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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 2004
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ________________
COMMISSION FILE NO. 0-15291
ARLINGTON HOSPITALITY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3312434
- ---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2355 S. ARLINGTON HEIGHTS ROAD, SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005
- ---------------------------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
(847) 228-5400
--------------
(Registrant's telephone number, including area code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES NO X
------ ------
As of August 13, 2004, 5,038,174 shares of the registrant's common stock were
outstanding.
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ARLINGTON HOSPITALITY, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2004
INDEX
PART I: Financial Information Page
----------------------------- ----
Item 1 - Financial Statements
Consolidated Balance Sheets as of June 30, 2004
and December 31, 2003 4
Consolidated Statements of Operations for the Three and Six Months
Ended June 30, 2004 and 2003 6
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2004 and 2003 7
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition 23
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 54
Item 4 - Controls and Procedures 55
PART II: Other Information
--------------------------
Item 2 - Changes in Securities; Use of Proceeds and Issuer 56
Purchases of Equity
Item 6 - Exhibits and Reports on Form 8-K 57
Signatures 60
-2-
Part I: Financial Information
Item 1: Financial Statements
-3-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
(Unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 3,998,318 $ 3,623,550
Accounts receivable, less an allowance of $76,500
at June 30, 2004 and December 31, 2003 (including
approximately $371,000 and $382,000 from related parties) 2,011,205 1,289,492
Notes receivable, current portion 116,042 146,000
Prepaid expenses and other current assets 568,755 1,142,032
Refundable income taxes 226,792 975,316
Costs and estimated earnings in excess of billings on
uncompleted contracts 327,349 1,232,481
Assets held for sale - other brands 11,442,589 10,603,160
Assets held for sale - AmeriHost Inn hotels 21,651,810 28,162,442
----------- -----------
Total current assets 40,342,860 47,174,473
----------- -----------
Investments in and advances to unconsolidated
hotel joint ventures 2,953,165 3,309,344
----------- -----------
Property and equipment:
Land 5,972,227 5,735,489
Buildings 28,694,754 31,174,776
Furniture, fixtures and equipment 10,516,445 13,176,842
Construction in progress 320,701 312,925
Leasehold improvements 115,239 2,396,689
----------- -----------
45,619,366 52,796,721
Less accumulated depreciation and amortization 11,602,986 13,242,842
----------- -----------
34,016,380 39,553,879
----------- -----------
Notes receivable, less current portion 800,000 867,500
Deferred income taxes 7,085,644 6,071,000
Other assets, net of accumulated amortization of
approximately $580,000 and $633,000 2,263,670 2,737,217
----------- -----------
10,149,314 9,675,717
----------- -----------
$87,461,719 $99,713,413
=========== ===========
-4-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
(Unaudited)
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,336,694 $ 2,768,402
Bank line-of-credit 3,250,000 3,850,000
Accrued payroll and related expenses 64,743 393,815
Accrued real estate and other taxes 2,161,198 1,980,015
Other accrued expenses and current liabilities 915,088 1,407,511
Current portion of long-term debt 1,089,350 1,195,050
Liabilities of assets held for sale - other brands 9,430,953 9,585,492
Liabilities of assets held for sale - AmeriHost Inns 23,040,649 28,540,561
------------ ------------
Total current liabilities 42,288,675 49,720,846
------------ ------------
Long-term debt, net of current portion 23,183,922 26,513,398
------------ ------------
Deferred income 11,313,699 11,361,927
------------ ------------
Commitments and contingencies (Note 13)
Minority interests 237,320 329,819
------------ ------------
Shareholders' equity:
Preferred stock, no par value; authorized 100,000 shares;
none issued -- --
Common stock, $.005 par value; authorized at 25,000,000 shares; issued and
outstanding 5,038,174 shares at June 30, 2004,
and 4,994,956 shares at December 31, 2003 25,191 24,975
Additional paid-in capital 13,391,327 13,220,302
Retained earnings (deficit) (2,541,540) (1,020,979)
------------ ------------
10,874,978 12,224,298
Less:
Stock subscriptions receivable (436,875) (436,875)
------------ ------------
Total shareholders' equity 10,438,103 11,787,423
------------ ------------
$ 87,461,719 $ 99,713,413
============ ============
-5-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenue:
AmeriHost Inn hotel operations $ 9,592,000 $ 11,044,545 $ 17,411,524 $ 19,567,054
Development and construction 390,031 617,283 1,590,686 2,097,261
Hotel sales 7,437,957 2,590,457 14,277,205 9,033,747
Management services 102,204 117,301 202,826 228,455
Employee leasing 560,884 541,275 1,123,159 1,058,682
Incentive and royalty sharing 317,006 223,994 600,414 429,649
Office building rental 175,387 178,995 349,294 356,223
------------ ------------ ------------ ------------
18,575,469 15,313,850 35,555,108 32,771,071
------------ ------------ ------------ ------------
Operating costs and expenses:
AmeriHost Inn hotel operations 7,101,402 7,761,903 14,130,129 15,485,921
Development and construction 641,592 544,350 2,121,984 2,136,477
Hotel sales 6,080,327 2,093,614 11,623,928 7,334,431
Management services 25,330 74,826 115,712 139,759
Employee leasing 524,785 524,792 1,069,915 1,026,714
Office building rental 34,849 46,865 75,960 96,417
------------ ------------ ------------ ------------
14,408,285 11,046,350 29,137,628 26,219,719
------------ ------------ ------------ ------------
4,167,184 4,267,500 6,417,480 6,551,352
Depreciation and amortization 514,325 956,387 1,066,656 1,914,710
Leasehold rents - hotels 1,196,545 1,219,127 2,393,090 2,438,254
Corporate general and administrative 712,582 515,006 1,579,809 962,837
Impairment provision 125,305 4,564,512 445,439 4,664,512
------------ ------------ ------------ ------------
Operating income (loss) 1,618,427 (2,987,532) 932,486 (3,428,961)
Other income (expense):
Interest expense (841,381) (1,144,709) (1,816,255) (2,240,103)
Interest income 104,028 120,922 229,966 240,881
Other income (expense) (94,470) 43,353 (74,335) 42,021
Equity in net income and (losses)
of unconsolidated joint ventures 17,026 (199,815) 10,861 (274,262)
------------ ------------ ------------ ------------
Income (loss) before minority
interests and income taxes 803,630 (4,167,781) (717,277) (5,660,424)
Minority interests in operations of
consolidated joint ventures (54,198) (53,329) (88,010) (81,692)
------------ ------------ ------------ ------------
Income (loss) before income taxes 749,432 (4,221,110) (805,287) (5,742,116)
Income tax (expense) benefit (299,302) 1,689,000 322,677 2,297,000
------------ ------------ ------------ ------------
Net income (loss) from continuing
operations 450,130 (2,532,110) (482,610) (3,445,116)
Discontinued operations, net of tax (395,285) (825,676) (1,037,951) (1,395,190)
------------ ------------ ------------ ------------
Net income (loss) $ 54,845 $ (3,357,786) $(1,520,561) $(4,840,306)
============ ============ =========== ===========
Net income (loss) from continuing operations per share:
Basic $ 0.09 $ (0.51) $ (0.10) $ (0.69)
Diluted $ 0.09 $ (0.51) $ (0.10) $ (0.69)
Net income (loss) per share:
Basic $ 0.01 $ (0.67) $ (0.30) $ (0.97)
Diluted $ 0.01 $ (0.67) $ (0.30) $ (0.97)
See notes to consolidated financial statements.
