeriHost Inn hotels remained flat
at 73.1% in 2002, versus 73.0% in 2001.
Operating costs and expenses for the hotel development segment increased to $7.2
million during 2002, from $1.5 million during 2001, consistent with the increase
in hotel development revenues for 2002. Operating costs and expenses in the
hotel development segment as a percentage of segment revenue increased to 100.3%
during 2002, from 85.8% during 2001 as the 2002 results reflect a greater amount
of construction activity, which resulted in higher operating costs in relation
to the revenue recognized. The results for 2001 consisted of a greater amount of
pre-construction, hotel development activity, which resulted in lower operating
costs in relation to the revenue recognized.
Hotel management segment operating costs and expenses declined to $714,648
during 2002, compared to $716,802 during 2001. This decrease was primarily due
to the decrease in the number of hotels operated and managed for unrelated third
parties and unconsolidated joint ventures and is consistent with the decrease in
hotel management segment revenue. Employee leasing operating costs and expenses
decreased 29.7% to $3.2 million in 2002, from $4.6 million during 2001, which is
consistent with the 30.2% decrease in the employee leasing segment revenue
during 2002.
Office building rental and other operating costs and expenses consisted
primarily of expenses related to the management of the Company's office building
in 2002 and 2001. Office building rental and other operating expenses were
$56,757 in 2002 and $2,958 in 2001. On October 1, 2001, the Company purchased
the office building in which its headquarters is located and assumed the
landlord duties for the other tenants.
Depreciation and amortization expense increased 18.0% to $5.5 million during
2002, from $4.7 million during 2001. This increase was primarily attributable to
the opening of six new Consolidated AmeriHost Inn hotels in 2001 and 2002; the
acquisition of one AmeriHost Inn hotel from a joint venture in 2001; and the
acquisition of the office building in the fourth quarter of 2001 and the
resulting depreciation and amortization therefrom, partially offset by the sale
of nine Consolidated hotels in 2001 and five Consolidated hotels in 2002.
Leasehold rents - hotels decreased 16.9% to $5.4 million during 2002, from $6.5
million during 2001. The decrease was primarily attributable to the termination
of six leased hotels during 2001 and 2002 as a result of the lessor selling
these hotels, offset by the amortization of the hotel leases with the REIT. The
amortization of deferred gain from the sale of the hotels to the REIT was
approximately $712,000 and $818,000 in 2002 and 2001, respectively.
-24-
Corporate general and administrative expense increased 15.2% to $2.2 million
during 2002, from $1.9 million during 2001, and can be attributed primarily to
approximately $683,000 in expenses related to the resignation and replacement of
the Company's President/CEO in 2002 and the overall growth of the Company. The
results for 2001 reflect the recognition of $167,000 in one-time expenses
related to the issuance of stock options in 2000 to joint venture partners,
including a director of the Company, in connection with the sale of the
AmeriHost Inn brand and franchising rights.
The Company's operating income decreased 64.2% to $2.0 million during 2002, from
$5.6 million during 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 2.2% to $3.2
million during 2002, from $3.1 million during 2001. This increase in operating
income was due to a 2.9% increase in same room revenues, and decreases in
certain hotel operating expenses. Operating loss from the hotel development
segment was ($30,785) during 2002, compared to operating income of $236,319
during 2001. The decrease in hotel development operating income was due to the
decrease in the higher margin hotel development activity for unrelated third
parties and unconsolidated joint ventures during 2002, compared to 2001.
Operating income from the sale of AmeriHost Inn hotels was $1.9 million during
2002, compared to $3.3 million during 2001, as a result of the sale of five
Consolidated AmeriHost Inn hotels during 2002, compared to the sale of nine
Consolidated AmeriHost Inn hotels during 2001. The hotel management segment had
operating income of $191,097 during 2002, compared to $295,356 during 2001. This
decrease was due primarily to a reduction in the number of hotel rooms managed
for unrelated third parties and unconsolidated joint ventures. Employee leasing
operating income decreased to $56,462 during 2002, compared to $110,642 during
2001, due primarily to the decrease in the number of employee leasing agreements
with unrelated third parties and unconsolidated joint ventures, and the
allocation of certain costs. Operating income for the development incentive and
royalty sharing segment increased to $588,938 in 2002 from $209,633 in 2001, as
a result of the sale of AmeriHost Inn hotels and the increase in the number of
non-company owned AmeriHost Inn hotels franchised with Cendant. The office
building rental segment had operating income of $454,397 during 2002, compared
to $130,831 during 2001, due primarily to the acquisition of the building during
the fourth quarter of 2001.
Interest expense increased 7.0% to $5.5 million during 2002, from $5.2 million
during 2001. This increase was primarily attributable to the overall increase in
outstanding debt from the mortgage financing of newly constructed Consolidated
hotels and the office building, partially offset by the sale of hotels and the
reduction of interest rates on certain floating rate loan agreements. During
2001, the Company modified the terms of three hotel loan agreements with the
related lenders to obtain more favorable interest rates. In addition, the
Company assisted three joint ventures in modifying their loan agreements to
obtain lower interest rates. Based upon a discounted cash flow analysis of the
interest rate differentials, the modification transactions did not qualify to be
treated as an extinguishment of debt with the simultaneous acquisition of new
debt. The Company capitalizes interest expense incurred during the pre-opening
construction period of a Company-owned hotel project, as part of the total
development cost. The amount capitalized includes both interest charges from a
direct construction loan, plus interest computed at the Company's incremental
borrowing rate on the total costs incurred to date in excess of the construction
loan funding. The Company capitalized approximately $287,000, $337,000 and
$100,000 in 2002, 2001 and 2000, respectively, in construction period interest
which is included in property and equipment.
The Company's share of equity in income (loss) of unconsolidated joint ventures
was ($412,094) during 2002, compared to ($925,654) during 2001. The increase in
equity in income (loss) during 2002 was primarily attributable to the sale of
two unconsolidated minority-owned properties in 2002 at a significant gain,
offset by an impairment provision on a non-core hotel of $100,000 during the
second quarter of 2002 and the recognition of 100% of the net operating losses
from two additional unconsolidated joint ventures during 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. This exchange was accounted for at
fair value and resulted in no gain or loss. 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 $172,685 during 2002, including a $150,000 note receivable
pursuant to the sale of a hotel, compared to $19,220 during 2001.
The Company recorded gains from the sale of assets of $727,076 during 2002,
compared to $1.3 million in 2001. During 2002, the gain was comprised primarily
of a $400,000 installment payment from Cendant for the purchase of the AmeriHost
Inn brands and franchising rights, and the unamortized deferred gain remaining
from the original sale of one
-25-
hotel to the REIT, which was recognized upon the consummation of the sale of
this hotel by the REIT to an unrelated third party in 2002 and the simultaneous
termination of the Company's lease with the REIT. During 2001, the gain was
comprised primarily of a $400,000 installment payment from Cendant for the
purchase of the AmeriHost Inn brands and franchising rights, and the recognition
of the unamortized deferred gains upon the sale of three hotels by the REIT to
unrelated third parties. The Company expects to continue recognizing the
unamortized deferred gain from either a reduction in the lease expense over a
period of time or the future sale of REIT-owned hotels.
The Company recorded an income tax benefit of $805,000 in 2002, compared to
income tax expense of $615,000 in 2001, which are directly related to the
pre-tax loss and income incurred in 2002 and 2001, respectively.
During 2002, the Company settled with its insurance company on a claim related
to a hotel which was destroyed by a fire. This claim included amounts for lost
profits, management fees, projected development cost increases, etc. The Company
reported all such proceeds in excess of actual costs paid in the amount of
approximately $298,000 in other income.
The Company reported a net loss of $1.7 million in 2002, compared to net income
of $755,100 in 2001, primarily due to the factors discussed above.
2001 compared to 2000
Revenues increased 1.3% to $77.2 million during 2001, from $76.2 million during
2000. The increase in the hotel sales and commissions segment was offset by
decreases in the hotel operations, hotel development, hotel management and
employee leasing segments.
Hotel operations revenue decreased 8.1% to $56.4 million during 2001, from $61.4
million during 2000. Revenues from Consolidated AmeriHost Inn hotels decreased
8.4% to $45.1 million during 2001, from $49.2 million during 2000. This decrease
was attributable primarily to the decrease in same room revenues and the net
reduction in the number of hotels from the sale of nine Consolidated AmeriHost
Inn hotels in 2001, partially offset by the opening of three new Consolidated
AmeriHost Inn hotels, and the acquisition of one Consolidated AmeriHost Inn
hotel from an unconsolidated minority-owned joint venture in 2001. Revenues from
Consolidated non-AmeriHost Inn hotels decreased 6.8% during 2001, compared to
2000. This decrease was primarily the result of the sale of one Consolidated
non-AmeriHost Inn hotel at the end of 2000. The hotel operations segment
included the operations of 63 Consolidated hotels (including 55 AmeriHost Inn
hotels) comprising 4,560 rooms at December 31, 2001, compared to 66 Consolidated
hotels (including 60 AmeriHost Inn hotels) comprising 4,630 rooms at December
31, 2000.
Hotel development revenue decreased 72.3% to $1.7 million during 2001, from $7.0
million during 2000. The Company was constructing one hotel for a minority-owned
joint venture and one hotel for an unrelated third party during 2001, both of
which were under construction at December 31, 2001. In 2000, four hotels were
under construction during the year, all of which were completed prior to
December 31, 2000. The Company also had several additional projects in various
stages of pre-construction development during these periods.
Hotel management revenue decreased 14.7% to $1.1 million during 2001, from $1.3
million in 2000. The number of hotels managed for third parties and
minority-owned entities decreased from 17 hotels, representing 1,378 rooms, at
December 31, 2000 to 16 hotels, representing 1,318 rooms, at December 31, 2001.
The decrease in revenue was primarily due to a 4.4% reduction in rooms under
contract and the decrease in same room revenues of those hotels.
Employee leasing revenue decreased 21.8% to $4.7 million during 2001, from $6.0
million during 2000, due primarily to the reduction in hotels managed for
minority-owned entities and unrelated third parties as described above, and the
associated decrease in payroll costs which is the basis for the employee leasing
revenue.
Incentive and royalty sharing revenue was approximately $210,000 in 2001,
compared to approximately $16,000 in 2000, as a result of the sale of the
AmeriHost Inn brand in 2000, and the sale of AmeriHost Inn hotels in 2001. The
Company received $1.6 million in development incentive fees in 2001 from the
sale of AmeriHost Inn hotels, with
-26-
approximately $148,000 recognized in 2001, as the amortization of this deferred
income. In addition, the Company recorded approximately $62,000 and $16,000 in
royalty sharing fees in 2001 and 2000, respectively.
Other revenue, consisting primarily of leasing revenue from the Company's office
building in 2001, and franchising revenue in 2000, decreased to $169,612 in
2001, from $586,276 during 2000. On October 1, 2001, the Company purchased the
office building in which its headquarters is located. The building contains
approximately 50,000 rentable square feet, of which the Company occupies
approximately 19,000 square feet. Nearly all of the remaining space was leased
to unrelated third parties pursuant to long-term leases. On September 30, 2000,
the Company sold the AmeriHost Inn franchising rights to Cendant. As a result,
the Company did not report franchising revenue in 2001.
Total operating costs and expenses decreased 0.4% to $58.5 million (75.8% of
total revenues) in 2001, from $58.7 million (77.1% of total revenues) during
2000, primarily due to decreases in operating costs and expenses from the hotel
operations and development segments as described below, offset by an increase in
operating costs from hotel sales. Operating costs and expenses in the hotel
operations segment decreased 5.7% to $42.1 million during 2001, from $44.7
million in 2000. A decrease in operating costs associated with the fewer number
of hotels included in this segment (62 hotels at December 31, 2001 versus 66
hotels at December 31, 2000), was partially offset by significant increases in
energy costs, inflationary increases in operating expenses and the greater
number of stabilized hotels. Hotel operations segment operating costs and
expenses as a percentage of segment revenue increased to 74.7% during 2001, from
72.8% during 2000, due primarily to the inflationary increases and higher energy
costs. Operating costs and expenses as a percentage of revenues for the
Consolidated AmeriHost Inn hotels increased to 73.0% in 2001, from 70.7% in
2000.
Operating costs and expenses for the hotel development segment decreased 78.6%
to $1.5 million during 2001, from $6.9 million during 2000, consistent with the
72.3% decrease in hotel development revenues for 2001. Operating costs and
expenses in the hotel development segment as a percentage of segment revenue
decreased to 76.5% during 2001, from 98.8% during 2000, due to the decrease in
hotel development activity for unrelated third parties and unconsolidated joint
ventures. The results for 2000 consisted of a greater amount construction
activity, which resulted in higher operating costs in relation to the revenue
recognized. The results for 2001 consisted of a greater amount of
pre-construction hotel development activity, which resulted in lower operating
costs in relation to the revenue recognized.
Hotel management segment operating costs and expenses decreased 11.2% to
$716,802 during 2001, from $806,959 during 2000. This decrease was primarily due
to the decrease in the number of hotels operated and managed for unrelated third
parties and minority-owned entities and consistent with the 14.7% decrease in
hotel management segment revenue. Employee leasing operating costs and expenses
decreased 22.2% to $4.6 million in 2001, from $5.9 million during 2000, which is
consistent with the 21.8% decrease in segment revenue during 2001.
Other operating costs and expenses consisted primarily of expenses related to
the management of the Company's office building in 2001, and franchising
activity in 2000. Other operating expenses were $2,958 in 2001 and $489,064 in
2000. On October 1, 2001, the Company purchased the office building in which its
headquarters is located and assumed the landlord duties for the other tenants.
On September 30, 2000, the Company sold the AmeriHost Inn brands and franchising
rights to Cendant. As a result, the Company did not report franchising operating
costs in 2001.
Depreciation and amortization expense increased 2.9% to $4.7 million during
2001, from $4.5 million during 2000. This increase was primarily attributable to
the opening of three new Consolidated AmeriHost Inn hotels, and the acquisition
of one AmeriHost Inn hotel from a joint venture in 2001 and the resulting
depreciation and amortization therefrom, partially offset by the sale of nine
Consolidated hotels consummated in 2001.
Leasehold rents - hotels remained relatively unchanged at $6.5 million during
both 2001 and 2000. The decrease primarily attributable to the termination of
four leased hotels as a result of the lessor selling these hotels during 2001
was offset by the reduction in deferred gain amortization as a result of the
extension of the hotel leases with the REIT. The amortization of deferred gain
from the sale of the hotels to the REIT was $818,000 and $1,487,000 in 2001 and
2000, respectively.
Corporate general and administrative expense increased 12.6% to $1.9 million
during 2001, from $1.7 million during 2000, and can be attributed primarily to
the overall growth of the Company and the recognition of $167,000 in expenses
-27-
during the first quarter of 2001 related to the issuance of stock options in
2000 to joint venture partners, including a director of the Company, in
connection with the sale of the AmeriHost Inn brand and franchising rights and
transitional accounting fees, offset by a concerted effort to reduce
administrative expenses.