-6-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2004 2003
------------ ------------
Cash flows from operating activities:
Cash received from customers $ 36,713,366 $ 35,947,775
Cash paid to suppliers and employees (22,637,970) (25,992,393)
Interest received 235,707 219,000
Interest paid (1,918,141) (2,245,876)
Income taxes received 748,524 381,225
------------ ------------
Net cash provided by operating activities 13,141,486 8,309,731
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (940,017) (3,773,828)
Distributions, and collections on advances,
from unconsolidated joint ventures 891,892 426,264
Purchase of investments in, and advances
to, unconsolidated joint ventures (477,801) (611,740)
Collections (issuance) of notes receivable 97,458 (138,709)
------------ ------------
Net cash used in investing activities (428,468) (4,098,013)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt -- 4,743,561
Principal payments on long-term debt (11,728,981) (7,734,663)
Net repayment on the line of credit (600,000) (1,984,287)
Distributions to minority interest (180,510) (90,255)
Issuance of common stock 171,241 126,280
------------ ------------
Net cash used in financing activities (12,338,250) (4,939,364)
------------ ------------
Net increase in cash 374,768 234,895
Cash and cash equivalents, beginning of period 3,623,550 3,969,515
------------ ------------
Cash and cash equivalents, end of period $ 3,998,318 $ 4,204,410
============ ============
(continued)
-7-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
2004 2003
------------ ------------
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $ (1,520,561) $ (4,840,306)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization 1,652,543 2,739,301
Equity in net (income) loss and interest income from unconsolidated
joint ventures and amortization of deferred income (96,720) 192,723
Minority interests in operations of consolidated joint ventures 88,011 5,574
Amortization of deferred gain (770,639) (646,617)
Deferred income taxes (1,014,644) (3,227,000)
Proceeds from sale of hotels 14,278,901 9,033,747
Income from sale of hotels (2,557,671) (1,681,998)
Provision for impairment 1,388,439 5,526,581
Gain on sale of investments, property and equipment -- 68,917
Changes in assets and liabilities, net of effects of acquisition:
(Increase) decrease in accounts receivable (813,954) 389,258
Decrease in prepaid expenses and
other current assets 554,550 518,131
Decrease in refundable income taxes 748,524 381,225
Decrease in costs and estimated earnings
in excess of billings 905,132 909,638
Decrease (increase) in other assets 242,163 (425,354)
Decrease in accounts payable (514,313) (1,642,722)
Decrease in accrued payroll and other accrued
expenses and current liabilities (497,143) (48,255)
Decrease (increase) in accrued interest 1,788 (5,773)
Increase in deferred income 1,067,080 1,062,661
------------ ------------
Net cash provided by operating activities $ 13,141,486 $ 8,309,731
============ ============
See notes to consolidated financial statements.
-8-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
1. 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, referred to as the "Company"). The Company
is engaged in the development and construction of limited service hotels,
without food and beverage facilities, as well as the ownership, operation,
management and sale of these hotels. During the past several years, the
Company has focused almost exclusively on AmeriHost Inn hotels, with
limited ownership and operation of other branded hotels. 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. To date,
all of 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, and to a lesser extent, secondary markets.
The Company intends to focus its new AmeriHost Inn development on larger,
secondary markets, and has designed a larger, three-story AmeriHost Inn &
Suites prototype with more public space and certain other enhancements for
this purpose.
The Company's operations are seasonal by nature. The Company's hotel
operations and sales 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.
2. BASIS OF PRESENTATION:
The interim financial statements included herein have been prepared by the
Company, without audit. In the opinion of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments, which
consist only of recurring adjustments necessary to present fairly the
financial position of Arlington Hospitality, Inc. and subsidiaries as of
June 30, 2004, and the results of its operations and cash flows for the
three and six months ended June 30, 2004 and 2003. The results of
operations for the six months ended June 30, 2004, are not necessarily
indicative of the results to be expected for the full year. It is suggested
that the accompanying consolidated financial statements be read in
conjunction with the consolidated financial statements and the notes
thereto included in the Company's 2003 Annual Report on Form 10-K. Certain
prior period amounts have been reclassified to conform to current period
presentation. These reclassifications had no effect on previously reported
operations or total shareholders' equity.
3. 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.
4. 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 hotel impairment charges,
depreciation of property and equipment and deferred income. The deferred
income tax balance at June 30, 2004 also includes a net operating loss
carryforward of approximately $5.2 million expiring in 2024, which is
expected to be utilized and has not been reserved against. The Company has
not recorded any potential net operating loss carry forward benefit for
state tax purposes.
-9-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
5. 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.
The calculation of basic and diluted earnings per share for the three and
six months ended June 30, is as follows:
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -------------------------------
2004 2003 2004 2003
------------- ------------- -------------- --------------
Net income (loss) from continuing
operations, before impairment $ 525,313 $ 206,597 $ (215,347) $ (646,409)
Impairment provision, net of tax (75,183) (2,738,707) (267,263) (2,798,707)
---------- ----------- ----------- -----------
Net income (loss) from continuing
operations 450,130 (2,532,110) (482,610) (3,445,116)
Discontinued operations (a) (395,285) (825,676) (1,037,951) (1,395,190)
---------- ----------- ----------- -----------
Net income (loss) 54,845 (3,357,786) (1,520,561) (4,840,306)
Impact of convertible
partnership interest -- -- -- --
---------- ----------- ----------- -----------
Net income (loss) available to
common shareholders $ 54,845 $(3,357,786) $(1,520,561) $(4,840,306)
========== =========== =========== ===========
Weighted average common
shares outstanding 5,038,168 5,019,588 5,020,425 5,011,478
Dilutive effect of convertible
partnership interests and
common stock equivalents -- -- -- --
---------- ----------- ----------- -----------
Dilutive common shares outstanding 5,038,168 5,019,588 5,020,425 5,011,478
========== =========== =========== ===========
Net income (loss) per share - Basic:
From continuing operations $ 0.09 $ (0.51) $ (0.10) $ (0.69)
From discontinued operations (0.08) (0.16) (0.20) (0.28)
---------- ----------- ----------- -----------
$ 0.01 $ (0.67) $ (0.30) $ (0.97)
========== =========== =========== ===========
Net income (loss) per share - Diluted:
From continuing operations $ 0.09 $ (0.51) $ (0.10) $ (0.69)
From discontinued operations (0.08) (0.16) (0.20) (0.28)
---------- ----------- ----------- -----------
$ 0.01 $ (0.67) $ (0.30) $ (0.97)
========== =========== =========== ===========
(a) Includes hotel impairment provision related to non-AmeriHost Inn
hotels to be sold of approximately $319,000 and $517,000, net of tax,
for the three months ended June 30, 2004 and 2003, respectively, and
$566,000 and $517,000, net of tax for the six months ended June 30,
2004 and 2003 (Notes 11 and 12).
-10-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
6. 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, 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. The Company had investments in 13 hotel
joint ventures at June 30, 2004, with a total investment balance of
approximately $1.3 million and 14 hotel joint ventures at December 31,
2003, with a total investment balance of approximately $859,000. The
Company is secondarily liable for the obligations and liabilities of the
limited partnerships in which it holds a general partnership interest.
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 the sale of the properties, cash flow generated from hotel
operations and mortgage financing. The advances were approximately
$1,616,000 and $2,451,000 at June 30, 2004 and December 31, 2003,
respectively, and are included in investments in and advances to
unconsolidated hotel joint ventures in the accompanying consolidated
balance sheets.
During the first quarter of 2004, a joint venture owning a non-AmeriHost
Inn hotel, in which the Company has a 50% ownership interest, amended its
partnership agreement. The amendment (i) provided for all future capital
calls to be funded by the other partner, with no funding obligation by the
Company and without dilution of ownership interest to the Company, (ii)
clarified the Company's first priority distributions upon the sale of the
hotel, (iii) mandated that the hotel be marketed for sale, and (iv)
transferred the hotel management responsibilities to an affiliate of the
joint venture partner. Based upon the initial analysis, the Company expects
that this joint venture will be considered a variable interest entity in
accordance with FIN 46R (Note 15). The Company is required to adopt FIN 46R
for interim periods ending after December 15, 2004, and expects to present
its investment in this joint venture on a consolidated basis in its
financial statements beginning December 31, 2004. The consolidation of this
joint venture is expected to add approximately $3.4 million in assets and
$2.1 million in liabilities.
The mortgage balances for the unconsolidated joint ventures have not been
included in the Company's consolidated balance sheet. Approximately $6.2
million of the mortgage debt with unconsolidated joint ventures relates to
four properties that have been identified to be sold as part of the
Company's strategic hotel disposition plan. One mortgage in the amount of
approximately $1.7 million matures in November 2004. This mortgage had
matured on November 1, 2003, however the lender extended the maturity for
one year, and waived a covenant violation for the minimum debt service
coverage ratio for 2003. This hotel is included in the hotel disposition
plan, and upon any such sale of the hotel, the net proceeds will be used to
pay off the mortgage. However, if the joint venture is unable to sell the
hotel prior to the loan maturity, on acceptable terms, and if the lender is
unwilling to extend the maturity date of the loan, or if acceptable
alternative financing is not available, it could create a default on behalf
of the joint venture whereby the lender would look to the Company for
repayment of the loan under the guarantee.
The Company has provided approximately $17.7 million in guarantees as of
June 30, 2004, on mortgage loan obligations for ten joint ventures in which
the Company holds a minority, non-controlling 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.
During the second quarter of 2004, the Company and a joint venture partner
entered into an agreement to pursue an offer by a third party to purchase
the hotel from the joint venture, which also provides for modifications,
under certain circumstances, to two other joint ventures with this partner.
The joint ventures are owned 25% by the Company and 75% by the joint
venture partner and the joint venture with the offer to purchase has assets
of $2.0 million and
-11-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
6. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES
(CONTINUED):
liabilities of $1.2 million as of June 30, 2004. The agreement provides
that upon the sale of the hotel, if consummated, the joint venture partner
would receive a minimum amount from the net proceeds, and any deficiency
would be funded by the Company. Based on the contemplated purchase price
offered by the third party, the joint venture partner's share of the net
distributable proceeds upon the sale of the hotel would be in excess of the
minimum amount as stipulated in the agreement. The Company is assessing
whether or not this joint venture would be considered a Variable Interest
Entity in accordance with FIN 46R (Note 15), and the value of the guarantee
computed in accordance with FIN45 was deemed immaterial. If the joint
venture partner receives the minimum amount under this agreement, the joint
venture partner's right to receive distributions from these other two joint
ventures will be limited. All three joint venture arrangements were further
modified subsequent to June 30, 2004 (Note 16).
7. BANK LINE-OF-CREDIT:
The Company had $3,250,000 and $3,850,000 outstanding on its bank operating
line-of-credit at June 30, 2004 and December 31, 2003, respectively. In
April 2004, the operating line-of-credit was renewed for a one year period
expiring April 30, 2005, and provides for a maximum availability of $4.0
million with a reduction in the maximum availability to $3.5 million on
February 28, 2005. In addition, the lender has the right to reduce the
maximum availability further based on hotel sales, or as deemed necessary.
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, and bears interest at the rate of 10% per annum. The
line-of-credit provides for the maintenance of certain financial covenants,
including minimum tangible net worth, a maximum leverage ratio, minimum
debt service coverage ratio, and minimum net income. The Company was in
compliance with all covenants as of June 30, 2004.
8. LONG-TERM DEBT AND LIABILITIES OF ASSETS HELD FOR SALE:
The Company's plan to sell certain hotel assets is expected to result in
the payoff of the related mortgage debt and the satisfaction of a capital
lease obligation for one hotel (Note 13). As a result, these mortgage
balances and capital lease obligation have been classified in current
liabilities, as liabilities of assets held for sale, in the accompanying
consolidated balance sheet as of June 30, 2004. The table below presents
the total mortgage debt and capital lease obligation outstanding, as well
as the amounts which are contractually due within the next twelve months,
regardless of the plan for hotel disposition.
Outstanding Contractually
Balance at due in the next
June 30, 2004 twelve months
-------------- ---------------
Held for Sale - AmeriHost Inn hotels $ 23,040,649 $ 2,500,967
Held for Sale - Other brand hotels 8,713,009 1,182,690
Operating hotels 19,360,141 804,500
Office building 4,913,131 284,850
-------------- ---------------
$ 56,026,930 $ 4,773,007
============== ===============
The above amounts include two mortgages which mature within the next twelve
months. These mortgages have an aggregate outstanding balance of
approximately $2.4 million as of June 30, 2004, and are secured by hotels
held for sale. The Company expects to sell the related hotel assets prior to
the mortgage maturity dates and to payoff the mortgages using the sale
proceeds. If not sold, the Company expects to refinance or extend the
mortgage loans until a sale is consummated.
-12-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
8. LONG-TERM DEBT AND LIABILITIES OF ASSETS HELD FOR SALE (CONTINUED):
The hotel mortgage loans bear interest at the floating rates of prime minus
0.25% to prime plus 2.5% per annum. The office building loan matures
January 1, 2006, and bears interest at the floating rate of either prime
minus 0.25% or LIBOR plus 2.25%, as chosen by the Company.
Certain of the Company's hotel mortgage notes and the office building note
contain financial covenants, principally minimum net worth requirements,
debt to equity ratios, and minimum debt service coverage ratios. These
financial covenants are typically measured annually, based on our fiscal
year end. The Company was in compliance with all covenants as of June 30,
2004.
The capital lease obligation represents the present value of minimum lease
payments through 2013 for one AmeriHost Inn hotel, including a residual
guarantee. This lease was accounted for as an operating lease until the
second quarter of 2004, when a lease modification was executed resulting in
capital lease treatment in accordance with SFAS 13 (Note 14). The capital
lease asset and obligation have been classified as "held for sale" since
the related hotel is currently under contract for sale. The annual rent
payment has been included as part of the amount contractually due within
the next twelve months.
9. 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.
Stock subscriptions receivable:
In connection with the purchase of certain management contracts from
Diversified Innkeepers, Inc. ("Diversified"), 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. Since the notes are secured by the Company's common
stock, they have been classified as a reduction of shareholders' equity on
the accompanying consolidated balance sheets. If the notes are not repaid,
the Company may take possession of the common stock and hold the shares in
treasury, or retire the shares, in satisfaction of the notes.
Reverse-Forward stock split:
In November 2003 the Company executed a reverse-forward stock split whereby
the shares held by shareholders owning less than 100 shares on the
effective date were redeemed and converted into the right to receive cash
from the Company. Shareholders owning at least 100 shares as of the
effective date were not affected. A total of 33,332 shares held by
approximately 775 shareholders, or 40% of the total shareholders, were
converted on the effective date into the right to receive approximately
$128,000 in cash. Through June 30, 2004, the Company has paid approximately
$45,152 for the redemption of 11,789 shares in connection with the
reverse-forward stock split. All shares that were converted into the right
to receive cash have been retired.
-13-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
10. 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, (5) employee leasing, (6) incentive and
royalty sharing fees due from Cendant, 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 for the six month periods, which is the information
utilized by the Company's decision makers in managing the business:
Revenues 2004 2003
-------- ------------- --------------
Hotel operations $ 17,411,524 $ 19,567,054
Hotel development and construction 1,590,686 2,097,261
Hotel sales 14,277,205 9,033,747
Hotel management 202,826 228,455
Employee leasing 1,123,159 1,058,682
Incentive and royalty sharing fees 600,414 429,649
Office building rental and other 349,294 356,223
------------- --------------
35,555,108 32,771,071
============= ==============
Operating costs and expenses 2004 2003
---------------------------- ------------- --------------
Hotel operations $ 14,130,129 $ 15,485,921
Hotel development and construction 2,121,984 2,136,477
Hotel sales 11,623,928 7,334,431
Hotel management 115,712 139,759
Employee leasing 1,069,915 1,026,714
Incentive and royalty sharing fees - -
Office building rental and other 75,960 96,417
------------- --------------
$ 29,137,628 $ 26,219,719
============= ==============
Operating income
----------------
Hotel operations $ (52,795) $ (120,521)
Hotel impairment (445,439) (4,664,512)
Hotel development and construction (533,739) (41,212)
Hotel sales 2,653,278 1,699,316
Hotel management 67,359 65,668
Employee leasing 52,551 30,830
Incentive and royalty sharing fees 600,414 429,649
Office building rental 193,673 178,692
Corporate general and administrative (1,602,816) (1,006,871)
-------------- ---------------
$ 932,486 $ (3,428,961)
============= ===============
-14-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
10. BUSINESS SEGMENTS (CONTINUED):
Identifiable assets
-------------------
Hotel operations $ 69,945,482 $ 93,198,668
Hotel development and construction 2,043,768 1,292,800
Hotel sales -- --
Hotel management 1,008,727 530,364
Employee leasing 164,395 152,279
Incentive and royalty sharing fees -- --
Office building rental and other 6,416,700 6,475,228
Corporate, including deferred tax asset 7,882,647 7,216,892
------------- --------------
$ 87,461,719 $ 108,866,231
============= ==============
Capital Expenditures
--------------------
Hotel operations $ 386,463 $ 3,763,792
Hotel development and construction 534,750 --
Hotel sales -- --
Hotel management 5,155 7,380
Employee leasing --
Incentive and royalty sharing fees --
Office building rental and other 12,174 799
Corporate 1,475 1,857
------------- --------------
$ 940,017 $ 3,773,828
============= ==============
Depreciation/Amortization
-------------------------
Hotel operations $ 941,099 $ 1,763,401
Hotel development and construction 2,440 1,996
Hotel sales -- --
Hotel management 19,755 23,028
Employee leasing 694 1,137
Incentive and royalty sharing fees -- --
Office building rental and other 79,660 81,114
Corporate 23,008 44,034
------------- --------------
$ 1,066,656 $ 1,914,710
============= ==============
11. PLAN FOR FUTURE HOTEL DISPOSITIONS:
Sale of hotels
In July 2003, the Company implemented a plan to sell approximately 25-30
hotel properties over a period of two years. The properties to be sold
included 20-25 AmeriHost Inns and six non-AmeriHost hotels that are wholly
owned or in which the Company has an ownership interest. The Company has
hired several regional and national hotel brokerage firms to market most of
the properties and manage the sales process. The Company expects this plan
to reduce debt and generate cash to pursue development and other strategic
objectives as well as accelerate the economic benefits of the Company's
transaction with Cendant Corporation, the owner of the AmeriHost Inn
franchise system. However, there can be no assurances under the plan as to
timing, terms of sale, or that any additional sales will be consummated.