The Company's operating income increased 19.2% to $5.5 million during 2001, from
$4.7 million during 2000. The following discussion of operating income by
segment is exclusive of any corporate general and administrative expense.
Operating income from Consolidated AmeriHost Inn hotels decreased 45.1% to $3.1
million during 2001, from $5.6 million during 2000. This decrease in operating
income was due to the decrease in the number of consolidated AmeriHost Inn
hotels operated by the Company, a decrease in same room revenues, and increases
in certain hotel operating expenses including energy costs. Operating income
from the hotel development segment increased to $236,319 during 2001, from
$46,782 during 2000. The increase in hotel development operating income was due
to the increase in pre-construction hotel development activity for unrelated
third parties and unconsolidated joint ventures during 2001, compared to 2000,
which has a higher gross profit margin than the construction activity. The hotel
management segment had operating income of $295,356 during 2001, compared to
$399,771 during 2000. This decrease was due primarily to a reduction in the
number of hotel rooms managed for unrelated third parties and unconsolidated
joint ventures. Employee leasing operating income increased slightly to $110,642
during 2001, compared to $108,812 during 2000, due primarily to the decrease in
employee leasing agreements with unrelated third parties and unconsolidated
joint ventures, offset by the allocation of certain costs.
During 2001, the Company modified the terms of three hotel loan agreements with
the related lenders to obtain more favorable interest rates. In addition, the
Company assisted three joint ventures in modifying their loan agreements to
obtain lower interest rates. Based upon a discounted cash flow analysis of the
interest rate differentials, the modification transactions did not qualify to be
treated as an extinguishment of debt with the simultaneous acquisition of new
debt. Interest expense decreased 8.1% to $5.2 million during 2001, from $5.6
million during 2000. This decrease was primarily attributable to the
aforementioned sales of hotels whereby the Company does not incur any interest
expense on the sold hotels after the sale dates as well as the reduction of
interest rates on certain loan agreements, partially offset by the mortgage
financing of newly constructed Consolidated hotels. The Company capitalizes
interest expense incurred during the pre-opening construction period of a
Company-owned hotel project, as part of the total development cost. The amount
capitalized includes both interest charges from a direct construction loan, plus
interest computed at the Company's incremental borrowing rate on the total costs
incurred to date in excess of the construction loan funding. The Company
capitalized $336,748, $100,275 and $121,238 in 2001, 2000, and 1999,
respectively, in construction period interest which is included in property and
equipment.
The Company's share of equity in income (loss) of affiliates was ($925,654)
during 2001, compared to ($101,872) during 2000. The decrease in equity of
affiliates during 2001 was primarily attributable to the sale of two
minority-owned properties in the first half of 2000 at a significant gain, as
well as the recognition of losses in 2001 in excess of the Company's ownership
interest for two joint ventures. Distributions from affiliates were $19,220
during 2001, compared to $473,808 during 2000.
The Company recorded gains from the sale of assets of $1,286,338 during 2001,
compared to $6.7 million in 2000. During 2001, the gains were comprised
primarily of a $400,000 installment payment received from the sale of the
AmeriHost Inn brands and franchising rights to Cendant, and the unamortized
deferred gains remaining from the original sale of four hotels to the REIT,
which were recognized upon the consummation of the sales of these hotels by the
REIT to unrelated third parties in 2001 and the simultaneous termination of the
Company's leases with the REIT. The Company expects to continue recognizing the
unamortized deferred gain from the future sale of REIT-owned hotels. The Company
reported a gain on sale from the sale of the AmeriHost Inn name and franchising
rights in 2000 for approximately $5.2 million. In addition, four Consolidated
hotels were sold in 2000, where the Company recorded gains on the sales.
The Company recorded income tax expenses of $615,000 in 2001, compared to $2.7
million in 2000, which are directly related to the pre-tax income incurred in
2001 and 2000, respectively.
The Company reported net income of $755,100 in 2001, compared to $4.0 million in
2000, primarily due to the factors discussed above.
-28-
LIQUIDITY AND CAPITAL RESOURCES
The Company has seven main sources of cash from operating activities: (i)
revenues from hotel operations; (ii) fees from development, construction and
renovation projects, (iii) revenues from the sale of hotel assets; (iv) fees
from management contracts, (v) fees from employee leasing services, (vi) hotel
development incentive fees and royalty sharing pursuant to the Cendant
transaction, and (vii) rental income from the ownership of an office building.
Approximately 10% of the Company's hotel operations revenues is not received at
checkout and is generated through other businesses and contracts (such as direct
billings to local companies using the hotel and third party hotel room brokers),
which is usually paid within 30 to 45 days from billing. Fees from development,
construction and renovation projects are typically received within 15 to 45 days
from billing. Due to the procedures in place for processing its construction
draws, the Company typically does not pay its contractors until the Company
receives its draw from the equity or lending source. 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. Management fee revenues typically are received
by the Company within five working days of 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 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. Office space rents are typically received monthly in advance, around
the first of each month.
During 2002, the Company's cash provided from operations was $14.3 million,
compared to $15.9 million during 2001, or a decrease in cash provided by
operations of $1.6 million. The decrease in cash flow from operations during
2002, when compared to 2001, can be attributed primarily to the decrease in sale
of hotel activity, the decrease in operating income from non-core hotels, and
the one-time expenses related to the resignation and replacement of the
Company's President/CEO in 2002, 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. The Board of Directors has authorized the
Company to buy back, at any time and without notice, up to 1,000,000 shares of
its own common stock under certain conditions. Under this authorization, to date
the Company has not repurchased a significant number of shares.
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, using approximately $680,000 in cash, plus
mortgage financing already committed from an affiliate of the REIT, and
facilitated the sale of one hotel by the REIT. The Company must facilitate the
sale or purchase of the REIT's third choice by June 5, 2003. The Company
believes a sale of this hotel is not likely in the near future, and thus it
intends to purchase this hotel by this date using
-29-
cash of approximately $556,000 and mortgage financing already committed by an
affiliate of the REIT of approximately $1.7 million.
On September 18, 2000, in connection with the approval of all joint venture
partners regarding the sale of AmeriHost Inn brand and franchising rights, the
Company finalized the terms of an agreement to issue 125,000 new stock options
to the partners in three existing joint ventures, canceling 60,000 existing
stock options held by these partners, and to purchase their remaining ownership
interests in these three joint ventures at specified prices. One of the partners
in these three joint ventures is a director of the Company (see item 13 below).
One of these acquisitions was completed in 2001, and one was completed during
the second quarter of 2002 using approximately $797,000. The final one is
scheduled to be completed before April 12, 2003; however, the Company currently
is in the process of extending this purchase obligation. The Company expects to
use approximately $830,000 for the purchase of the remaining joint venture
interest.
During 2002, the Company used $17.1 million in investing activities compared to
using $27.5 million during 2001. During 2002, the Company bought out a partner's
interest in one joint venture for $796,786, used $18.6 million to purchase
property and equipment for Consolidated hotels, and received $877,904 in
distributions and collections on advances from affiliates, net of investments in
and advances to affiliates. During 2001, the Company bought out a partner's
interest in one joint venture for $804,613, used $25.4 million to purchase
property and equipment for Consolidated hotels, and used $1.5 million for
investments in and advances to affiliates, net of distributions and collections
on advances from affiliates.
Cash provided by financing activities was $2.0 million during 2002 compared to
cash provided by financing activities of $14.6 million during 2001. In 2002, the
primary factors were $13.0 million in proceeds from the mortgage financing of
Consolidated hotels, offset by net repayments of $409,415 on the Company's
operating line-of-credit, and principal repayments of $10.4 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
$20.6 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 $9.2 million on the mortgage financing of
Consolidated hotels, including the repayments of mortgages in connection with
the sale of hotels. Approximately $4.0 million is classified as current portion
of long-term debt, including one mortgage which is due within the next twelve
months. The Company expects this mortgage to be repaid through the sale of the
hotel or refinanced prior to maturity. This mortgage bears interest at the
floating rate of prime plus 2.5% per annum. If refinanced, the Company expects,
based on current market conditions, the interest rate to remain at a similar
level.
The Company has secured a $20 million construction line of credit facility,
which provides for both construction financing as well as long-term permanent
mortgage financing. The Company utilizes this facility primarily for the
construction of wholly-owned AmeriHost Inn properties, as approved by the lender
on a project-by-project basis. As of December 31, 2002, approximately $8.5
million has been utilized for three hotel projects, which is, or will be,
converted to long-term financing. The Company has until May 31, 2003, to utilize
this facility for new projects and is currently in the process of renewing this
facility.
The Company, through wholly-owned subsidiaries, is a general partner or managing
member in 16 joint ventures as of December 31, 2002. As such, the Company is
secondarily liable for the obligations and liabilities of these joint ventures.
As of December 31, 2002, these joint ventures had $29.4 million outstanding
under mortgage loan agreements. Approximately $7.4 million of this amount has
been included in the Company's consolidated financial statements as of December
31, 2002, since it is from joint ventures in which the Company has a majority or
controlling ownership interest, leaving approximately $22.0 million in
off-balance sheet mortgage debt with unconsolidated joint ventures. Of this
$22.0 million of financing, the Company also has provided approximately $15.0
million in guarantees to the lenders. Other partners have also guaranteed
portions of this amount. One unconsolidated joint venture mortgage loan in the
amount of $1.8 million at December 31, 2002, matures in 2003. The Company
expects the joint venture may sell this hotel, extend the loan, or refinance the
loan 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 advances bear interest at rates ranging
from prime to 10% per annum and are due upon demand. The advances were $2.9
million and $7.0 million at December 31, 2002 and 2001, respectively, and are
included in investments in and advances to unconsolidated hotel joint ventures
in the Company's consolidated financial statements. The amount at December 31,
2001, includes mortgage financing the Company had provided for one
unconsolidated joint venture.
-30-
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.
At December 31, 2002, the Company was not in compliance with the minimum debt
service coverage ratio contained in two mortgage loan agreements, aggregating
approximately $4.6 million. However the Company has obtained waivers with
respect to these violations. In addition, one joint venture where the Company
has guaranteed the mortgage debt was not in compliance with the minimum debt
service coverage ratio covenant contained in the mortgage loan agreement. This
joint venture has also obtained a waiver from the lender regarding this
violation.
At December 31, 2002, the Company had $6.4 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's leverage ratio, ranging from zero to 0.5% (if prime
based) or 3.0% (if LIBOR based), and matures April 30, 2003. The credit line
provides for the maintenance of certain financial covenants, including minimum
tangible net worth, a maximum leverage ratio and a minimum debt service coverage
ratio. The Company was not in compliance with the maximum leverage ratio and the
minimum debt service coverage ratio covenants as of December 31, 2002; however
the lender has waived these violations in connection with the renewal of the
line-of-credit set forth below.
In March 2003, the Company received a commitment from this lender to renew the
line-of-credit through April 30, 2004, with a maximum available of $6.5 million,
reducing to $6.0 million on September 30, 2003, and to $5.5 million on February
28, 2004. The commitment is subject to the closing of the renewed loan by April
30, 2003, and certain other conditions. The terms of the agreement were revised
to provide for interest at the rate of prime, plus 2.5%, with a floor of 6.75%.
The credit line provides for the maintenance of certain financial covenants, as
in the previous credit line, as well as a minimum net income covenant for 2003.
The Company intends to pursue longer term financing options with other lenders
that would better match the Company's business plan of developing, building and
selling AmeriHost Inn hotels. However, there can be no assurance that the
Company will obtain an alternative credit facility of longer duration under
terms and conditions that the Company deems satisfactory.
The following table summarizes the contractual obligations of the Company,
including off-balance sheet mortgage loan guarantees provided for certain joint
ventures:
Payments due by period
----------------------
Less than 1 - 3 3 -5 More than
Total 1 year years years 5 years
------------- ------------- ------------- ------------- ---------------
Long-term debt - consolidated $ 76,241,989 $ 4,038,301 $ 14,496,163 $ 16,852,092 $ 40,855,433
Long-term debt - unconsolidated
joint ventures 22,025,814 2,585,794 2,673,162 2,361,224 14,405,634
Line of credit 6,384,287 6,384,287 - - -
Operating leases - consolidated 67,990,000 5,939,000 11,935,000 12,395,000 37,721,000
Operating leases - unconsolidated - - - - -
Purchase obligations:
Joint venture buyout 829,800 829,800 - - -
Lease buyout 2,225,000 2,225,000 - - -
Construction contracts 3,033,730 3,033,730 - - -
Other long-term liabilities - - - - -
Total $ 178,730,620 $ 25,035,912 $ 29,104,325 $ 31,608,316 $ 92,982,067
============= ============= ============= ============= =============
-31-
The Company expects cash from operations, including proceeds from the sale of
hotels, to be sufficient to pay all operating and interest expenses in 2003, as
well as commitments to purchase hotel assets; provided that current financing
facilities remain in place.
FINANCING RISKS
The availability of financing on reasonable terms is critical to the ability of
the Company to develop hotels, maintain its operations and sell hotels. The
Company's results and prospects may be materially affected by the availability
and conditions of development and mortgage financing and lines-of-credit for the
Company and for potential purchasers and franchisees of the Company's hotels.
The requirements of lenders may be influenced by economic and geopolitical
conditions, as well as the Company's business. Changes in the availability or
terms of financing could have a material adverse effect on the company.
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 primarily midwest
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. Quarterly earnings also may be
adversely affected by events beyond the Company's control, such as extreme
weather conditions, economic factors, securities and geopolitical concerns and
other general factors affecting travel. In addition, hotel construction is
seasonal, depending upon the geographic location of the construction projects.
Construction activity in the Midwest may be slower in the first and fourth
calendar quarters due to weather conditions. Also, since the Company's
management fees are based upon a percentage of the hotel's total gross revenues,
the Company is further susceptible to seasonal variations.
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 4, "Reporting Gains and Losses from Extinguishment of Debt," and SFAS 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which
amended SFAS 4, will affect income statement classification of gains and losses
from extinguishment of debt. SFAS 4 requires that gains and losses from
extinguishment of debt be classified as an extraordinary item, if material.
Under SFAS 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 APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the 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
-32-
not yet fully assessed the impact of SFAS 146 on the consolidated financial
statements, but does not anticipate it to be material.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others," and interpretation of FASB Statements No. 5, 57 and 107
and a rescission of FASB Interpretation No. 34. This interpretation elaborates
on the disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under guarantees issued. The interpretation
also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of the interpretation are
applicable to guarantees issued or modified after December 31, 2002, and are not
expected to have a material effect on the Company's consolidated financial
statements. As described in Note 4, the Company has guaranteed mortgage loan
obligations on certain joint ventures in which the Company holds a minority
ownership interest, to secure undertakings made by those joint ventures. The
Company anticipates that no such contingent liability will be realized, and that
the various guarantees will eventually expire. As such, the Company believes the
aggregate fair value of all such guarantees is negligible.