The Company sold six wholly-owned AmeriHost Inn hotels during the six
months ended June 30, 2004, of which four were sold in the second quarter.
Gross sale proceeds, net of closing costs, from these hotels was
approximately $14.3 million, which has been included in hotel sales and
commission revenue in the accompanying consolidated financial statements.
The net book value of these hotels at the time of their sales was
approximately $11.6 million, resulting in
-15-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
11. PLAN FOR FUTURE HOTEL DISPOSITIONS (CONTINUED):
operating income from the sale of these hotels of approximately $2.7
million. In addition, approximately $10.5 million in mortgage debt was paid
off with proceeds from the sale of these hotels. The Company incurred a
mortgage prepayment fee of approximately $97,000 in conjunction with the
sale of one AmeriHost Inn hotel in June 2004, which has been included in
"other expense" in the accompanying consolidated financial statements.
During the six months ended June 30, 2003, the Company sold three
wholly-owned AmeriHost Inn hotels, of which one was sold in the second
quarter. Gross sale proceeds, net of closing costs, was approximately $9.0
million; net book value of these hotels at the time of their sales was
approximately $7.3 million, resulting in operating income from the sale of
these hotels of approximately $1.7 million; and mortgage debt of
approximately $5.6 million was paid off with the proceeds.
In addition, one joint venture in which the Company had a minority
ownership interest sold its hotel asset during the first six months of 2004
and another joint venture sold its hotel asset during the first six months
of 2003. The Company accounted for these joint ventures by the equity
method and included its share of the gain from these sales in equity in net
income and (losses) of unconsolidated joint ventures in the accompanying
consolidated financial statements.
Impairment
On January 1, 2002, the Company adopted SFAS 144, "Statement of Financial
Accounting Standard (SFAS) No. 144, Accounting for Long-Lived assets (SFAS
144)". SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 requires a long-lived
asset to be sold to be classified as "held for sale" in the period in which
certain criteria are met, including that the sale of the asset within one
year is probable. In addition, the debt that is expected to be paid off as
a result of these hotel sales has been classified as current liabilities in
the accompanying consolidated financial statements. Certain hotels may be
marketed for sale for more than one year, if not sold, since market
conditions and contemplated sale terms have changed for these hotels,
including asking price adjustments in certain cases. The Company continues
to actively market these hotels for sale with the expectation that these
properties will be sold within the next 12 months. Therefore, these hotels
are expected to continue to be classified as "held for sale," until sold.
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. However, the disposition of AmeriHost Inn hotels, although
classified as "held for sale" on the accompanying consolidated balance
sheets, have not been treated as discontinued operations due to the ongoing
royalty fees to be earned by the Company after their disposition. In
addition, in accordance with this literature, depreciation ceased on the
hotel assets that have been classified as "held for sale".
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 the year ended December 31, 2003, in connection with the
implementation of the plan to sell hotels, the Company recorded non-cash
impairment charges of approximately $6.0 million, including approximately
$909,000 which was included in "discontinued operations." The non-cash
impairment charges represent adjustments to reduce the carrying value of
certain hotel assets to the estimated sales prices, net of estimated costs
to sell, based on current market conditions and the change in holding
periods of the properties. The Company recorded $445,000 and $4.7 million
in non-cash impairment charges during the first six months of 2004 and
2003, respectively, related to consolidated AmeriHost Inn hotels and
unconsolidated (both AmeriHost Inn and non-AmeriHost Inn) hotels. The 2004
-16-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
11. PLAN FOR FUTURE HOTEL DISPOSITIONS (CONTINUED):
amount represents additional adjustments for certain AmeriHost Inn hotels
based on our most recent analysis and market information. In addition,
approximately $943,000 and $862,000 in non-cash impairment charges related
to consolidated non-AmeriHost Inn hotels anticipated to be sold, have been
included in "discontinued operations" during the six months ended June 30,
2004 and 2003, respectively. The impairment recorded in 2004 for
non-AmeriHost Inn hotels relates primarily to one exterior corridor hotel
which is over 25 years old and which could require capital expenditures
over the next few years in excess of ongoing replacement reserves if the
hotel is not sold. The operating results have declined significantly over
the past several months, as a result of a change in brand affiliation and
the addition of newer hotels in its local market. This decline has had a
negative impact on the value of the hotel, resulting in the impairment
charge.
12. DISCONTINUED OPERATIONS:
The Company has reclassified its consolidated statements of operations for
the three and six months ended June 30, 2004 and 2003, to reflect
discontinued operations of seven consolidated non-AmeriHost Inn hotels sold
during this period, or to be sold pursuant to the plan for hotel
dispositions within the next twelve months and one hotel operated under a
lease to be terminated. This reclassification has no impact on the
Company's net income or net income per common share. Non-AmeriHost Inn
hotels sold or held for sale, which are owned by joint ventures and
accounted for using the equity method of accounting, are not presented as
"discontinued operations," nor are the sales of the AmeriHost Inn hotels
due to the Company's long-term royalty sharing agreement for all
non-Company owned AmeriHost Inn hotels. Condensed financial information of
the results of operations for the hotels presented as discontinued
operations is as follows:
Three Months Ended June 30, Six Months Ended June 30,
------------------------------- ------------------------------
2004 2003 2004 2003
-------------- ------------- ------------- -------------
Hotel Operations:
Revenue $ 1,804,168 $ 2,413,446 $ 3,060,274 $ 4,113,915
Operating expenses 1,562,295 2,100,059 2,968,882 4,107,318
----------- ----------- ----------- -----------
241,873 313,387 91,392 6,597
Depreciation and amortization 274,608 430,292 585,887 824,591
Leasehold rents - hotels 20,331 115,850 80,331 231,700
Hotel impairment provision 531,414 862,070 943,000 862,070
----------- ----------- ----------- -----------
Operating loss (584,480) (1,094,825) (1,517,826) (1,911,764)
Other income (expense):
Interest expense (151,328) (201,858) (307,040) (401,433)
Other income (expense) 77,000 (87,172) 94,948 (88,111)
----------- ----------- ----------- -----------
Loss from discontinued
operations, before minority
interests and income taxes (658,808) (1,383,855) (1,729,918) (2,401,308)
Minority interests in (income) loss
of consolidated joint ventures -- 8,179 -- 76,118
----------- ----------- ----------- -----------
Income (loss) from discontinued
operations, before income taxes (658,808) (1,375,676) (1,729,918) (2,325,190)
Income tax benefit 263,523 550,000 691,967 930,000
----------- ----------- ----------- -----------
Net loss from discontinued
operations $ (395,285) $ (825,676) $(1,037,951) $(1,395,190)
=========== =========== =========== ===========
-17-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
12. DISCONTINUED OPERATIONS (CONTINUED):
Five consolidated non-AmeriHost Inn hotels to be sold pursuant to the plan
for hotel disposition, and one leased non-AmeriHost Inn hotel to be
terminated, the operations of which are included in discontinued
operations, have been classified as held for sale in the accompanying
consolidated balance sheet as of June 30, 2004. Condensed balance sheet
information for these hotels is as follows:
June 30,
2004
------------
ASSETS
Current assets:
Cash and cash equivalents $ 321,841
Accounts receivable 169,014
Prepaid expenses and other current assets 61,144
------------
Total current assets 551,999
------------
Property and equipment 17,969,592
Less accumulated depreciation and amortization (6,947,285)
------------
11,022,307
------------
Other assets, net of accumulated amortization
190,124
------------
$ 11,764,430
============
LIABILITIES
Current liabilities:
Accounts payable $ 181,148
Accrued payroll and other expenses 536,797
Current portion of long-term debt 1,182,690
------------
Total current liabilities 1,900,635
Long-term debt, net of current portion 7,530,318
Equity 2,330,107
------------
$ 11,764,430
============
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
Sale/leaseback of hotels:
In 1998 and 1999, the Company completed the sale of 30 AmeriHost Inn hotels
to PMC Commercial Trust ("PMC"), a real estate investment trust ("REIT")
for $73.0 million. Upon the respective sales to PMC, a subsidiary of the
Company entered into agreements to lease back the hotels. The leases had an
initial term of 10 years, and in January 2001, the master lease agreement
with PMC was amended to allow either PMC or the Company to extend the
leases for a five-year period, through 2013. The lease payments are
currently 10.51% of the sale price and are subject to an annual CPI
increase with a 2% maximum. All of these leases are triple net and provide
for monthly base rent payments ranging from $14,000 to $27,000.
-18-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
The gains from the sale of the hotels to PMC 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 term,
including the five-year extension option. At June 30, 2004, the balance of
this deferred income was approximately $6.1 million.
The January 2001 amendment also provided for the sale by PMC to third
parties or to the Company, eight unidentified hotels under specified terms,
with the specific hotels to be chosen by both PMC and the Company. 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 June 30, 2004, the first three scheduled rent
increases were not effective due to the sale of three hotels from PMC to
the Company. Pursuant to the amendment, the Company was obligated to either
facilitate the sale of one final hotel to a third party, or purchase it
from PMC at a price of approximately $2.6 million by June 5, 2004, or the
fourth 0.25% rent increase of approximately $127,000 on an annual basis
would become effective, however this obligation has been extended to
October 31, 2004, as a result of the Company and PMC entering into a
temporary sales letter agreement, as described in the following paragraphs.
Including the hotels sold to the Company or to third parties under the
January 2001 amendment, PMC has sold nine hotels since the lease inception,
resulting in 21 hotels currently leased by the Company from PMC as of June
30, 2004.
In 2004, the Company entered into discussions with PMC, on behalf of its
subsidiary, with the objective to restructure these long-term lease
agreements, and to allow for the sale of the hotels to third parties. The
Company engaged a consultant to assist in the analysis and discussions of
any lease restructuring agreement, which cost will be accounted for as a
lease restructuring cost and amortized over the remaining lease term. On
March 12, 2004, the subsidiary entered into a temporary letter agreement
with PMC which provided that base rent will continue to accrue at the rate
of approximately $445,000 per month, as set forth in the lease agreements;
however the base rent payments required to be paid on March 1, 2004 and
April 1, 2004 were reduced to approximately $360,000 per month, with the
March 1, 2004 payment being due and payable upon the execution of the
temporary letter agreement. In addition, the subsidiary was allowed to
utilize $200,000 of its security deposit held with PMC to partially fund
these payments. The Company accrued rent expense based on the original base
rent amount during the months in which a portion of the cash payment was
deferred. The terms of the temporary letter agreement have been extended
through August 31, 2004, providing for the same reduced rent payments, for
the months of May through July 2004. The Company paid the full base rent of
approximately $445,000 for the month of August 2004. Upon the expiration of
the temporary letter agreement (as extended) on August 31, 2004, the
deferred portion of the base rent (approximately $434,000) plus the
$200,000 needed to restore the security deposit to its March 12, 2004
balance will be payable to PMC in four equal monthly installments beginning
September 1, 2004. While the objective is to reach a restructured agreement
prior to the expiration of the temporary letter agreement, there can be no
assurance that the leases will be restructured on terms and conditions
acceptable to the Company, if at all.
Also, in connection with the Company's discussions with PMC, the Company
and PMC entered into a temporary sales letter agreement dated May 18, 2004.
This agreement provides for the extension of the final hotel sale to a
third party or purchase obligation by the Company, pursuant to the 2001
amendment, until October 31, 2004. This hotel is currently under contract
for sale to a third party, and the sale transaction is expected to be
consummated prior to October 31, 2004. However, if the hotel is not sold to
a third party by October 31, 2004, the Company would be subject to the rent
increase discussed above, or would be required to purchase this hotel at
the specified price, using mortgage debt to be obtained and cash from
operations or working capital, if available. In either event, upon the sale
of this hotel or the alternative rate increase, the Company will have no
further obligations under the January 2001 amendment. Upon the sale of this
hotel, the individual lease would be terminated, and pursuant to this
temporary agreement, PMC would receive the sale proceeds, net of closing
costs, plus a termination fee from the Company. If the
-19-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
total proceeds to PMC, including the termination fee, are less than the
specified value contained in the original lease the shortfall becomes an
obligation of the Company bearing interest at the rate of 8.5% on an annual
basis, due May 1, 2005. If the total proceeds to PMC, including the
termination fee, are more than the specified value, the excess will be used
to reduce the specified values for the remaining leased hotels, which is
the basis for the monthly rent payments. Due to the modified terms of the
temporary sales letter agreement, the lease relating to this hotel has been
treated as a capital lease in accordance with SFAS 13. As such,
approximately $2.6 million has been recorded as property and equipment
under capital lease "held for sale" and a related capital lease obligation
classified as "liabilities of assets held for sale" as of June 30, 2004.
The remaining unamortized balance of the deferred gain from the original
sale of the hotel to PMC in the amount of approximately $307,000 was
recorded as a reduction to the basis of the property and equipment under a
capital lease as of June 30, 2004.
Hotel lease:
A joint venture in which the Company has a controlling ownership interest
leases one non-AmeriHost Inn hotel. This lease is triple net, and provided
for rent payments of $20,000 per month. The lease was scheduled to expire
May 31, 2010, however, in May 2004, the terms of the lease were modified to
(i) change the monthly lease payments from $240,000 per year to an amount
based on a percentage of hotel room revenue, with a minimum of $90,000 on
an annual basis, and (ii) to change the lease expiration date to the
earlier of November 1, 2005, or when and if, the landlord sells the
property, redevelops the property, or leases the property to a new tenant.
In addition, the Company will receive a portion of the residual value of
the furniture, fixtures, and equipment upon termination of the lease. The
operations of this hotel have been presented as "discontinued operations"
in the accompanying consolidated financial statements due to this lease
modification. Although modified, the Company determined that this hotel
lease would continue to be accounted for as an operating lease.
Employment agreements:
The Company has entered into employment agreements with its Chief Executive
Officer, its Chief Financial Officer and three other executives. The
agreements expire January 2005 through December 2005, and provide for total
annual base compensation of $907,000. The agreements also provide for
performance bonuses tied to company performance, and are payable in a
combination of cash and restricted common stock of the Company, with the
restricted stock to be issued pursuant to the 2003 Long Term Incentive Plan
adopted by the shareholders in 2003.
Investment banker/financial advisor:
The Company has engaged an investment banker/financial advisor to review
the Company's business plan and related strategies for the purpose of
assisting the Company in optimally structuring and obtaining new debt or
equity financing, as needed. A portion of the fees for this engagement was
expensed in the second quarter of 2004, as certain analyses were initiated
during such quarter. The remaining fees will be expensed when the analyses
are completed and presented to the Company's board of directors. In
addition, the contract provides for additional fees based on the Company's
success in obtaining any such new debt or equity capital.
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.