In December 2002, the FASB issues SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). This statement amends
FASB Statement No. 123, "Accounting for Stock-based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
148 and the disclosure requirements of Statement No. 123 require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after December 15,
2002, and are included in the notes to these consolidated financial statements.
The Company has not yet determined whether it will commence reporting the fair
value of any options as a charge against earnings.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," (FIN46) an interpretation of ARB No. 51. This
interpretation addresses the consolidation by business enterprises of variable
interest entities as defined in the interpretation. The interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests obtained in variable interest
entities after January 31, 2003. For public companies like the Company, the
interpretation is applied to the enterprise no later than the beginning of the
first annual reporting period beginning after June 15, 2003. The application of
this interpretation is not expected to have a material effect on the Company's
consolidated financial statements. The interpretation requires certain
disclosures in the consolidated financial statements issued after January 15,
2003, if it is reasonably possible that the Company will consolidate or disclose
information about variable interest entities when the interpretation becomes
effective. The Company does not currently anticipate consolidating any variable
interest entities upon the application of FIN46.
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.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's long-term debt obligations. The Company has some cash
flow exposure on its long-term debt obligations to changes in market interest
rates. The Company primarily enters into long-term debt obligations in
connection with the development and financing of hotels. The Company maintains a
mix of fixed and floating debt to mitigate its exposure to interest rate
fluctuations.
The Company's management believes that fluctuations in interest rates in the
near term would not materially affect the Company's consolidated operating
results, financial position or cash flows, as the Company has limited risks
related to interest rate fluctuations.
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 December 31, 2002. The carrying amounts reflected approximate
the estimated fair values. As the table incorporates only those exposures that
existed as of December 31, 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 $ 6,384,287 5.50%
Mortgage debt - fixed rate $ 29,000,331 7.52%
Mortgage debt - variable rate $ 47,241,658 6.17%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements filed as part of this Form 10-K are
included under "Exhibits, Financial Statements and Reports on Form 8-K" under
Item 15. Selected quarterly financial data is presented in Note 16 to the
consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with KPMG LLP on accounting and financial
disclosure matters which are required to be described by Item 304 of Regulation
S-K.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers and directors are:
Name Age Position
---- --- --------
Kenneth M. Fell 45 Chairman of the Board of Directors
Andrew E. Shapiro 41 Vice Chairman of the Board of Directors
Jerry H. Herman 49 President, Chief Executive Officer and
Director
James B. Dale 39 Senior Vice President of Finance,
Secretary, Treasurer and Chief
Financial Officer
Steven J. Belmonte 50 Director
Salomon J. Dayan 57 Director
Gerald T. LaFlamme 63 Director
Thomas J. Romano 50 Director
Kenneth M. Fell has been a member of the Board of Directors since August 2002.
In December 2002, Mr. Fell was elected independent Chairman of the Board of
Directors. Since 1983, Mr. Fell has been an independent floor trader and member
of various divisions of the Chicago Mercantile Exchange. These include the Index
and Options Market (1983-present), the International Monetary Market
(1984-present), and the Growth and Emerging Market (1995-present). Since 1986,
Mr. Fell has been the President and sole owner of K.F., Inc., a financial
derivatives trading corporation.
Andrew E. Shapiro has been a member of the Board of Directors since September
2002, and was elected independent Vice Chairman of the Board of Directors in
February 2003. He is also Chairman of the Company's Corporate
Governance/Nominating Committee. Mr. Shapiro is Managing Member and President of
Lawndale Capital Management, LLC, a San Francisco Bay area investment advisory
firm, and Chairman and President of a predecessor investment advisor, and now
holding company, Lawndale Capital Management, Inc., since 1992. Prior to forming
the Lawndale Capital entities, Mr. Shapiro obtained numerous years of experience
in highly leveraged investments and lending. He has been a Board Observer of
Earl Scheib, Inc. (A-ESH), pursuant to an agreement with that company's Board,
and he is a member of the National Association of Corporate Directors (NACD).
Jerry H. Herman is President and Chief Executive Officer, and a member of the
Board of Directors, since January 2003. Mr. Herman is responsible for the
development and implementation of the Company's strategic objectives, business
plan, core businesses, and asset decisions. From 1992 to 2002, Mr. Herman was
Chief Executive Officer and a member of the Board of Directors of City Hotels
USA, the U.S. holding company of a publicly traded ownership, development,
management and hospitality company headquartered in Belgium with assets in
Europe and the United States. Prior to that, from 1984 to 1991, he was General
Counsel and then Senior Vice President of Hotel Acquisitions for C.R.I., Inc., a
national real estate investment and management firm with multi-family, hotel,
and commercial ownership and mortgage portfolios. Mr. Herman is a member of the
District of Columbia Bar and the American Bar Association, and he recently
served as a founding member of the National Franchise Advisory Boards of the
Doubletree and Homewood Suites brands.
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James B. Dale was promoted to Chief Financial Officer in 1998, in addition to
his responsibilities as Senior Vice President of Finance. Mr. Dale began his
employment with the Company in May 1994 as the Company's first Corporate
Controller. He has been responsible for overseeing all aspects of the Company's
property and corporate accounting departments, including preparation of all SEC
filings. In 1999, Mr. Dale was elected Secretary by the Board of Directors.
Prior to joining the Company, Mr. Dale was an Audit Manager with an
international public accounting firm, with nearly nine years of experience in
auditing, financial reporting and taxation. Mr. Dale is a Certified Public
Accountant and is a member of the American Institute of Certified Public
Accountants and the Illinois CPA Society.
Steven J. Belmonte, CHA, has been a member of the Board of Directors since
August, 2002. He is Chairman of the Company's Compensation Committee. In 2002,
Mr. Belmonte launched Hospitality Solutions, LLC, a full-service, nationwide
consultation firm specializing in lodging industry issues at the hotel and
corporate level. Hospitality Solutions offers expert witness and arbitration
services, litigation support, license agreement formulation or termination
negotiation assistance, asset management, special projects, targeted training
programs, and motivational speaking. From 1991 to 2002, Mr. Belmonte oversaw the
Ramada hotel chain, which had over 1,000 hotels and nearly 135,000 hotel rooms
throughout the United States, becoming the longest standing president of a
national franchised hotel chain. Mr. Belmonte has assumed leadership roles in
charities related to the hotel industry as follows: Chairman of the American
Hotel Foundation (AHF) and Vice Chairman of the American Hotel & Lodging
Educational Foundation (AH&LEF). Furthermore, Mr. Belmonte's charitable
leadership has also extended to Childreach, whose activities have included
constructing two medical facilities, a Food and Science Laboratory and a library
in Africa, and schools in the Dominican Republic and Honduras.
Salomon J. Dayan, M.D., has been a member of the Board since August, 1996. In
1980, Dr. Dayan, a physician certified in internal and geriatric medicine,
founded the Salomon J. Dayan Ltd., a multi-specialty medical group, which is
dedicated to the care of the elderly in hospital and nursing home settings. He
was Chief Executive Officer from 1980 until the medical group was sold in 1998.
Dr. Dayan was the Medical Director and Executive Director of Healthfirst, a
corporation which operates multiple medical ambulatory facilities in the
Chicago, Illinois area from 1986 until the corporation was sold in 1996. Since
1994, he has been an assistant professor at Rush Medical Center in Chicago. Dr.
Dayan is currently the Chairman of the Board of Directors of J. D. Financial, a
bank holding company owning Pan American Bank. In July 2002, Dr. Dayan started a
new company called Pan American Mortgage, LLC, a residential mortgage broker,
where he serves as CEO. Dr. Dayan also has numerous investments in residential
and commercial real estate.
Gerald T. LaFlamme has been a member of the Board of Directors since August
2002. He is Chairman of the Company's Audit Committee. He is the Senior Vice
President and Chief Financial Officer of Davidson Communities, LLC, a real
estate development company since 2001, where his responsibilities include land
acquisitions, joint venture transactions and the financing of real estate
projects. From 1997 through 2001, Mr. LaFlamme was retired. From 1978 to 1997,
Mr. LaFlamme was a Managing Partner with Ernst & Young LLP and had
responsibility for managing the firm's Real Estate Office in San Diego,
California. Mr. LaFlamme has extensive experience in structuring real estate
transactions and in developing business strategies for Real Estate Investment
Trusts, residential and commercial developers, and hospitality management
companies.
Thomas J. Romano has been a member of the Board since November 1999. Mr. Romano
has been an Executive Vice President and a member of executive management for
Bridgeview Bank Corp. since 1997. He served as Chief Credit Officer and
President of the Lake County, Illinois region, responsible for a significant
loan portfolio from 1997 until June 2002, at which time he became, responsible
for leading the community banks' marketing efforts for Bridgeview Payment
Solutions and Bridgeview Capital Solutions. Prior to Bridgeview Bank Group, his
experience includes 19 years with First of America Bank where his
responsibilities included the management of the commercial lending functions
across the Northern Illinois Region. Mr. Romano is currently a member of Robert
Morris Associates and serves as a director for Bridgeview Bank N.A., Laserage
Technology Corporation and the Goldman Philanthropic Partnerships.
-36-
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon a review of Section 16(a) filings furnished to the Company, the
Company is not aware of any failure to file reports required by Section 16(a) on
a timely basis during 2002.
CORPORATE GOVERNANCE
Since June 2002, the Company has adopted strong corporate governance changes
that enhance the independent composition and independent functioning of the
Company's board. Key elements include mandating that a super-majority of
two-thirds of the Board and 100% of its key committees be composed of
independent directors. Since August 2002, five new directors have been elected
to the seven-member board. The Board meets regularly in non-management executive
session, and the Chairman of the Board position has been made independent and
separate from the Chief Executive Officer. In February 2003, an independent
director was named Vice Chairman as part of the Board's program to improve
succession planning.
The Board of Directors also acts through four standing committees, consisting of
the Audit Committee, Corporate Governance Committee, Compensation Committee and
Ad Hoc Committee. All committees are comprised of independent directors, except
for the Ad Hoc Committee which is comprised of a supermajority of indepedent
members. The Board has determined that at least one of the members of the Audit
Committee is a financial expert.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the annual and
long-term compensation for services as officers to the Company for the fiscal
years ended December 31, 2002, 2001 and 2000, of those persons who were, at
December 31, 2002: The chief executive officer and the other executive officer
of the Company (the "Named Officers"). See "Compensation of Directors" under
Item 11.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
---------------------------
Annual Compensation Restricted Securities
-----------------------------
Name and Principal Stock Underlying All Other
Position Year Salary Bonus Awards Options(#)(1) Compensation(2)
- ------------------------ ------ -------- ---------- ------ -------------- ---------------
Michael P. Holtz (3) 2002 316,250 - - 100,000 464,315
Former Chairman of the Board, 2001 325,000 - - 100,000 23,422
President, Chief Executive Officer 2000 325,000 36,500 - 100,000 17,500
James B. Dale 2002 145,000 13,600 - 21,000 2,036
Senior Vice President Finance, 2001 132,115 9,000 - 21,000 2,214
Secretary, Treasurer, and 2000 125,000 5,000 - 21,000 1,300
Chief Financial Officer
(1) Includes 50,000, 50,000, and 100,000 options issued to Mr. Holtz in 2002,
2001 and 2000, respectively, which did not vest and were forfeited. Mr.
Holtz exercised 50,000 options issued in 2002 and 50,000 options issued
in 2001 upon the closing of his settlement agreement in December 2002.
Includes 7,000 and 7,000 options issued in 2002 and 2001, respectively,
to Mr. Dale which did not vest and were forfeited. All other options
issued to Mr. Dale were fully vested as of December 31, 2002, except for
14,000 options issued in 2002.
(2) Includes severance compensation and benefits in the amount of $440,200
for Mr. Holtz in 2002, in accordance with the terms of his severance
settlement agreements. Also includes life and disability insurance
premiums paid by the Company on behalf of the Named Officers and the
Company's 401(k) matching contributions of $2,750, $2,625 and $2,500 for
Mr. Holtz, and $1,586, $1,764 and $1,300 for Mr. Dale, for 2002, 2001 and
2000, respectively.
(3) On August 15, 2002, Mr. Holtz tendered his resignation as an executive
officer of the Company, which resignation became effective on December
12, 2002. On December 19, 2002, the Company entered into a new employment
agreement with Jerry H. Herman with a start date of January 7, 2003. A
summary of Mr. Herman's employment agreement follows below.
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STOCK OPTIONS
The following table summarizes the number and terms of stock options granted to
each of the Named Officers during the year ended December 31, 2002.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
---------------------------------------------------------- -----------------------------
% of Total Options
Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- ------------------------------------- --------------- ------------ ------------ ---------- -----------
Michael P. Holtz 100,000 51.8% $2.02 Jan. 2012 335,878 617,249
James B. Dale 21,000 10.9% $3.51 June 2012 41,593 105,471
Since the Company did not meet certain financial performance criteria for 2002,
50,000 and 7,000 options issued in 2002 to Mr. Holtz and Mr. Dale, respectively,
did not vest and were forfeited. Mr. Holtz exercised 50,000 options granted in
2002 prior to his separation from the Company.
The following table provides information concerning the exercise of stock
options during 2002 and the year-end value of unexercised options for each of
the Named Officers and Directors of the Company.
OPTION EXERCISES AND YEAR-END VALUE TABLE
Number of Unexercised Value of Unexercised
Options Held at in-the-Money Options at
Shares December 31, 2002 December 31, 2002 (1)
Acquired Value --------------------------- --------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
Salomon J. Dayan - $ - 71,000 3,500 $ 797 $ -
Thomas J. Romano - - 4,500 3,500 797 -
Kenneth M. Fell - - - 3,500 - -
Andrew E. Shapiro - - - 2,500 - -
Gerald T. LaFlamme - - - 3,500 - -
Steven J. Belmonte - - - 3,500 - -
James B. Dale - - 73,500 21,000 8,367 -
Michael P. Holtz 100,000 $ 50,600 470,000 - $ 96,438 $ -
(1) The closing sale price of the Company's Common Stock on such date on the Nasdaq National Market was $3.46.
EMPLOYMENT AGREEMENT
The Company's President and Chief Executive Officer, Michael P. Holtz, resigned
effective December 12, 2002. Mr. Holtz provided services to the Company under
the terms of an employment agreement originally dated January 1, 1995, as
amended. Pursuant to the agreement, Mr. Holtz received a base salary of $325,000
per year, and 100,000 options each year, with 50,000 vesting 90 days from the
date of issuance and 50,000 vesting only if the Company attained certain
financial performance criteria. The agreement also provided for a cash bonus
based upon financial performance and hotel operation performance. In 2001 and
2002, the Company did not meet the financial performance criteria, therefore
50,000 of the options issued to Mr. Holtz in 2001 and 50,000 of the options
issued in 2002 did not vest. Mr. Holtz did not receive a cash bonus in 2002.