-20-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
14. SUPPLEMENTAL CASH FLOW DATA:
The following represents the supplemental schedule of noncash investing and
financing activities for the six months ended June 30:
2004 2003
------------- --------------
Notes received in connection with the
sale of hotels $ 100,000 $ 250,000
============= ==============
Capital lease obligation $ 2,577,996 $ --
============= ==============
Deferred income adjustment - capital lease $ 306,856 $ --
============= ==============
Interest paid, net of interest capitalized $ 1,918,141 $ 2,647,309
============= ==============
15. NEW ACCOUNTING STANDARDS:
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," which addresses how a
business enterprise should evaluate whether or not it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FIN 46,
"Consolidation of Variable Interest Entities", which was issued in January
2003. The Company is required to adopt the requirements of FIN 46R for
interim periods ending after December 15, 2004. This Interpretation
requires that the Company present any variable interest entities in which
it has a majority variable interest on a consolidated basis in its
financial statements. The Company is continuing to assess the provisions of
this Interpretation and the impact to the Company of adopting this
Interpretation. Therefore the following amounts may change based upon
additional analysis. Due to the adoption of this Interpretation, the
Company expects that it will begin to present its investments in three
joint ventures in which it has a majority variable interest, as determined
in accordance with the provisions of this Interpretation, on a consolidated
basis in its financial statements beginning with the consolidated financial
statements issued for the quarterly period ended December 31, 2004. The
consolidation of these joint ventures is expected to add approximately $7.2
million in assets and $5.6 million in liabilities to the Company's
consolidated balance sheet. As of June 30, 2004, the Company had
investments in, and advances to, these joint ventures of approximately $1.6
million, which was presented as such under the equity method of accounting
in the accompanying consolidated financial statements. The Company expects
that it will continue to present all of its other unconsolidated
investments under the equity method. The Company entered into one new joint
venture agreement during the second quarter of 2004, and based on the
Company's analysis, this joint venture does not qualify for consolidation
pursuant to FIN 46R.
16. SUBSEQUENT EVENTS:
Subsequent to June 30, 2004, the Company sold one wholly owned
non-AmeriHost Inn hotel at an immaterial gain with approximately $1.4
million of mortgage debt assumed by the buyer of the hotel. This sale
transaction will be reported in the Company's third quarter 2004 statement
of operations.
The Company has three hotel joint ventures, whereby the Company owns 25%
and the same joint venture partner owns 75% of each venture. The joint
venture agreements require the approval of both partners with respect to
the sale of the hotels. In July 2004, the Company and the joint venture
partner entered into a supplemental agreement that provides for the sale of
each of the three hotels, under certain circumstances, which is consistent
with the Company's strategic plan for hotel disposition (Note 11).
Depending upon the order in which the hotels are sold, certain
disproportionate distributions may be made to the joint venture partner
upon the sale of a hotel, with an offsetting reduction in distributions to
the joint venture partner upon the sale of the remaining hotel(s). Upon the
sale of all three hotels, total
-21-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 2004 AND 2003
16. SUBSEQUENT EVENTS (CONTINUED):
distributions to the Company and to the joint venture partner are expected
to be substantially the same as under the original joint venture
agreements. Based upon the initial analysis, the Company expects that two
of these joint ventures will be considered variable interest entities in
accordance with FIN 46R, and will be consolidated in the Company's
financial statements upon adoption of FIN 46R (Note 15). The Company is
required to adopt FIN 46R for interim periods ending after December 15,
2004. The consolidation of the two joint ventures is expected to add $3.8
million in assets and $3.6 million in liabilities to the consolidated
financial statements as of December 31, 2004.
In connection with the Company's discussions with PMC to restructure the
leases for 21 hotels (Note 13), the temporary letter agreement which
deferred the payment of a portion of the monthly rent for the months of
March through July 2004, was extended through August 31, 2004.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Information both included and incorporated by reference in this Quarterly Report
on Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and as such may involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements.
Forward-looking statements, which are based on various assumptions and describe
our future plans, strategies and expectations, are generally identified by our
use of words such as "intent," "plan," "may," "should," "will," "project,"
"estimate," "anticipate," "believe," "expect," "continue," "potential,"
"opportunity," and similar expressions, whether in the negative or affirmative.
We cannot guarantee that we actually will achieve these plans, intentions or
expectations. All statements regarding our expected financial position, business
and financing plans are forward-looking statements.
Factors that could have a material adverse effect on our operations and future
prospects include, but are not limited to:
o a downturn or sluggishness in the national economy in general, and the
real estate market specifically;
o the effect of threats or acts of terrorism and increased security
precautions on travel patterns and demand for hotels;
o governmental actions and other legislative/regulatory changes,
including changes to tax laws;
o level of proceeds from asset sales;
o ability of our hotel buyers to obtain adequate financing;
o cash available for operating expenses and ongoing capital
expenditures;
o availability of hotel debt and corporate and/or joint venture equity
capital for new development/acquisition growth;
o ability to refinance debt and restructure our lease agreements with
PMC;
o rising interest rates;
o the rising costs associated with being a publicly held company;
o competition;
o supply and demand for hotel rooms in our current and proposed market
areas, including the existing and continuing weakness in business
travel and lower-than-expected daily room rates; and
o other factors that may influence the travel industry, including
health, safety and economic factors.
These risks and uncertainties, along with the risk factors discussed under "Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 2003,
our Report on Form 10-Q for the three months ended March 31, 2004, and those
risk factors discussed under "Risk Factors" herein, should be considered in
evaluating any forward-looking statements contained in this report or
incorporated by reference herein. All forward-looking statements speak only as
of the date of this report or, in the case of any document incorporated by
reference, the date of that document. All subsequent written and oral
forward-looking statements attributable to us or any person acting on our behalf
are qualified by the cautionary statements in this section. We undertake no
obligation to update or publicly release any revisions to forward-looking
statements to reflect events, circumstances or changes in expectations after the
date of this report.
-23-
EXECUTIVE OVERVIEW
We are engaged primarily in developing, selling, owning, operating and managing
limited service hotels, without food and beverage facilities, primarily
AmeriHost Inn hotels. Our hotels are concentrated primarily in the Midwestern
U.S., however we have developed a number of hotel properties in California and
the South Central U.S. over the past several years. Our portfolio, as well as
the changes in 2004 are summarized as follows:
Hotels at Hotels Hotels Hotels at
12/31/03 Sold/Disposed Opened/Acquired 06/30/04
---------------- ----------------- ---------------- ------------------
Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
------ ----- ------- ----- ------ ----- ------ -----
Consolidated (1):
AmeriHost Inn hotel 49 3,161 (6) (389) -- -- 43 2,772
Other brands 5 692 -- -- -- -- 5 692
--- ----- --- ---- --- --- --- -----
54 3,853 (6) (389) -- -- 48 3,464
--- ----- --- ---- --- --- --- -----
Unconsolidated:
Amerihost Inn hotel 8 574 -- -- 1 79 9 653
Other brands 2 228 (1) (124) -- -- 1 104
--- ----- --- ---- --- --- --- -----
10 802 (1) (124) 1 79 10 757
--- ----- --- ---- --- --- --- -----
Totals:
AmeriHost Inn hotels 57 3,735 (6) (389) 1 79 52 3,425
Other brands 7 920 (1) (124) -- -- 6 796
--- ----- --- ---- --- --- --- -----
64 4,655 (7) (513) 1 79 58 4,221
=== ===== === ==== === === === =====
Consolidated hotels are those in which we have a 100% or controlling ownership
interest or a leasehold interest.
Our AmeriHost Inn hotels operate under franchise agreements with Cendant. Our
other brand hotels are those hotels operated under other national franchise
affiliations, that are also owned by Cendant, under the Days Inn, Ramada Inn,
and Howard Johnson Express brands.
Sources of Revenue
We generate revenue from the following primary sources:
o Hotel operations consisting of the revenues from all hotels in which
we have a 100% or controlling ownership or leasehold interest
(consolidated hotels). Unconsolidated hotels are those hotels in which
we have a minority or non-controlling ownership or leasehold interest,
and which are accounted for by the equity method.
o Development and construction revenues consisting of fees for new
development, construction and renovation activities.
o Revenue and commissions from selling of our consolidated AmeriHost Inn
hotels.
o Incentive and royalty sharing fees consisting of the amortization of
one-time development incentive fees received from Cendant, and our
portion of the AmeriHost Inn franchise royalty fees Cendant receives
from all other AmeriHost Inn franchisees and pays to us.