The Company entered into a series of settlement agreements with Mr. Holtz,
designed to result in a smooth transition of the Company's leadership, a
mutually beneficial severance settlement, and the profitable disposition of two
of its AmeriHost Inn hotel properties. The settlement agreements provided for
the payment to Mr. Holtz of one year's base salary of $325,000 plus his regular
salary through February 15, 2003, the expiration of the six-month notice
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period in accordance with the terms of his employment agreement, plus certain
fringe benefits including health insurance, disability insurance, and life
insurance for a one year period. The settlement agreements also provided for the
sale of two AmeriHost Inn hotels to entities controlled by Mr. Holtz, subject to
certain conditions including financing commitments and appraised values within
certain parameters from an independent appraiser. The Company closed on the sale
of two AmeriHost Inn hotels (an 89-room hotel in Vicksburg, Mississippi, and a
64-room hotel in Freeport, Illinois) to entities controlled by Mr. Holtz on
December 12, 2002. Upon closing, Mr. Holtz resigned as a director and officer of
the Company.
The Company's Chief Financial Officer, James B. Dale, provides services to the
Company under the terms of an employment agreement dated January 12, 2001, as
amended. The agreement expires January 12, 2005, providing for a base salary of
$145,000 during 2002, increasing by 5% in 2003 and 2004. The agreement also
provides for cash and restricted stock bonuses based on individual and company
performance. Mr. Dale received cash bonuses of $13,600 in 2002, primarily in
connection with the sale of hotels. Mr. Dale did not receive restricted stock in
2002. The agreement provides for severance equal to 50% of annual compensation
if termination without cause, plus an additional $50,000 if terminated without
cause prior to December 31, 2003.
NEW PRESIDENT AND CEO
On January 7, 2003, Jerry H. Herman began with the Company as President and
Chief Executive Officer under the terms of an employment agreement dated
December 19, 2002. The agreement expires on December 31, 2005, unless terminated
earlier. The agreement provides for Mr. Herman to receive a base salary of
$300,000 per year, plus cash and equity bonuses based on certain Capital Events
and Board-budgeted performance targets. The Equity Performance Bonus is payable
by issuance of restricted common stock of the Company and is subject to certain
vesting provisions. In addition, the agreement provides for participation in
standard Company-sponsored benefit plans and normal business expense
reimbursement. Change-in-control provisions provide for early termination of the
agreement. Severance compensation, if payable, will be the base salary for the
remaining term of the agreement but no less than 12 months and no greater than
24 months. Standard non-compete, confidentiality and non-solicitation of
employee provisions are included in the agreement. All disputes arising from the
agreement (except disputes arising from the restrictive covenants) are to be
resolved through binding arbitration.
The complete Employment Agreement is an Exhibit to an 8-K filing with the SEC on
December 20, 2002, and amended by 8-K/a filed on December 23, 2002, and can be
viewed in its entirety on the SEC's web site.
COMPENSATION OF DIRECTORS
Each nonemployee Director of the Company received an annual retainer fee of
$9,000 ($750 per month) in 2002. Each nonemployee Director of the Company also
received $250 for each Board of Directors meeting attended in person, $150 for
each Board of Directors meeting conducted by telephone and $150 for each
committee meeting attended. Each Director is reimbursed for all out-of-pocket
expenses related to attendance at Board meetings. Non-employee Directors may
elect to receive their retainer fee in restricted common stock of the Company.
Each nonemployee Director of the Company has historically received an option to
purchase 1,000 shares of common stock of the Company annually, upon their
election to the Board, pursuant to the 1996 Stock Option Plan for Nonemployee
Directors. In addition, beginning in 2000, each nonemployee Director also
received 2,500 options annually which vest only if the Company meets certain
performance criteria, including earnings per share, EBITDA or net operating
income, as defined. The performance options issued in 2001 and 2002 were
terminated, since the Company did not meet the financial performance criteria in
2001 and 2002. All Director stock options are priced at the market price on the
date of issuance.
On February 24, 2003, the Board of Directors adopted a resolution to modify its
director compensation to better align directors with shareholders as follows:
Meeting fees - The resolution provides that each nonemployee Director of the
Company now receives $1,500 for each Board of Directors meeting attended in
person, $500 for each Board of Directors meeting conducted by telephone and
exceeding one and one-half hours, and $250 for each Board of Directors meeting
conducted by
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telephone and lasting less than one-and one-half hours. Each nonemployee
Director of the Company will also receive $1,000 for each Board Committee
meeting attended in person and exceeding one and one-half hours, $500 for each
Board Committee meeting attended in person and lasting less than one and
one-half hours, $300 for each Board Committee meeting conducted by telephone and
exceeding one and one-half hours, and $150 for each Board Committee meeting
conducted by telephone and lasting less than one and one-half hours.
Board leadership supplements - The resolution also provides that the Chairman of
the Board of Directors receives a supplemental payment of 50% of the annual
retainer ($4,500 based on the current $9,000 per year retainer) and fees for
Board meetings in which the Chairman presides. The Vice Chairman of the Board of
Directors will also receive a supplemental payment of 25% of the annual retainer
and fees for Board meetings when the Vice Chairman presides in lieu of the
Chairman. In addition, the Chairman of the Audit Committee of the Board of
Directors will receive a supplemental payment of 50% of the amount paid for
committee meetings attended in person and by telephone. The Chairmen of all
other committees of the Board of Directors will receive a supplemental payment
of 30% of the amount paid for committee meetings attended in person and by
telephone.
Retainer - The Board also authorized the modification of the annual retainer
compensation to be paid primarily in the form of restricted shares of common
stock, subject to finalization and any required approvals.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 27, 2003, by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's Directors, (iii) each of the Named
Officers and (iv) all Directors and executive officers as a group.
Shares Beneficially Owned
As of March 27, 2003
--------------------
Name Number Percent
- --------------------------------------- ------------------- -----------
Michael P. Holtz 707,408 (1) 12.9%
Wellington Management Company 565,000 (2) 11.3
Kenneth M. Fell 490,700 (3) 9.8
Andrew E. Shapiro 472,300 (4) 9.4
H. Andrew Torchia 426,032 (5) 8.2
Dimensional Fund Advisors, Inc. 395,500 (6) 7.9
Salomon J. Dayan 387,862 (7) 7.5
Richard A. D'Onofrio 338,519 (5) 6.6
Raymond and Liliane R. Dayan 311,801 (8) 6.2
Russell J. Cerqua 262,913 (9) 5.0
James B. Dale 81,775 (10) 1.6
Jerry H. Herman 40,000 0.8
Thomas J. Romano 19,500 (11) 0.4
Steven J. Belmonte 11,568 0.2
Gerald T. LaFlamme 1,000 (12) --
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (8 PERSONS) 1,493,137 28.4%
========= ====
- ------------------------------
(1) Based on information filed on Form 4 dated December 11, 2002. Includes
9 232,615 shares held directly; 2,200 shares held by the custodian for
Mr. Holtz's SEP; and 2,593 shares held by the children of Mr. Holtz.
Also includes 470,000 shares subject to options exercisable presently
or within 60 days. Mr. Holtz's address is 490 East Route 22, North
Barrington, Illinois 60010.
(2) Based upon information provided in its Schedule 13G dated December 31,
2002, Wellington Management Company ("WMC"), in its capacity as
investment advisor, may be deemed beneficial owner of 565,000 shares of
the Company which are owned by numerous investment counseling clients.
Of the shares shown above, WMC has shared voting power for 565,000
shares and shared investment power for 565,000 shares. The address of
WMC is 75 State Street, Boston, Massachusetts 02109.
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(3) Based upon information provided in a 13D filing dated January 13, 2003,
includes 200,670 shares held by KF, Inc. Profit Sharing Plan; 199,430
shares held by Kenneth M. Fell Trust; 88,100 shares held by Mr. Fell's
IRA; and 2,500 shares held by Mr. Fell's wife, Margaret A. Fell, IRA.
Mr. Fell's address is 30 South Wacker Drive, Suite 1003, Chicago,
Illinois 60606.
(4) Based upon information provided in a 13D filing dated September 9,
2002, includes 415,400 shares beneficially held by Diamond A. Partners,
L.P. and 56,900 shares held by Diamond A. Investors, L.P. Mr. Shapiro
is Managing Member of Lawndale Capital Management, LLC, the General
Partner and Investment Advisor to these partnerships. The reporting
person has only a prorata interest in the securities with respect to
which indirect beneficial ownership is reported and discloses
beneficial ownership in such securities, except to the extent of such
reporting person's pecuniary interest. Mr. Shapiro's, Lawndale Capital
Management LLC's, Diamond A. Partners, L.P.'s and Diamond A. Investors,
L.P.'s address is One Sansome Street, Suite 3900, San Francisco,
California 94104.
(5) Based upon information provided in a 13D joint filing dated January 13,
2003. Includes 80,443 and 600 shares owned directly by Messrs. Torchia
and D'Onofrio, respectively, and 150,000 options each owned by Messrs.
Torchia and D'Onofrio, which currently are exercisable. In addition, it
includes 383,508 shares owned by Urban 2000 Corp. Mr. Torchia is the
51% stockholder of Urban 2000 Corp. and disclaims beneficial ownership
of all but an aggregate of 195,589 shares owned directly, or
indirectly, by Urban 2000 Corp. Mr. D'Onofrio is the 49% stockholder of
Urban 2000 Corp. and disclaims beneficial ownership of all but an
aggregate of 187,919 shares owned directly, or indirectly by Urban 2000
Corp. The address of Urban 2000 Corp. is 10300 West Higgins Road, Suite
105, Rosemont, Illinois 60018.
(6) Based upon information provided in its Schedule 13G dated December 31,
2002, Dimensional Fund Advisors, Inc. ("DFA"), in its capacity as
investment advisor, may be deemed beneficial owner of 395,500 shares of
the Company which are owned by numerous investment counseling clients.
Of the shares shown above, DFA has sole voting and investment power for
395,500 shares. The address of DFA is 1299 Ocean Avenue, Santa Monica,
California 90401.
(7) Includes 228,812 shares held by the Salomon J. Dayan UTD 11/08/78, and
4,000 shares held by the children of Dr. Dayan. Also includes 71,000
shares subject to option exercisable presently or within 60 days, and
partnership interests which are convertible into 84,050 shares of
common stock of the Company at a conversion rate of $8.00 per share.
Dr. Dayan's address is 2837 Sheridan Place, Evanston, Illinois 60201.
(8) Based upon information provided in their Schedule 13D dated May 10,
2002, Mr. and Mrs. Dayan beneficially own 311,801 shares of the
Company. Of the shares shown above, Mr. and Mrs. Dayan have sole voting
and investment power for 311,801 shares. The address of Mr. and Mrs.
Dayan is 1000 Lake Shore Plaza, #10B, Chicago, Illinois 60611.
(9) Includes 55,655 shares held directly, 2,800 shares held by Mr. Cerqua's
SEP, and 204,458 shares subject to options exercisable presently or
within 60 days. Mr. Cerqua's address is 22073 Cuba Road, Kildeer,
Illinois 60047.
(10) Includes 1,275 shares held directly, and 80,500 shares subject to
options exercisable presently or within 60 days.
(11) Includes 10,000 shares held directly; and 5,000 shares held by Ashley
E. Romano UGTMA, with Mr. Romano as custodian. Also includes 4,500
shares subject to options exercisable presently or within 60 days.
(12) Includes 1,000 shares held by the 1988 LaFlamme Family Trust dated
January 14, 1988.
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The following table sets forth information, as of December 31, 2002, with
respect to compensation plans under which equity securities of the Company are
authorized for issuance, aggregated by (i) all compensation plans previously
approved by the shareholders, and (ii) all compensation plans not previously
approved by the shareholders:
Number of shares
remaining available
(a) for future issuance
Number of shares Weighted average under equity
to be issued upon exercise price of compensation plans
exercise of outstanding (excluding shares
outstanding options, options, warrants reflected in
warrants and rights and rights column (a))
--------------------- ----------------- ---------------------
Equity compensation plans
approved by shareholders 800,100 $ 4.54 273,291
Equity compensation plans not
approved by shareholders 1,122,458 $ 4.19 23,000
Total 1,922,558 $ 4.33 296,291
=========== ============ ===========
The shareholders of the Company approved two stock option compensation plans in
1996: (i) the 1996 Omnibus Incentive Stock Plan, and (ii) the 1996 Stock Option
Plan for Nonemployee Directors. The 1996 Omnibus Incentive Stock Plan provides
for the issuance to employees of up to 3% of the weighted average shares
outstanding each year, on a cumulative basis, adjusted for forfeitures. The
nonemployee director plan provides for the issuance of up to 50,000 options. The
exercise price per share may not be less than the fair market value per share on
the date the options are granted. Generally, options vest over a period of up to
two years and are exercisable for a period of 10 years from the date of grant.
The options outstanding, which were not approved by the shareholders, were
primarily issued prior to the adoption of the aforementioned plans in 1996.
These options generally contain exercise prices equal to the market price on the
date of grant and are exercisable for a period of 10 years. Since 2000, the
directors also have received options outside of the director plan, which vest
only if the Company achieves certain financial performance criteria. These
options contain exercise prices equal to the market price on the date of grant
and are exercisable for a period of 10 years.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In the past, certain of the Company's directors and executive officers have,
directly or indirectly, invested in joint ventures with the Company. For
example, Dr. Dayan, a director of the Company, has invested approximately $1.6
million in seven joint ventures since 1988. In one joint venture, the partners,
including Dr. Dayan, have been guaranteed minimum annual distributions by the
Company equal to 10% of their original capital contribution, and also have the
right to convert their existing partnership interests into shares of the
Company's common stock, under certain conditions. On September 18, 2000, in
connection with the approval of all joint venture partners regarding the sale of
the AmeriHost Inn brand and franchising rights, the Company finalized the terms
of an agreement to issue 125,000 new stock options to the partners in three
existing joint ventures, including Dr. Dayan, canceling 60,000 existing stock
options held by these partners, and to purchase their remaining ownership
interests in these three joint ventures at specified prices. The Company has
purchased the remaining ownership interests in two of the joint ventures, and is
currently obligated to purchase, for approximately $830,000, the ownership
interests of the limited partners, including approximately $415,000 for Dr.
Dayan's interest, in the third joint venture by April 10, 2003, at which time
Dr. Dayan will no longer have an ownership interest in any joint venture with
the Company. However, the Company is currently in the process of extending this
purchase obligation. Dr. Dayan and each of the Company's directors and executive
officers who have made such investments have done so on the same terms as all
other investors in such joint ventures.
Dr. Dayan is also the owner and Chairman of the Board of Directors of the
company that owns Pan American Bank. Pan American Bank has provided mortgage
financing to a different joint venture in which the Company is a partner, in the
amount of $938,000 at December 31, 2002.