We generate revenue from additional secondary sources;
o Management and employee leasing revenues consisting of fees for hotel
management and employee leasing services.
o Rental revenue from the third-party tenants in our office building.
-24-
Operating Expenses
Operating expenses consist of the following:
o Operating expenses from hotel operations, consisting of all costs
associated with operating our consolidated hotels including front
desk, housekeeping, utilities, marketing, maintenance, insurance, real
estate taxes, and other general and administrative expenses.
o Operating expenses from hotel development, including all direct costs
of development and construction activities, such as site work, zoning
costs, the cost of all materials, construction contracts, and
furniture, fixtures and equipment, as well as indirect internal costs
such as architectural, design, purchasing and legal expenses.
o Operating expenses from Amerihost Inn hotel sales equal to the net
book value of consolidated AmeriHost Inn hotels we sell.
o Operating expenses from hotel management, including the direct and
indirect costs of management services, including sales, marketing,
quality control, training, purchasing and accounting.
o Operating expenses from employee leasing, including the actual payroll
cost for hotel employees.
o Operating expenses for the office building, including all costs
associated with managing and owning the office building, such as
maintenance, repairs, security, real estates taxes, and other direct
and indirect administrative expenses.
Hotel and corporate level financing
Our company-owned and operated hotels have been financed historically through
either a combination of debt and equity, or lease financing. Our lenders are
typically local or regional banks, or other financial institutions, that provide
mortgage debt based on a percentage of cost or value, as determined by each
individual lender. The loan to value ratios have typically ranged from 60%-75%.
The equity requirement has been funded through our operating cash flow or other
corporate financing resources, such as our operating line-of-credit with LaSalle
Bank NA.
Our joint ventures have also historically been financed through a combination of
debt and equity, similar to the terms discussed above, and in one case, through
a lease. We have also typically made an equity contribution of up to 30% of the
total equity as a minority partner. In addition, we have guaranteed the mortgage
debt of the joint venture in most instances. Our business plan currently
emphasizes that the majority of new development will be through joint ventures
where our partners will fund the majority of the equity contributions.
We paid off approximately $6.7 million in mortgage debt in the second quarter of
2004, in connection with the sale of four hotels. For the six months ended June
30, 2004, we paid off $10.5 million in mortgage debt in connection with the sale
of six hotels. We expect to decrease our mortgage debt further as we sell
additional hotels. Total annual hotel mortgage debt service for the hotels
currently in our portfolio, excluding debt service on mortgages which mature in
the next 12 months, is approximately $4.7 million for all of our consolidated
hotels. Total annual hotel mortgage debt service for our current portfolio of
unconsolidated joint ventures, excluding debt service on mortgages which mature
in the next twelve months, is approximately $2.1 million. However, if certain
anticipated hotel sales occur, these obligations would decrease, as the related
mortgage debt would be paid off with the proceeds therefrom. These debt service
amounts are exclusive of the debt service on our corporate line of credit and
the mortgage on our office building.
In May 2004, the one joint venture which operates its hotel under a lease,
revised the terms of the lease agreement. The revised agreement reduced the
annual lease payments from $240,000 to a percentage of hotel room revenue with a
minimum of $90,000 on an annual basis, and changed the lease expiration date
from May 31, 2010 to the earlier of November 1, 2005, or when, and if, the
landlord sells the property, redevelops the property, or leases the property to
a new tenant. Although modified, we determined that this hotel lease would
continue to be accounted for as an operating lease.
In 1998 and 1999, our subsidiary completed a sale and lease back transaction
with PMC Commercial Trust ("PMC"), a real estate investment trust ("REIT"), for
30 AmeriHost Inn hotels. Since then, PMC has sold, or we have repurchased, nine
hotels, leaving 21 hotels currently leased from PMC. The leases expire in 2008,
subject to a five-year extension as elected by either our subsidiary or PMC, as
provided in an amendment executed in January 2001. The lease payments are
currently
-25-
at 10.51% of the sales prices per annum, and are subject to annual CPI increases
with a 2% maximum. Our subsidiary's current lease obligation for these 21 hotels
is approximately $5.3 million on an annual basis. We have guaranteed our
subsidiary's obligation under the leases.
The January 2001 master lease amendment also provided for the sale of eight
unidentified hotels to third parties or to the Company under specified terms.
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 us by the dates
specified. As of June 30, 2004, the first three scheduled rent increases were
avoided due to the sale of three hotels from PMC to us. The fourth 0.25%
increase of approximately $127,000 on an annual basis becomes effective if we do
not either facilitate the sale to a third party, or purchase from PMC, one
specified hotel at a price of approximately $2.6 million by October 31, 2004, as
extended.
Due to numerous economic and market-driven factors relating to these 21
remaining hotels, the parent Company, Arlington Hospitality, Inc., has had to
fund, on behalf of our subsidiary, from other operating sources such as the sale
of our hotels, a significant portion of the approximate $5.3 million annual
lease obligation, as the aggregate operating cash flow from these hotels for the
past several years has been insufficient to meet the lease obligation. We have
entered into discussions with PMC, on behalf of our subsidiary, with the
objective to restructure these long-term lease agreements, including the
extension of the obligation discussed above, and to provide for the sale of the
hotels to third parties. On March 12, 2004, we entered into a temporary letter
agreement with PMC that expired on April 30, 2004. The temporary letter
agreement provided that base rent will continue to accrue at the rate of
approximately $445,000 per month, as set forth in the lease agreements; however
the base rent payments required to be paid on March 1, 2004 and April 1, 2004
were reduced to approximately $360,000 per month, with the March 1, 2004 payment
being due and payable upon the execution of the temporary letter agreement. In
addition, we were allowed to utilize $200,000 of our security deposit held with
PMC to partially fund these payments. The temporary letter agreement has been
extended through August 31, 2004 with the reduced rent paid for the months of
May 2004 through July 2004. For the month of August 2004, the full base rent of
approximately $445,000 was paid. The deferred portion of the March through July
2004 rent (approximately $434,000), plus the $200,000 needed to restore the
security deposit to its March 12, 2004 balance, will be payable to PMC in four
equal monthly installments beginning September 1, 2004, unless deferred pursuant
to any contemplated restructuring.
Also, in connection with our discussions with PMC, we entered into a temporary
sales letter agreement dated May 18, 2004. This agreement provides for the
extension of the final hotel sale to a third party, or purchase obligation by
us, pursuant to the January 2001 amendment, until October 31, 2004. This hotel
is currently under contract for sale to a third party, and the sale transaction
is expected to be consummated prior to October 31, 2004. If the hotel is not
sold to a third party by October 31, 2004, we would be subject to the rent
increase discussed above, or would be required to purchase this hotel at the
specified price, using mortgage debt to be obtained and cash from operations or
working capital, if available. In either event, we will have no further
obligation under the January 2001 amendment. Upon the sale of this hotel, the
individual hotel lease would be terminated and pursuant to this temporary
agreement, PMC would receive the sale proceeds, net of closing costs, plus a
termination fee from us. If the total proceeds to PMC, including the termination
fee, are less than the specified value contained in the original lease, the
shortfall becomes our obligation bearing interest at the rate of 8.5% on an
annual basis due May 1, 2005. If the total proceeds to PMC, including the
termination fee, are more than the specified value, the excess will be used to
reduce the specified values for the remaining leased hotels, which is the basis
for the monthly rent payments. Due to this modification, the lease for this
hotel was accounted for as a capital lease as of June 30, 2004.
Our objective of the contemplated restructuring is to improve our operating
results and cash flow with respect to these hotels, and to agree on a plan that
would transfer these hotels to third party operators through the sale of the
properties. The sale of these hotels is consistent with our strategic
objectives, as discussed above. While our objective is to reach a restructured
agreement prior to the expiration of the temporary letter agreement (as
extended), there can be no assurance that the leases will be restructured on
terms and conditions acceptable to us, if at all, or that a restructuring will
improve operating results and cash flow, or provide for the sale of the hotels
to third party operators.