Mr. Romano is an executive officer of Bridgeview Bank & Trust, which was the
bank that maintained the Company's operating line-of-credit until February 19,
2002, at which time the Company transferred the line-of-credit to another
lender. Various demand deposit accounts of the Company and its hotels maintained
at Bridgeview Bank & Trust were all closed during 2002.
On August 15, 2002, the Company's then President and Chief Executive Officer,
Michael P. Holtz, delivered notice of resignation from the employment of the
Company. On November 7, 2002, the Company entered into a series of settlement
agreements with Mr. Holtz. The agreements provided for severance benefits (see
item 11 above) and also
-42-
for the sale of two AmeriHost Inn hotels at a total price of approximately $5.2
million to entities controlled by Mr. Holtz, subject to financing commitments
and independent appraisals. The Company closed on the sale of the two hotels on
December 12, 2002, whereupon Mr. Holtz resigned as a director and officer of the
Company.
ITEM 14. 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 are filed
or submitted 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.
FORWARD LOOKING STATEMENTS
Certain statements appearing in this report on Form 10-K can be construed as
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. These statements are subject to risks and uncertainties that could
cause actual results to differ materially from those set forth in the
forward-looking statements, including without limitation, risks relating to the
development and operation of hotels, the timing, consummation and final terms of
hotel sales, the availability of capital to finance growth, geopolitical events,
competition and the historical cyclicality of the lodging industry.
-43-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
Financial Statements:
---------------------
The following consolidated financial statements are filed as part of this Report
on Form 10-K for the fiscal year ended December 31, 2002.
(a)(1) Financial Statements:
Independent Auditors' Report............................. F-1
Consolidated Balance Sheets at December 31, 2002
and 2001................................................ F-2
Consolidated Statements of Operations for the years
ended December 31, 2002, 2001 and 2000.................. F-4
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2002, 2001 and 2000.... F-5
Consolidated Statements of Cash Flows for the years
ended December 31, 2002, 2001 and 2000.................. F-6
Notes to Consolidated Financial Statements............... F-8
(a)(2) Financial Statement Schedules:
No financial statement schedules are submitted as part of this report because
they are not applicable or are not required under regulation S-X or because the
required information is included in the financial statements or notes thereto.
(a)(3) Exhibits:
The following exhibits were included in the Registrant's Report on Form 10-K
filed on March 26, 1993, and are incorporated by reference herein:
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation
of Arlington Hospitality, Inc. (formerly Amerihost
Properties, Inc.)
4.2 Specimen Common Stock Purchase Warrant for Employees
The following exhibits were included in the Registrant's Proxy Statement for
Annual Meeting of Shareholders filed on July 25, 1996, and are incorporated by
reference herein:
Exhibit No. Description
- ----------- -----------
10.2 1996 Omnibus Incentive Stock Plan (Annex A)
10.3 1996 Stock Option Plan for Nonemployee Directors
(Annex B)
-44-
The following exhibit was included in the Registrant's Report on Form 10-K filed
March 30, 1999:
Exhibit No. Description
- ----------- -----------
10.5 Agreement of Purchase and Sale between PMC Commercial
Trust and Arlington Hospitality, Inc. (formerly
Amerihost Properties, Inc.), including exhibits
thereto
The following exhibits were included in the Registrant's Report on Form 10-Q
filed November 7, 2000:
Exhibit No. Description
- ----------- -----------
10.10 Asset Purchase Agreement
10.11 Royalty Sharing Agreement
10.12 Development Agreement
The following exhibits were included in the Registrant's Report on Form 10-Q
filed November 14, 2002:
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
The following exhibits were included in the Registrant's Report on Form 8-K
filed December 19, 2002:
Exhibit No. Description
- ----------- -----------
10.13 Employment agreement between Arlington Hospitality,
Inc. and Jerry H. Herman dated December 19, 2002
The following exhibits are included in this Report on Form 10-K filed March 31,
2003:
Exhibit No. Description
- ----------- -----------
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
10.14 Line-of-credit agreement with LaSalle Bank, NA
99.1 Certificate Pursuant to 18 U.S.C. Section 1350 as
Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the three months
ended December 31, 2002:
Date Filed Description
- ---------- -----------
November 8, 2002 Execution of settlement agreements with previous
President/CEO
December 12, 2002 Closing of previous President/CEO settlement
agreements
December 20, 2002 Appointment of new President/CEO and employment
agreement
December 23, 2002 Minor clarification of new President/CEO employment
agreement
-45-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARLINGTON HOSPITALITY, INC.
By: /s/ Jerry H. Herman
----------------------------
Jerry H. Herman
Chief Executive Officer
By: /s/ James B. Dale
----------------------------
James B. Dale
Chief Financial Officer
Chief Accounting Officer
March 28, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Jerry H. Herman /s/ Kenneth M. Fell
- --------------------------------------- ----------------------------------
Jerry H. Herman, Director Kenneth M. Fell, Chairman
March 28, 2003 March 28, 2003
/s/ Andrew E. Shapiro /s/ Gerald T. LaFlamme
- --------------------------------------- ----------------------------------
Andrew E. Shapiro, Vice-Chairman Gerald T. LaFlamme, Director
March 28, 2003 March 28, 2003
/s/ Steven J. Belmonte /s/ Thomas J. Romano
- --------------------------------------- ----------------------------------
Steven J. Belmonte, Director Thomas J. Romano, Director
March 28, 2003 March 28, 2003
/s/ Salomon J. Dayan
- ---------------------------------------
Salomon J. Dayan, Director
March 28, 2003
-46-
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Arlington Hospitality, Inc.
We have audited the accompanying consolidated balance sheets of Arlington
Hospitality, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2002.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Arlington
Hospitality, Inc. and subsidiaries at December 31, 2002 and 2001, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2002, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Chicago, Illinois
March 24, 2003
F-1
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
==================================================================================================================
December 31, December 31,
2002 2001
--------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,969,515 $ 4,748,156
Accounts receivable, less an allowance of $150,000
at December 31, 2002 and 2001 (including approximately
$166,000 and $126,000 from related parties) 2,064,463 2,343,423
Notes receivable, current portion (Note 2) 100,000 518,499
Prepaid expenses and other current assets 975,432 998,559
Refundable income taxes 1,574,776 298,330
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 3) 1,479,101 1,079,137
--------------- --------------
Total current assets 10,163,287 9,986,104
--------------- --------------
Investments in and advances to unconsolidated
hotel joint ventures (Notes 4 and 6) 4,291,504 5,404,744
--------------- --------------
Property and equipment (Notes 6, 7 and 12):
Land 13,418,378 12,454,360
Buildings 76,849,071 68,095,453
Furniture, fixtures and equipment 26,553,701 24,189,969
Construction in progress 6,447,039 5,973,890
Leasehold improvements 2,760,906 2,899,179
Assets held for sale - 2,187,822
--------------- --------------
126,029,095 115,800,673
Less accumulated depreciation and amortization 26,417,755 22,905,635
--------------- --------------
99,611,340 92,895,038
--------------- --------------
Notes receivable, less current portion (Note 2) 782,083 1,000,000
Deferred income taxes (Note 9) 2,427,000 2,662,000
Other assets, net of accumulated amortization of
approximately $1,259,000 and $1,035,000 (Note 5) 2,658,500 2,939,900
--------------- --------------
5,867,583 6,601,900
--------------- --------------
$ 119,933,714 $ 114,887,786
=============== ==============
F-2
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
==================================================================================================================
December 31, December 31,
2002 2001
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,965,028 $ 2,467,704
Bank line-of-credit (Note 6) 6,384,287 6,793,702
Accrued payroll and related expenses 827,353 784,533
Accrued real estate and other taxes 1,969,297 1,952,875
Other accrued expenses and current liabilities 1,974,350 452,086
Current portion of long-term debt (Note 7) 4,038,301 2,110,652
--------------- --------------
Total current liabilities 19,158,616 14,561,552
--------------- --------------
Long-term debt, net of current portion (Note 7) 72,203,688 70,088,269
--------------- --------------
Deferred income (Note 12) 10,867,418 10,714,735
--------------- --------------
Commitments and contingencies (Notes 4, 6, 7, 8 and 12)
Minority interests 333,888 456,631
--------------- --------------
Shareholders' equity (Notes 1 and 8):
Preferred stock, no par value; authorized 100,000 shares;
none issued - -
Common stock, $.005 par value; authorized 25,000,000 shares;
issued and outstanding 4,962,817 shares at December 31,
2002, and 4,958,081 shares at December 31, 2001 24,814 24,790
Additional paid-in capital 13,184,564 13,171,151
Retained earnings 4,597,601 6,307,533
--------------- --------------
17,806,979 19,503,474
Less:
Stock subscriptions receivable (Note 8) (436,875) (436,875)
--------------- --------------
17,370,104 19,066,599
--------------- --------------
$ 119,933,714 $ 114,887,786
=============== ==============
See notes to consolidated financial statements.
F-3
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
=====================================================================================================================
2002 2001 2000
----------------- --------------- ----------------
Revenue (Note 10):
Hotel operations:
AmeriHost Inn hotels $ 43,216,506 $ 45,081,431 $ 49,228,661
Other hotels 10,632,860 11,301,017 12,123,035
Development and construction 7,180,222 1,724,249 6,966,588
Hotel sales and commissions 10,017,080 12,922,459 -
Management services 957,801 1,066,645 1,251,107
Employee leasing 3,267,491 4,678,189 5,979,363
Incentive and royalty sharing (Note 14) 588,938 209,633 16,090
Office building rental and other 669,769 169,612 586,276
-------------- ------------- -------------
76,530,667 77,153,235 76,151,120
-------------- ------------- -------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 31,570,220 32,919,678 34,811,649
Other hotels 9,956,254 9,194,835 9,858,175
Development and construction 7,205,328 1,479,947 6,901,617
Hotel sales and commissions 8,159,459 9,621,536 -
Management services 714,648 716,802 806,959
Employee leasing 3,208,708 4,564,508 5,868,189
Office building rental and other 56,757 2,958 489,064
-------------- ------------- -------------
60,871,374 58,500,264 58,735,653
-------------- ------------- -------------
15,659,293 18,652,971 17,415,467
Depreciation and amortization 5,516,302 4,676,069 4,542,461
Leasehold rents - hotels (Note 12) 5,410,796 6,510,436 6,524,930
Corporate general and administrative 2,198,640 1,907,742 1,694,611
Impairment provision (Note 1) 542,019 - -
-------------- ------------- -------------
Operating income 1,991,536 5,558,724 4,653,465
Other income (expense):
Interest expense (5,514,765) (5,153,590) (5,605,550)
Interest income 489,747 821,839 786,806
Other income 283,899 125,880 381,868
Gain on sale of fixed assets (Note 14) 727,076 1,286,338 6,663,124
Equity in net income and (losses) from
unconsolidated joint ventures (412,094) (925,654) (101,872)
-------------- ------------- -------------
Income before minority interests and income taxes (2,434,601) 1,713,537 6,777,841
Minority interests in operations of
consolidated subsidiaries and partnerships (80,331) (343,437) (60,939)
-------------- ------------- -------------
Income before income taxes (2,514,932) 1,370,100 6,716,902
Income tax benefit (expense) (Note 9) 805,000 (615,000) (2,707,000)
-------------- ------------- -------------
Net income (loss) $ (1,709,932) $ 755,100 $ 4,009,902
============== ============= =============
Net income (loss) per share - Basic $ (0.34) $ 0.15 $ 0.81
Net income (loss) per share - Diluted $ (0.34) $ 0.13 $ 0.74
See notes to consolidated financial statements.
F-4
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
====================================================================================================================================
Stock
Common stock subscrip-
--------------------- Additional tions Total
paid-in Retained and notes shareholders'
Shares Amount capital earnings receivable equity
--------- --------- ----------- ----------- ----------- -------------
BALANCE AT JANUARY 1, 2000 4,968,673 $ 24,843 $13,050,069 $ 1,542,531 $ (436,875) $ 14,180,568
Shares issued for compensation 10,571 53 75,255 - - 75,308
Net income for the year ended December 31, 2000 - - - 4,009,902 4,009,902
BALANCE AT DECEMBER 31, 2000 4,979,244 $ 24,896 $13,125,324 $ 5,552,433 $ (436,875) $ 18,265,778
Acquisition of common stock (Note 8) (26,100) (131) (84,984) - - (85,115)
Shares and options issued for compensation 4,937 25 130,811 - - 130,836
Net income for the year ended December 31, 2001 - - - 755,100 - 755,100
BALANCE AT DECEMBER 31, 2001 4,958,081 $ 24,790 $13,171,151 $ 6,307,533 $ (436,875) $ 19,066,599
Acquisition of common stock (Note 8) (100) - (310) - - (310)
Shares and options issued for compensation 4,836 24 13,723 - - 13,747
Net loss for the year ended December 31, 2002 (1,709,932) - (1,709,932)
BALANCE AT DECEMBER 31, 2002 4,962,817 $ 24,814 $13,184,564 $ 4,597,601 $ (436,875) $ 17,370,104
========= ========= =========== =========== =========== ============
See notes to consolidated financial statements.
F-5
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
======================================================================================================================
2002 2001 2000
---------------- ---------------- ---------------
Cash flows from operating activities:
Cash received from customers $ 77,501,677 78,329,783 $ 77,110,459
Cash paid to suppliers and employees (57,969,651) (58,192,786) (69,503,958)
Interest received 551,838 870,945 883,422
Interest paid (5,516,449) (5,194,741) (5,679,212)
Income taxes paid (236,446) (305,750) (1,592,704)
--------------- --------------- ---------------
Net cash provided by operating activities 14,330,969 15,507,451 1,218,007
--------------- ---------------- ---------------
Cash flows from investing activities:
Distributions, and collections on advances,
from affiliates 3,020,396 1,183,012 2,712,840
Purchase of property and equipment (18,582,826) (25,399,733) (10,433,566)
Purchase of investments in, and advances
to, minority-owned affiliates (2,142,492) (2,687,328) (2,715,495)
Acquisitions of partnership interests,
net of cash acquired (796,786) (804,613) -
Collection on notes receivable (15,362) 201,332 91,315
Proceeds from sale of assets and franchising rights 1,443,701 402,500 13,072,813
--------------- --------------- ---------------
Net cash (used in) provided by investing activities (17,073,369) (27,104,830) 2,727,907
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 13,016,749 20,612,595 4,696,807
Principal payments on long-term debt (10,440,190) (9,206,128) (6,442,369)
Net (repayments) borrowings of line of credit (409,415) 3,385,569 (4,152,081)
Distributions to minority interests (203,075) (90,255) (85,725)
Common stock repurchases (310) (85,115) -
Other - -
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 1,963,759 14,616,666 (5,983,368)
--------------- --------------- ---------------
Net increase (decrease) in cash and cash equivalents (778,641) 3,019,287 (2,037,454)
Cash and cash equivalents, beginning of year 4,748,156 1,728,869 3,766,323
--------------- --------------- ---------------
Cash and cash equivalents, end of year $ 3,969,515 $ 4,748,156 $ 1,728,869
=============== =============== ===============
F-6
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
==================================================================================================================
2002 2001 2000
------------- ------------- --------------
Reconciliation of net income (loss) to net cash
provided by operating activities:
Net income (loss) $ (1,709,932) $ 755,100 $ 4,009,902
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 5,516,302 4,676,069 4,542,461
Equity in net (income) loss and interest income from
unconsolidated joint ventures and amortization
of deferred income 230,402 1,174,630 101,872
Minority interests in operations of consolidated
subsidiaries and partnerships 80,331 343,437 60,939
Bad debt expense 15,000 50,000 192,351
Issuance of common stock and common stock options 13,747 130,836 75,308
Gain on sale of assets and franchising rights (727,076) (1,286,338) (6,663,124)
Deferred income taxes 235,000 740,000 925,000
Amortization of deferred gain (1,079,047) (966,232) (1,487,118)
Proceeds from sale of hotels 9,865,111 11,511,336 -
Income from sale of hotels (1,705,651) (2,189,256) -
Provision for impairment 642,019 - -
Other (298,022) - -
Changes in assets and liabilities, net of effects
of acquisitions:
Decrease in accounts receivable 68,101 255,675 95,439
Decrease (increase) in prepaid expenses and
other current assets 88,369 99,344 (41,217)
(Increase) decrease in refundable income taxes (1,276,446) (430,750) 189,296
(Increase) decrease in costs and estimated
earnings in excess of billings (399,964) (703,357) 459,040
Increase in other assets (331,689) (413,336) (72,303)
Increase (decrease) in accounts payable 1,473,684 23,530 (309,750)
Increase (decrease) in accrued payroll and other
accrued expenses and current liabilities 1,552,416 165,246 (905,846)
Decrease in accrued interest (1,684) (41,151) (73,852)
Increase in deferred income 2,079,998 1,612,668 119,609
Net cash provided by operating activities $ 14,330,969 $ 15,507,451 $ 1,218,007
============= ============= ==============
F-7
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and business:
--------------------------
Arlington Hospitality, Inc. was incorporated under the laws of Delaware on
September 19, 1984. Arlington Hospitality, Inc. also acts through its
wholly-owned subsidiaries which have been formed since 1984 under the laws
of several states (Arlington Hospitality, Inc. and its subsidiaries,
collectively, where appropriate, the "Company"). The Company is engaged in
the development, construction and sale of AmeriHost Inn hotels, and the
ownership, operation and management of both AmeriHost Inn hotels and other
hotels (Note 15). The AmeriHost Inn brand is used by the Company to provide
for the consistent, cost-effective development and operation of mid-price
hotels in various markets. All AmeriHost Inn hotels are developed and
constructed using a two- or three-story prototype, featuring 60 to 120
rooms, interior corridors and an indoor pool area and generally are located
in smaller town markets. The Company also has designed a four-story
AmeriHost Inn & Suites prototype for larger markets.
The Company's operations are seasonal by nature. The Company's hotel
revenues are generally greater in the second and third calendar quarters
than in the first and fourth calendar 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.
Principles of consolidation:
----------------------------
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and entities in which the Company has a
majority or controlling ownership interest. All significant intercompany
accounts and transactions have been eliminated.
Revenue recognition:
--------------------
The revenue from the operation of a consolidated hotel is recognized as part
of the hotel operations segment when earned.
Development fee revenue from construction/renovation projects with
unaffiliated third parties or entities in which the Company has a minority
ownership interest is recognized using the percentage-of-completion method.
Construction fee revenue from construction/renovation projects with
unaffiliated third parties or entities in which the Company has a minority
ownership interest is recognized on the percentage-of-completion method,
generally based on the ratio of costs incurred to estimated total contract
costs. Revenue from contract change orders is recognized to the extent costs
incurred are recoverable. Profit recognition begins when construction
reaches a progress level sufficient to estimate the probable outcome.
Provision is made for anticipated future losses in full at the time they are
identified.
F-8
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The Company's intention is to operate its AmeriHost Inn hotels until a buyer
is found at an appropriate price. The Company may actively try to sell the
AmeriHost Inn hotels during the construction period, upon opening or anytime
thereafter. The Company records the hotel sale price as development revenue
and the net cost basis of the hotel asset as development expense, when the
sale is consummated, as part of the ongoing operational activity of the
Company. Beginning in 2001, the Company records the hotel sale price as
development revenue and the net cost basis of the hotel asset as development
expense, when the sale is consummated, as part of the ongoing operational
activity of the Company. Prior to 2001, the sales of all hotels which had
been operated for longer than 12 months were recorded as a "gain on sale"
below the operating income line, computed as the difference between the net
sale price and the net cost basis of building the hotel. This treatment was
considered appropriate since the strategy of building and selling had not
yet been solidified until the consummation of the Cendant transaction in the
latter part of 2000 (Note 14).
The Company recognizes management fee revenue when it performs hotel
management services for unrelated third parties and unconsolidated joint
ventures. The management fees are computed based upon a percentage of total
hotel revenues, plus incentive fees in certain instances, in accordance with
the terms of the individual written management agreements. The Company
recognizes the management fee revenue in the hotel management segment as the
related hotel revenue is earned.
The Company recognizes employee leasing revenue when it staffs hotels and
performs related services for unrelated third parties and unconsolidated
joint ventures. Employee leasing revenues are generally computed as the
actual payroll costs, plus an administrative fee, in accordance with the
terms of the individual written staffing agreements. The Company recognizes
the employee leasing revenue in the employee leasing segment as the related
payroll cost is incurred.
The franchisor of the AmeriHost Inn brand has agreed to pay the Company a
development incentive fee every time the Company sells one of its existing
AmeriHost Inn hotels to a buyer who executes an AmeriHost Inn franchise
agreement with the franchisor (see "Deferred income" below). The franchisor
of the AmeriHost Inn brand has agreed to pay the Company a portion of all
royalty fees received from all of its AmeriHost Inn franchisees through
September 2025. Generally, the royalty fees from each franchisee are based
upon a percentage of guest room revenue. The Company includes the
amortization of the deferred development incentive fees and the royalty
sharing fees as incentive and royalty sharing fee revenue in the
accompanying consolidated financial statements.
The Company owns the building in which its headquarters is located and
leases a portion of the office space to third-party tenants. Rental revenue
is recognized monthly in accordance with the terms of the leases, including
charges for common area expenses and real estate taxes.
Cash equivalents:
-----------------
The Company considers all investments with an initial maturity of three
months or less to be cash equivalents.
F-9
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Concentrations of credit risk:
------------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments, accounts receivable and notes receivable. The Company invests
temporary cash balances in financial instruments of highly rated financial
institutions generally with maturities of less than three months.
Fair values of financial instruments:
-------------------------------------
The carrying values reflected in the consolidated balance sheets at December
31, 2002 and 2001, reasonably approximate the fair values for cash and cash
equivalents, accounts and contracts receivable and payable, and variable
rate long-term debt. The carrying value of the notes receivable approximate
their fair values based upon the estimated fair value of the underlying
collateral (Note 2). The Company estimates that the fair value of its fixed
rate long-term debt at December 31, 2002, approximates the carrying value
considering the property specific nature of the notes. In making such
assessments, the Company considered the current rate at which the Company
could borrow funds with similar remaining maturities.
Investments:
------------
Investments in entities in which the Company has a non-majority,
non-controlling ownership interest are accounted for using the equity
method, under which method the original investment is increased (decreased)
for the Company's share of the joint venture's net income (loss), increased
by contributions made and reduced by distributions received.
Property and equipment:
-----------------------
Property and equipment are stated at cost. Repairs and maintenance are
charged to expense as incurred, and renewals and betterments are
capitalized. Depreciation is being provided for assets placed in service,
principally by use of the straight-line method over their estimated useful
lives. Leasehold improvements are being amortized by use of the
straight-line method over the term of the lease. Construction period
interest of approximately $287,000, $337,000 and $100,000 was capitalized in
2002, 2001 and 2000, respectively, and is included in property and
equipment.
For each classification of property and equipment, depreciable periods are
as follows:
Building 31.5-39 years
Furniture, fixtures and equipment 5-7 years
Leasehold improvements 1-15 years
Other assets:
-------------
Deferred lease costs:
Deferred lease costs represent the amounts paid for the acquisition of
leasehold interests for certain hotels. These costs are being amortized by
use of the straight-line method over the terms of the leases.
F-10
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Deferred loan costs:
Deferred loan costs represent the costs incurred in issuing mortgage notes.
These costs are being amortized by use of the interest method over the life
of the debt.
Initial franchise fees:
Initial franchise fees paid by the Company to franchisors for certain hotels
are capitalized and amortized by use of the straight-line method over the
terms of the franchise licenses, ranging from 10 to 20 years.
Deferred income:
----------------
Deferred income includes the gain from the sale of 22 hotels in 1998 and
1999, which were simultaneously leased-back (Note 13). This gain is being
recognized on a straight-line basis over the 15-year term of the lease, as
amended, as an adjustment to leasehold rent expense.
Deferred income also includes incentive fees received in connection with the
sale of AmeriHost Inn hotels. These fees are recognized on a straight-line
basis over a 76-month period in which the unamortized portion of the fees
may be considered refundable under certain conditions.
Deferred income also includes that portion of development, construction and
renovation fees earned from entities in which the Company holds an ownership
interest. The portion of fees deferred is equal to the Company's
proportional ownership interest in the entity and is being recognized in
income over the life of the operating assets. The balance of the fees is
recorded in income as earned.
Income taxes:
-------------
Deferred income taxes are provided on the differences in the bases of the
Company's assets and liabilities, as determined for tax and financial
reporting purposes, and relate principally to depreciation of property and
equipment and deferred income.
Earnings per share:
-------------------
Basic earnings per share ("EPS") is calculated by dividing the income (loss)
available to common shareholders by the weighted average number of common
shares outstanding for the period, without consideration for common stock
equivalents. Diluted EPS gives effect to all dilutive common stock
equivalents outstanding for the period. The Company excluded stock
equivalents which had an anti-dilutive effect on the EPS computations.
F-11
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The calculation of basic and diluted earnings per share for each of the
three years ended December 31, is as follows:
2002 2001 2000
------------- ------------- --------------
Net income (loss) $ (1,709,932) $ 755,100 $ 4,009,902
Impact of convertible partnership interests - (78,178) (117,028)
------------- ------------- --------------
Net income (loss) available to common
shareholders - diluted $ (1,709,932) $ 676,922 $ 3,892,874
============= ============= ==============
Weighted average common shares
outstanding 4,958,438 4,974,821 4,976,236
Dilutive effect of:
Stock options - 38,650 46,266
Convertible partnership interests - 168,100 249,350
Dilutive common shares outstanding 4,958,438 5,181,571 5,271,852
============= ============= ==============
Net income (loss) per share - Basic $ (0.34) $ 0.15 $ 0.81
============= ============= =============
Net income (loss) per share - Diluted $ (0.34) $ 0.13 $ 0.74
============= ============= =============
Advertising:
------------
The costs of advertising, promotion and marketing programs are charged to
operations in the year incurred. These costs were approximately $1,411,000,
$1,389,000 and $1,418,000 for the years ended December 31, 2002, 2001 and
2000.
Use of estimates:
-----------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the statements and reported amounts of revenue
and expenses during the reported periods. Actual results may differ from
those estimates.
F-12
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Long-lived assets and impairment:
---------------------------------
On January 1, 2002, the Company adopted SFAS 144, which is required for
fiscal years beginning after December 15, 2001, and interim periods within
those years. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121"), and related literature
and establishes a single accounting model, based on the framework
established in SFAS 121, for long-lived assets to be disposed of by sale.
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, it generally does not 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 December 31, 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 the Company's 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 December 31, 2002,
there were no identifiable discontinued operations.
The Company periodically reviews the carrying value of certain of its
long-lived assets in relation to historical results, current business
conditions and trends to identify potential situations in which the carrying
value of assets may not be recoverable. If such reviews indicate that the
carrying value of such assets may not be recoverable, the Company would
estimate the undiscounted sum of the expected cash flows of such assets to
determine if such sum is less than the carrying value of such assets to
ascertain if an impairment exists. If an impairment exists, the Company
would determine the fair value by using quoted market prices, if available
for such assets, or if quoted market prices are not available, the Company
would discount the expected future cash flows of such assets.
During 2002, the Company reduced the carrying value of fixed assets by
$450,000, and reduced the carrying value of investments in and advances to
unconsolidated joint ventures by approximately $192,000 in connection with
such review. During 2000, the Company reduced the carrying value of an
investment in a joint venture by approximately $110,000 in connection with
such review.
Stock-based compensation
------------------------
The Company applies APB No. 25, Accounting for Stock Issued to Employees,
and related interpretations, and the intrinsic method, in accounting for
options granted to employees. No compensation expense was recorded during
2002, 2001 or 2000 under APB No. 25.
The Company established qualified incentive stock option plans for employees
and directors. Under the plan for employees, on an annual basis, options for
up to 3% of its common stock, as defined, can be granted. Under the plan for
directors, a total of 50,000 options can be granted. The exercise price per
share may not be less than the fair market value per share on the date the
options are granted. Generally, options vest over a period of up to two
years and are exercisable for a period of 10 years from the date of grant.
At December 31, 2002, options to purchase 800,100 shares of common stock
were outstanding under the plans.
F-13
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The Company has granted to various key employees and directors,
non-qualified options to purchase shares of common stock with exercise
prices ranging from $3.25 to $6.50 per share. The exercise price is the
market price on the date of grant. At December 31, 2002, options to purchase
1,056,833 shares of common stock were outstanding. These options are
currently exercisable and expire through September 2012.
In 1997, the Company granted to two then officers, options to purchase
65,625 shares of common stock with an exercise price of $1.53 per share.
These options currently are exercisable and expire in February 2007.
The following table summarizes the employee stock options granted, exercised
and outstanding:
Weighted Average
Shares Exercise Price
------------ ----------------
Options outstanding January 1, 2000 1,606,058 4.52
Forfeitures (80,000) 3.57
Options granted 238,500 3.23
----------- -----------
Options outstanding December 31, 2000 1,764,558 4.39
Forfeitures (16,000) 3.23
Options granted 201,500 3.34
----------- -----------
Options outstanding December 31, 2001 1,950,058 4.29
Forfeitures (140,500) 2.84
Exercised (100,000) 2.48
Options granted 213,000 2.85
----------- -----------
Options outstanding December 31, 2002 1,922,558 $ 4.33
=========== ===========
Options exercisable December 31, 2002 1,801,225 $ 4.39
=========== ===========
F-14
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The weighted-average grant-date fair value of stock options granted to
employees during the year and the weighted-average significant assumptions
used to determine those fair values, using a Black-Scholes option pricing
model, and the pro forma effect on earnings of the fair value accounting for
employee stock options under Statement of Financial Accounting Standards No.
123 are as follows:
2002 2001 2000
-------------- ------------- --------------
Grant-date fair value per share:
Options issued at market $ 1.16 $ 2.04 $ 1.67
Weighted average exercise prices:
Options issued at market $ 2.85 $ 3.34 $ 3.38
Significant assumptions (weighted-average):
Risk-free interest rate at grant date 3.39% 5.19% 6.50%
Expected stock price volatility 0.43 0.53 0.30
Expected dividend payout n/a n/a n/a
Expected option life (years) (a) 4.62 7.91 8.28
Net income (loss):
As reported $ (1,709,932) $ 755,100 $ 4,009,902
Stock-based employee compensation
expense, net of tax $ (126,182) $ (197,032) $ (252,451)
Pro forma $ (1,836,114) $ 558,068 $ 3,757,451
Net income (loss) per share - Basic:
As reported $ (0.34) $ 0.15 $ 0.81
Pro forma $ (0.37) $ 0.11 $ 0.76
Net income (loss) per share - Diluted:
As reported $ (0.34) $ 0.13 $ 0.74
Pro forma $ (0.37) $ 0.09 $ 0.69
(a) The expected option life considers historical option exercise patterns
and future changes to those exercise patterns anticipated at the date
of grant.
The following table summarizes information about employee stock options
outstanding at December 31, 2002:
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
$ 1.53 to 4.38 1,303,125 4.71 Years $3.47 1,181,792 $3.46
$ 5.75 to 7.81 619,433 4.71 6.15 619,433 6.15
-------------- ---------- ---- ------ --------- -----
$ 1.53 to 7.81 1,922,558 4.71 $4.33 1,801,225 $4.39
============== ========= ==== ===== ========= =====
F-15
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
2. NOTES RECEIVABLE:
Notes receivable consists of: 2002 2001
----------- ------------
Hotel sale related notes $ 850,000 $ 425,000
Diversified Innkeepers, Inc. - 1,093,499
Other notes 32,083 -
----------- ------------
882,083 1,518,499
Less current portion 100,000 518,499
----------- ------------
Notes receivable, less current portion $ 782,083 $ 1,000,000
=========== ============
Notes receivable at December 31, 2002, consists primarily of notes received
in connection with the sale of hotels. The notes bear interest at rates
ranging from 7.0% to 9.0% and mature through December 31, 2021. Certain of
the notes are collateralized by the related hotel or other tangible assets.
The Company accepted notes in connection with the purchase of management
contracts from Diversified Innkeepers, Inc. ("Diversified") in a prior year.
During 2002, the Company exchanged the note receivable from Diversified for
a 50% ownership interest in a hotel joint venture. The provisions of the
joint venture provide for preferential distributions of operating cash flow,
as well as distributions upon the sale of the hotel (Note 4). The exchange
was accounted for at fair value and resulted in no gain or loss.
3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS:
Information regarding contracts-in-progress is as follows at December 31,
2002 and 2001:
2002 2001
------------- --------------
Costs incurred on uncompleted contracts $ 1,606,580 $ 512,270
Estimated earnings 643,215 852,872
------------- --------------
2,249,795 1,365,142
Less billings to date 770,694 286,005
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 1,479,101 $ 1,079,137
============= ==============
Costs and estimated earnings in excess of billings on uncompleted contracts
includes $1,348,565 and $732,441 as of December 31, 2002 and 2001, from
joint ventures in which the Company has a minority ownership interest (Note
10).
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES:
The Company has non-controlling ownership interests, ranging from 1.0% to
50.0%, in general partnerships, limited partnerships and limited liability
companies formed for the purpose of owning and operating hotels. These
investments are accounted for using the equity method. The Company had
investments in 12 hotel joint ventures at December 31, 2002, with a total
investment balance of $1,399,362, and 15 hotel joint ventures at December
31, 2001, with a total investment balance of ($1,621,631). The Company is
secondarily liable for the obligations and liabilities of the limited
partnerships in which it holds a general partnership interest.
F-16
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES
(CONTINUED):
The Company advances funds to hotels in which the Company has a minority
ownership interest for working capital and construction purposes. The
advances bear interest ranging from the prime rate to 10% per annum and are
due on demand. The Company expects the partnerships to repay these advances
through cash flow generated from hotel operations and mortgage financing.
The advances were $2,892,142 and $7,026,375 at December 31, 2002 and 2001,
respectively, and are included in investments in and advances to
unconsolidated hotel joint ventures in the accompanying consolidated balance
sheets.
In May 2002, the Company acquired the remaining ownership interest in one
hotel joint venture, resulting in this hotel being 100% owned by the Company
subsequent to the acquisition date. In addition, the Company exchanged a
note receivable for a 50% interest in a hotel joint venture (Note 2).
Effective January 1, 2001, the Company acquired the remaining ownership
interest in one hotel joint venture, resulting in this hotel being 100%
owned by the Company subsequent to the acquisition date. Furthermore, the
Company began consolidating a minority-owned joint venture as of September
1, 2001, when the Company guaranteed certain underlying debt and assumed
control of the joint venture, in connection with a mortgage refinancing. The
following is the financial statement impact of the acquisitions and the
aforementioned consolidations:
2002 2001
------------- ---------------
Property and equipment $ 2,279,309 $ 3,038,557
Other assets 1,125,178 131,478
Notes receivable (1,086,778) -
Long-term debt (1,466,510) (2,188,764)
Other liabilities (54,413) (176,658)
------------- --------------
Cash paid $ 796,786 $ 804,613
============= ==============
The following represents condensed financial information for all of the
Company's investments in affiliated companies accounted for under the equity
method at December 31, 2002, 2001 and 2000.
2002 2001 2000
-------------- ------------- --------------
Current assets $ 677,290 $ 581,390 $ 787,037
Noncurrent assets 26,732,517 29,215,768 32,703,002
Current liabilities 3,667,191 6,049,363 4,550,271
Long-term debt 23,591,779 26,095,565 31,282,189
Equity (deficit) 150,837 (2,347,770) (2,342,421)
Gross revenue 9,641,145 12,173,902 14,253,813
Gross operating profit 3,036,726 3,716,282 3,944,469
Depreciation and amortization 1,315,745 1,824,408 2,201,762
Net loss (478,350) (1,680,699) (100,027)
The Company has provided approximately $15.1 million in guarantees as of
December 31, 2002, on mortgage loan obligations for 10 joint ventures in
which the Company holds a minority equity interest, which expire at various
dates through March 2024. Other partners also have 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.
F-17
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
5. OTHER ASSETS:
Other assets, net of accumulated amortization, at December 31, 2002 and
2001, are comprised of the following:
2002 2001
------------ -------------
Deposits, franchise fees and
other assets $ 1,404,305 $ 1,693,912
Deferred loan costs 1,189,163 1,067,816
Deferred lease costs 65,032 178,172
------------ ------------
Total $ 2,658,500 $ 2,939,900
============ ============
6. BANK LINE-OF-CREDIT:
The Company had $6,384,287 and $6,793,702 outstanding on its bank operating
line-of-credit at December 31, 2002 and 2001, respectively. The operating
line-of-credit 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), with a minimum rate of 5.5% per annum (effective rate as
of December 31, 2002), and was scheduled to mature April 30, 2003. The
Company was not in compliance with the maximum debt to net worth ratio, and
minimum debt service coverage ratio covenants as of December 31, 2002. On
March 21, 2003, the lender provided a commitment for a renewal of the
line-of-credit agreement until April 30, 2004, subject to the closing of the
renewal by April 30, 2003, and certain other conditions, and has waived the
existing covenant violations. The commitment provides for a maximum amount
available of $6.5 million with interest at the rate of prime plus 2.5% per
annum (6.75% minimum rate). The maximum commitment under the line-of-credit
will be reduced to $6.0 million on September 30, 2003, and to $5.5 million
on February 28, 2004. The Company will also be required to maintain certain
financial covenants, including minimum net income, minimum tangible net
worth, a maximum leverage ratio and a minimum debt service coverage ratio.
7. LONG-TERM DEBT:
Long-term debt consists of:
2002 2001
------------- --------------
Mortgage notes maturing 2003 through 2022, with a
weighted average interest rate of 6.67% $ 76,231,031 $ 72,177,428
Other 10,958 21,493
------------- --------------
76,241,989 72,198,921
Less current portion 4,038,301 2,110,652
------------- --------------
$ 72,203,688 $ 70,088,269
============= ==============
The mortgage notes are collateralized by certain hotel properties and the
Company's office building. The notes provide for monthly payments of
principal and interest, with interest on the fixed rate notes (total
outstanding of approximately $29.0 million at December 31, 2002) ranging
from 7.0% to 9.25% (weighted average interest rate of 7.52% at December 31,
2002), and interest on the floating rate notes (total outstanding of
approximately $47.2 million at December 31, 2002) ranging from LIBOR, plus
2.25% to prime plus 2.25% (weighted average interest rate of 6.17% at
December 31, 2002).
F-18
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
7. LONG-TERM DEBT (CONTINUED):
In February 2001, the Company secured a $20 million new construction loan
facility with a lender who also holds the mortgage on a hotel owned by the
Company and another mortgage on a hotel owned by a joint venture in which
the Company has a minority ownership interest. This facility provides for
both construction financing as well as long-term permanent mortgage
financing as the projects open. The Company has until May 31, 2003, to
utilize this loan facility, subject to lender's approval of each project. As
of December 31, 2002, approximately $8.5 million has been utilized and is
included in long-term debt in the accompanying consolidated financial
statements.
Certain of the hotel mortgage notes, as well as the office building mortgage
note, provide for financial covenants, principally minimum net worth
requirements, debt to equity ratios and minimum debt service coverage
ratios. At December 31, 2002, the Company was not in compliance with the
minimum debt service coverage ratio contained in two mortgage loans
aggregating approximately $4.6 million; however, the Company has obtained
waivers with respect to the violations. In addition, one joint venture in
which the Company has guaranteed the mortgage debt was not in compliance
with the minimum debt service coverage ratio covenant contained in the
mortgage loan. The joint venture has obtained a waiver from the lender
regarding this violation.
The aggregate maturities of long-term debt are approximately as follows:
Year Ending December 31, Amount
------------------------ ---------------
2003 $ 4,038,301
2004 10,239,226
2005 4,256,937
2006 7,829,017
2007 9,023,075
Thereafter 40,855,433
------------
$ 76,241,989
The Company expects to refinance or extend a mortgage loan due in 2003, or
sell the related hotel asset and repay the mortgage in its entirety, prior
to its maturity.
8. SHAREHOLDERS' EQUITY:
Authorized shares:
------------------
The Company's corporate charter authorizes 25,000,000 shares of Common Stock
with a par value of $0.005 per share and 100,000 shares of Preferred Stock
with no par value. The Preferred Stock may be issued in series and the Board
of Directors shall determine the voting powers, designations, preferences
and relative participation, optional or other special rights and the
qualifications, limitations or restrictions thereof.
Non-employee stock options and warrants:
----------------------------------------
The Company has issued options to acquire shares of the Company's common
stock to certain of its partners in various hotel joint ventures referred to
in Note 4. During 2001, the Company recognized $167,000 of expense related
to the issuance of stock options to joint venture partners, including a
director of the Company (Note 12). At December 31, 2002, options to purchase
125,000 shares of common stock continued to be outstanding with an exercise
price of $3.794 per share and exercisable through October 2005. The Company
accounted for these options during 2001 at fair value, in accordance with
FASB Statement No. 123.
F-19
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
8. SHAREHOLDERS' EQUITY (CONTINUED):
Limited partnership conversion rights:
--------------------------------------
The Company is the general partner in a partnership where the limited
partners, including a Director of the Company, have the right at certain
times and under certain conditions to convert their limited partnership
interests into 84,975 shares of the Company's common stock. These conversion
rights will expire in 2003 when the Company fulfills its obligation to
acquire these limited partner interests (Note 13).
Stock subscriptions receivable:
-------------------------------
In connection with the purchase of management contracts from Diversified
(Note 2), the Company secured promissory notes from the principals of
Diversified in the total amount of $436,875 with interest at 6.5% per annum.
The notes are collateralized by 125,000 shares of common stock of the
Company, which were issued upon the exercise of stock options in 1993. The
total principal balance is due December 31, 2005. These notes receivable
have been classified as a reduction of shareholders' equity on the
accompanying consolidated balance sheets.
9. TAXES ON INCOME:
The provision for income taxes in the consolidated statements of operations,
excluding $101,000 in tax expense relating to the extraordinary item in
2002, is as follows:
2002 2001 2000
-------------- ------------- ---------------
Current $ (1,040,000) $ 460,000 $ 1,782,000
Deferred 235,000 155,000 925,000
Income tax (benefit) expense $ (805,000) $ 615,000 $ 2,707,000
============== ============= ==============
The following reconciles income tax expense for 2002 at the federal
statutory tax rate with the effective rate:
2002 2001 2000
-------------- ------------- --------------
Income taxes at the
federal statutory rate (34.0%) 34.0% 34.0%
State taxes, net of federal tax benefit 2.0% 10.9% 6.3%
-------------- ------------- --------------
Effective tax rate (32.0%) 44.9% 40.3%
============= ============= ==============
F-20
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
9. TAXES ON INCOME (CONTINUED):
Temporary differences between the carrying amounts of assets and liabilities
for financial reporting and income tax purposes that give rise to a net
deferred income tax asset relate to the following:
2002 2001
------------- --------------
Differences in deferred income recognized for tax
purposes and financial reporting purposes $ 270,000 $ 196,000
Gain on sale/leaseback transaction recognized
for tax purposes and deferred for financial
reporting purposes 3,032,000 3,612,000
Start-up costs capitalized for tax purposes and
expensed for financial reporting purposes 62,000 104,000
Differences in the basis of investments, property and
equipment from partner acquisitions and due
to majority-owned partnerships consolidated for
financial reporting purposes but not for tax purposes 1,201,000 1,314,000
Other 61,000 148,000
------------- --------------
4,626,000 5,374,000
Differences in the basis of property and equipment (1,127,000) (1,620,000)
Cumulative depreciation differences (1,072,000) (1,092,000)
------------- --------------
Net deferred income tax asset $ 2,427,000 $ 2,662,000
============= ==============
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.
10. RELATED PARTY TRANSACTIONS:
The following table summarizes related party revenue recorded in 2002, 2001
and 2000 from various unconsolidated partnerships in which the Company has
an ownership interest:
2002 2001 2000
-------------- ------------- --------------
Development and construction revenue $ 5,253,226 $ 652,815 $ 6,982,678
Hotel management revenue 808,598 709,631 1,025,632
Employee leasing revenue 2,895,295 2,830,719 4,275,476
Other - - 586,276
Interest income 212,346 530,035 516,511
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
11. BUSINESS SEGMENTS:
The Company's business is primarily involved in seven segments: (1) hotel
operations, consisting of the operations of all hotels in which the Company
has a 100% or controlling ownership or leasehold interest, (2) hotel
development, consisting of development, construction and renovation of
hotels for unconsolidated joint ventures and unrelated third parties, (3)
hotel sales and commissions, resulting from the sale of AmeriHost Inn
hotels, (4) hotel management, consisting of hotel management activities, (5)
employee leasing, consisting of the leasing of employees to various hotels,
(6) incentive and royalty sharing fees due from the owner of the AmeriHost
Inn brand, and (7) office building rental activities.
Results of operations of the Company's business segments are reported in the
consolidated statements of operations. The following represents revenues,
operating costs and expenses, operating income, identifiable assets, capital
expenditures and depreciation and amortization for each business segment,
which is the information utilized by the Company's decision makers in
managing the business:
Revenues 2002 2001 2000
-------- -------------- ------------- --------------
Hotel operations $ 53,849,366 $ 56,382,448 $ 61,351,696
Hotel development and construction 7,180,222 1,724,249 6,966,588
Hotel sales and commissions 10,017,080 12,922,459 -
Hotel management 957,801 1,066,645 1,251,107
Employee leasing 3,267,491 4,678,189 5,979,363
Incentive and royalty sharing fees 588,938 209,633 16,090
Office building rental and other 669,769 169,612 586,276
-------------- ------------- --------------
$ 76,530,667 $ 77,153,235 $ 76,151,120
============== ============= ==============
Operating costs and expenses
----------------------------
Hotel operations $ 41,526,474 $ 42,114,513 $ 44,669,824
Hotel development and construction 7,205,328 1,479,947 6,901,617
Hotel sales and commissions 8,159,459 9,621,536 -
Hotel management 714,648 716,802 806,959
Employee leasing 3,208,708 4,564,508 5,868,189
Incentive and royalty sharing fees - - -
Office building rental and other 56,757 2,958 489,064
-------------- ------------- --------------
$ 60,871,374 $ 58,500,264 $ 58,735,653
============== ============= ==============
Operating income
----------------
Hotel operations $ 1,234,665 $ 3,229,462 $ 5,737,820
Hotel development and construction (30,785) 236,319 46,782
Hotel sales and commissions 1,857,621 3,300,922 -
Hotel management 191,097 295,356 399,771
Employee leasing 56,462 110,642 108,812
Incentive and royalty sharing fees 588,938 209,633 16,090
Office building rental and other 454,397 130,831 92,812
Corporate (2,360,859) (1,954,441) (1,748,622)
-------------- ------------- --------------
$ 1,991,536 $ 5,558,724 $ 4,653,465
============== ============= ==============
F-22
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
11. BUSINESS SEGMENTS (CONTINUED):
Identifiable assets 2002 2001 2000
-------------------- -------------- ------------- --------------
Hotel operations $ 104,644,225 $ 99,086,728 $ 92,406,355
Hotel development and construction 2,445,882 1,467,116 660,620
Hotel sales and commissions - - -
Hotel management 1,513,640 119,236 (42,842)
Employee leasing 256,787 70,584 329,833
Incentive and royalty sharing fees - - -
Office building rental and other 6,672,294 6,553,474 -
Corporate 4,400,886 7,877,318 4,788,749
-------------- ------------- --------------
$ 119,933,714 $ 115,174,456 $ 98,142,715
============== ============= ==============
Capital Expenditures
--------------------
Hotel operations $ 18,218,231 $ 18,874,420 $ 10,253,713
Hotel development and construction 53,673 5,975 7,942
Hotel sales and commissions - - -
Hotel management 16,574 52,173 34,161
Employee leasing - - 5,831
Incentive and royalty sharing fees - - -
Office building rental and other 273,605 6,411,585 17,422
Corporate 16,378 55,580 114,497
-------------- ------------- --------------
$ 18,578,461 $ 25,399,733 $ 10,433,566
============== ============= ==============
Depreciation/Amortization
-------------------------
Hotel operations $ 5,135,412 $ 4,528,036 $ 4,419,121
Hotel development and construction 5,679 7,983 18,189
Hotel sales and commissions - - -
Hotel management 52,056 54,487 44,377
Employee leasing 2,321 3,039 2,362
Incentive and royalty sharing fees - - -
Office building rental and other 158,615 35,822 4,400
Corporate 162,219 46,702 54,012
-------------- ------------- --------------
$ 5,516,302 $ 4,676,069 $ 4,542,461
============== ============= ==============
F-23
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
12. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
Sale/leaseback of hotels:
-------------------------
On June 30, 1998, the Company completed the sale of 26 AmeriHost Inn hotels
to a real estate investment trust ("REIT") for $62.2 million. The Company
completed the sale of four additional AmeriHost Inn hotels to the same REIT
in March 1999. Upon the respective sales to the REIT, the Company entered
into agreements to lease back the hotels for an initial term of 10 years,
with two five-year renewal options. The lease payments are fixed at 10% of
the sale price for the first three years. Thereafter, the lease payments are
subject to a CPI increase with a 2% annual maximum. In January 2001, the
Company amended the master lease with the REIT to provide for the purchase
of eight unidentified hotels from 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 a
third party or purchased by the Company by the dates specified. As of
December 31, 2002, the Company is obligated under the terms of the amendment
to either facilitate the sale or purchase from the REIT, one hotel prior to
June 5, 2003, or the 0.25% rent increase becomes effective. The Company
currently expects to purchase this hotel for approximately $2.2 million
prior to June 5, 2003.
The gains from the sale of the hotels to the REIT were deferred for
financial statement reporting purposes, due to the continuing involvement
with the long-term lease agreement, and are being amortized on a
straight-line basis into income as a reduction of leasehold rent expense
over the 15-year initial term. At December 31, 2002, the balance of this
deferred income was approximately $7.4 million.
In 2002, one hotel owned by the REIT was sold; in 2001, four hotels owned by
the REIT were sold; and in 2000, one hotel owned by the REIT was sold.
Accordingly, the leases with the REIT for these hotels were terminated, and
the remaining unamortized gain of approximately $352,000, $1.0 million and
$402,000 was recognized in 2002, 2001 and 2000, respectively, as a gain on
sale of property in the accompanying consolidated financial statements. In
addition, the Company acquired one hotel owned by the REIT in 2002 and one
in 2001, in accordance with the terms of the amendment.
Hotel leases:
-------------
Including the hotels leased from the REIT, the Company leases 24 hotels as
of December 31, 2002, 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.
The two leases, other than the REIT leases, each 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. At December 31, 2002, the aggregate purchase price for
these leased hotels was approximately $7,030,000. One of these leases
expires August 31, 2003, and the Company does not intend to exercise its
purchase option.
F-24
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
12. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
Total rent expense for all operating leases was approximately $5,411,000,
$6,747,000 and $6,892,000 in 2002, 2001 and 2000, respectively, including
approximately $39,000, $278,000 and $686,000 in 2002, 2001 and 2000,
respectively, to entities in which the Company has a minority ownership
interest. Minimum future rent payments under all operating leases are as
follows:
Year Ending December 31, Amount
------------------------ ---------------
2003 $ 5,939,000
2004 5,911,000
2005 6,024,000
2006 6,139,000
2007 6,256,000
Thereafter 37,721,000
------------
$ 67,990,000
============
Limited partnership guaranteed distributions:
---------------------------------------------
The Company is the general partner in one partnership where the Company has
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, in connection with the approval of all
joint venture partners regarding the sale of the AmeriHost Inn brand and
franchising rights (Note 14), the Company finalized the terms of an
agreement to issue 125,000 new stock options to the partners, including this
same Director, in three existing joint ventures (Note 8), cancelling 60,000
existing stock options held by these partners, and to purchase their
remaining ownership interests in these three joint ventures at specified
prices. One of these acquisitions was completed in 2001, and one was
completed during the second quarter of 2002 using approximately $800,000.
The final one is scheduled to be completed before April 12, 2003; however,
the Company currently is in the process of extending this purchase
obligation. The Company expects to use approximately $830,000 for the
purchase of the remaining joint venture interest.
Construction in progress:
-------------------------
As of December 31, 2002, the Company had entered into non-cancelable
subcontracts for approximately $3.0 million in connection with the
construction of three hotels, representing a portion of the total estimated
construction costs for these hotels. These commitments will be funded
through construction and long-term mortgage financing currently in place.
Employment agreement:
---------------------
During 2002, the Company's President/CEO resigned. Pursuant to the terms of
the employment and settlement agreement, the Company closed on the sale of
two AmeriHost Inn hotels to entities controlled by the previous
President/CEO, and paid the previous President/CEO his regular salary
through February 15, 2003, one year's base salary of $325,000, and fringe
benefits for a one-year period. All related amounts were paid or accrued as
of December 31, 2002.
Legal matters:
--------------
The Company and certain of its subsidiaries are defendants in various
litigation matters arising in the ordinary course of business. In the
opinion of management, the ultimate resolution of all such litigation
matters is not likely to have a material effect on the Company's financial
condition, results of operation or liquidity.
F-25
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
13. SUPPLEMENTAL CASH FLOW DATA:
The following represents the supplemental schedule of noncash investing and
financing activities for the years ended December 31:
2002 2001 2000
------------- ------------- --------------
Sale of assets and franchising rights:
Cost basis of assets sold $ 294,173 $ 192,357 $ 8,200,961
Accumulated depreciation at sale (168,742) (46,227) (1,172,929)
Deferred assets - - 83,747
Deferred income (352,507) (1,030,468) (402,090)
Notes received, less $50,000 allowance - - (300,000)
Gain on sale 727,076 1,286,338 6,663,124
------------- ------------- --------------
Net cash proceeds $ 500,000 $ 402,000 $ 13,072,813
============= ============= ==============
Liabilities assumed in connection with
acquisition and consolidation of hotel
partnership interests $ 1,520,923 $ 2,365,422 $ -
============= ============= ===============
Notes received in connection with the
sale of hotels $ 450,000 $ 300,000 $ 250,000
============= ============= ==============
Deferred income adjustment to hotels acquired $ 347,989 $ 511,943 $ -
============= ============= ===============
Exchange of note and interest receivable for
partnership interest $ 1,256,639 $ - $ -
============= ============= ===============
Interest paid, net of interest capitalized $ 5,516,449 $ 5,194,741 $ 5,679,212
============= ============= ==============
14. SALE OF AMERIHOST INN BRANDS AND FRANCHISING RIGHTS:
Effective September 30, 2000, the Company completed the sale of the
AmeriHost Inn brands and franchising rights to Cendant. The Company
simultaneously entered into franchise agreements with Cendant for its
AmeriHost Inn hotels. The Company received an initial payment of
approximately $5.5 million upon closing and recorded a gain from this
payment, net of closing costs of approximately $5.2 million. In addition,
the sale agreement provides for three installment payments to the Company of
$400,000 each, payable on September 30, 2001, 2002 and 2003. These payments
are included in gain on sale of assets in the accompanying consolidated
financial statements when received. The agreement with Cendant also provides
for additional incentives to the Company as the AmeriHost Inn hotel
franchise system expanded. In conjunction with this transaction, the Company
changed its name and began conducting business as Arlington Hospitality,
Inc. in May 2001.
F-26
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected quarterly financial data (in thousands, except per share amounts)
for 2002 and 2001 is summarized below. The sum of the quarterly earnings
(loss) per share amounts may not equal the annual earnings per share amounts
due primarily to changes in the number of common shares and common share
equivalents outstanding from quarter to quarter.
Three Months Ended
------------------------------------------------------ Year Ended
3/31 6/30 9/30 12/31 12/31
---------- ---------- --------- ---------- -----------
2002:
Total revenue $ 17,938 $ 20,643 $ 18,390 $ 19,560 $ 76,531
Operating income (loss) (450) 1,992 2,101 (1,652) 1,992
Gains on sale of assets and
franchising rights 327 - 400 - 727
Net income (loss) (758) 234 746 (1,932) (1,710)
Net income (loss) per share:
Basic $ (0.15) $ 0.05 $ 0.15 $ (0.39) $ (0.34)
Diluted $ (0.15) $ 0.05 $ 0.14 $ (0.39) $ (0.34)
2001:
Total revenue $ 19,461 $ 16,963 $ 22,556 $ 18,174 $ 77,153
Operating income (loss) (32) 1,379 3,746 454 5,547
Gains on sale of assets 315 275 696 - 886
Net income (loss) (620) 153 1,857 (635) 755
Net income (loss) per share:
Basic $ (0.12) $ 0.03 $ 0.37 $ (0.13) $ 0.15
Diluted $ (0.13) $ 0.03 $ 0.35 $ (0.13) $ 0.13
16. NEW ACCOUNTING STANDARDS:
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others," and interpretation of FASB Statements
No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This
interpretation elaborates on the disclosures to be made by a guarantor in
its interim and annual financial statements about its obligations under
guarantees issued. The interpretation also clarifies that a guarantor is
required to recognize, at inception of a guarantee, a liability for the fair
value of the obligation undertaken. The initial recognition and measurement
provisions of the interpretation are applicable to guarantees issued or
modified after December 31, 2002, and are not expected to have a material
effect on the Company's consolidated financial statements. As described in
Note 4, the Company has guaranteed mortgage loan obligations on certain
joint ventures in which the Company holds a minority ownership interest, to
secure undertakings made by those joint ventures. The Company anticipates
that no such contingent liability will be realized, and that the various
guarantees will eventually expire. As such, the Company believes the
aggregate fair value of all such guarantees is negligible.
F-27
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
================================================================================
16. NEW ACCOUNTING STANDARDS (CONTINUED):
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). This Statement
amends FASB Statement No. 123, "Accounting for Stock-based Compensation," to
provide alternative methods of transition for a voluntary change to the fair
value method of accounting for stock-based employee compensation. In
addition, SFAS 148 and the disclosure requirements of Statement No. 123
require prominent disclosures in both annual and interim financial
statements. Certain of the disclosure modifications are required for fiscal
years ending after December 15, 2002, and are included in the notes to these
consolidated financial statements. The Company has not yet determined
whether it will commence reporting the fair value of any options as a charge
against earnings.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," and interpretation of ARB No. 51. This
interpretation addresses the consolidation by business enterprises of
variable interest entities as defined in the interpretation. The
interpretation applies immediately to variable interests in variable
interest entities created after January 31, 2003, and to variable interests
obtained in variable interest entities after January 31, 2003. For public
companies like the Company, the interpretation is applied to the enterprise
no later than the beginning of the first annual reporting period beginning
after June 15, 2003. The application of this interpretation is not expected
to have a material effect on the Company's consolidated financial
statements. The interpretation requires certain disclosures in the
consolidated financial statements issued after January 15, 2003, if it is
reasonably possible that the Company will consolidate or disclose
information about variable interest entities when the interpretation becomes
effective.
17. SUBSEQUENT EVENTS:
During 2003, the Company sold two AmeriHost Inn hotels for total net
proceeds of approximately $6.5 million and has simultaneously paid off the
related mortgage loans of approximately $4.2 million. In addition, an
unconsolidated joint venture in which the Company is a minority owner, sold
its AmeriHost Inn hotel.