At the corporate level, our sole financing source is our operating
line-of-credit with LaSalle Bank NA, which matures April 30, 2005. This
line-of-credit is a revolving facility, allowing us to take advances when
needed, up to the allowed maximum, and to repay any advances without penalty.
This facility also requires us to satisfy financial covenants such as minimum
net worth, maximum debt to net worth, minimum net income, and minimum debt
service ratio. Our current maximum availability under the line-of-credit is $4.0
million, subject to adjustments discussed below. As of June 30, 2004 the
outstanding balance on the line-of-credit was $3.25 million, and we were in
compliance with all covenants.
-26-
Overall industry and economic factors
The lodging industry's performance, and the related travel patterns of both
business and leisure travelers, generally follows the trends of the overall U.S.
economy, with the lodging industry typically lagging six to nine months behind
the U.S. economy. Both the U.S. economy and the lodging industry began to
decline in 2001. As the U.S. economy began to show signs of improvement in 2003,
the lodging industry has followed in the latter part of 2003 and continues to
improve in 2004. However, the economic recovery in the Midwestern United States,
which is primarily where our hotels are located, has lagged behind the general
U.S. economic recovery. In fact, the lodging industry in certain Midwestern
states has not shown any significant signs of recovery. While our hotel revenues
have increased in 2004, they have not increased to the same extent as the
overall U.S. lodging industry, as reported by industry analysts. Nevertheless,
based on the economic forecasts such as the GDP growth forecast, our industry
outlook for the remainder of 2004 is optimistic with respect to hotel revenue
growth.
The downturn in the lodging industry from 2001 through 2003 has also negatively
impacted the values of hotel assets. In an environment with declining revenues
and margins, the prices at which hotels are sold have generally been relatively
lower than prior to the economic downturn. It is expected that a sustained
economic recovery will have a positive impact on hotel valuations. Fluctuations
in values could have a material adverse or positive impact on our plan to sell a
significant number of hotels on an accelerated basis in 2004 and 2005, and the
net cash proceeds that we receive.
Key business trends and developments
We have several key indicators that we use to evaluate the performance of our
business. These indicators include room revenue per available room, or RevPAR,
and RevPAR penetration index. RevPAR is a commonly used measure within the hotel
industry to evaluate hotel operations. RevPAR is defined as the product of the
average daily room rate charged and the average daily occupancy achieved. RevPAR
does not include revenues from telephone and other guest services generated by
the property. RevPAR is generally considered the leading indicator of core
revenues for many hotels, and we use RevPAR to compare the results of our hotels
between periods and to compare results of our comparable hotels.
The table below shows our same room AmeriHost Inn hotel RevPAR results versus
the mid-scale without food and beverage segment of the limited service hotel
industry over the past eight years and in 2004, through June. The variance in
2004 can be attributed to the lagging economic recovery in the Midwestern U.S.,
which is where our hotels are primarily located.
RevPAR Growth
YTD(3)
1996 1997 1998 1999 2000 2001 2002 2003 2004
----- ---- ---- ---- ---- ----- ----- ----- ------
AmeriHost Inn Hotels (1) 14.5% 3.9% 9.4% 7.2% 5.9% (2.1%) 3.7% (0.3%) 3.8%
Limited service segment,
without food and
beverage (2) 3.5% 3.2% 3.1% 2.2% 4.4% (1.6%) (0.6%) 0.5% 6.4%
(1) Includes all AmeriHost Inn hotels we owned and operated, including
unconsolidated minority-owned hotels, operating for at least 13 full
months during the periods presented.
(2) According to Smith Travel Research, a leading industry analyst.
(3) Through June 30, 2004.
A related revenue measure for our hotels is the RevPAR penetration index. The
RevPAR penetration index reflects each property's RevPAR in relation to the
RevPAR for that property's competitive set. We use the measure as an indicator
of a property's market share. For example, a RevPAR penetration index of 100
would indicate that a hotel's RevPAR is, on average, the same as its
competitors. A RevPAR penetration index exceeding 100 would indicate that a
hotel maintains a RevPAR premium in relation to its competitive set, while a
RevPAR penetration index below 100 would be an indicator that a hotel is under
performing its competitive set. One critical component in this calculation is
the determination of a hotel's competitive set. Factors that we consider include
geographic proximity, as well as the level of service provided at the property.
Our methodology for determining a hotel's competitive set, however, may differ
for those used by other owners and/or managers. From a market penetration
standpoint, in the aggregate, our AmeriHost Inn hotels were at an index of 100.0
for the six months ended June 30, 2004, compared to an index of 97.3 for the
year ended December 31, 2003.
-27-
We believe that many factors contribute to the RevPar penetration index. Some
factors which may negatively impact the index at some of our hotels, include:
o the relatively smaller size of the AmeriHost Inn brand compared to
many other hotel brands with significant critical mass and market
penetration,
o a lower contribution rate from the AmeriHost Inn reservation system
compared to many other hotel brands, and the level of new competition
in the local markets which compete directly with our hotels.
Despite some positive trends with regard to same room revenue and RevPAR
penetration, the cash flow from the operations of many of our hotels in 2003 was
not sufficient to pay their related mortgage debt service, lease obligations,
and ongoing capital expenditures. Our operating margins declined significantly
in 2003 as many expenses increased substantially, including employee wages and
benefits, insurance, maintenance, utilities, and property taxes. Many of these
expenses continue to increase in 2004, however at a lower rate, as we made
improvements in controlling some of these costs. In fact, we have been
successful in decreasing certain costs in 2004 compared to 2003, including
insurance and real estate taxes, which partially offsets the increases in other
expense areas. We anticipate that for 2004, the cash flow from the operation of
many of our hotels will still not be sufficient to pay the related mortgage debt
service, lease obligations, and ongoing capital expenditures. We have a
significant amount of debt and obligations under long-term leases, such as the
leases with PMC, requiring us to dedicate a substantial portion of our cash flow
from our overall operations, including our business activities other than hotel
operations, to make these required payments.
While we believe the combination of improved demand for hotel rooms and our cost
control initiatives create the possibility of improvements in our hotel
operations in 2004, there can be no assurance that any increases in hotel
revenues, or improvement in earnings will be achieved. The trends discussed
above may not occur for any number of reasons, including slower than anticipated
growth in the economy, changes in travel patterns of both business and leisure
travelers, the continued threat of terrorist attacks, and competitive factors
attributable to the markets in which our hotels are located, all of which may
result in lower revenues or higher operating costs and declining operating
margins.
LaSalle Bank NA, the lender for our corporate line-of-credit has decreased the
availability under this facility over the past two years. Earlier in 2004, we
renewed this facility with LaSalle Bank through April 30, 2005 at an initial
maximum availability of $4.0 million as reduced from the previous level of $5.5
million. This reduction was achieved primarily as a result of the sale of two
hotel properties during the first quarter of 2004 with the proceeds used to pay
down the line of credit balance. In addition, the terms require that the maximum
availability under the facility be reduced to $3.5 million on February 28, 2005,
and also provides LaSalle Bank with the right to reduce the maximum availability
further, based on future hotel sales, or as deemed necessary. The facility bears
interest at the rate of 10% per annum.
Our $20 million new construction loan facility expired October 31, 2003 without
renewal. Historically, we have used local, regional, and national lenders,
including this new construction loan facility. Mortgage financing is a critical
component of the hotel development process and we are continually seeking
financing sources. If we, or the hotel joint ventures in which we are a partner,
are unable to obtain adequate mortgage financing on acceptable terms, our
ability to develop new hotels will be significantly limited.
Management's priorities
Based on our primary business objectives and anticipated operating conditions,
our key priorities, and focus for the remainder of 2004 and the next several
years include the following:
o Sell a significant number of hotels in our existing hotel portfolio,
which hotels in many instances have operated with cash flow that is
insufficient to pay their debt service and ongoing capital
expenditures during the past year;
o Expand our hotel development activities to be developing and/or
acquiring and converting hotels at a pace of 10 - 15 hotels per year
by the end of 2005. We intend for this development to primarily be the
new construction of larger AmeriHost Inn hotels, or selective
acquisition of existing hotels and their conversion to AmeriHost Inn,
in larger markets, primarily through joint ventures where we can earn
significant development fees, with the intention of selling these
hotels after a shorter holding period than we have historically;
o Grow our relationships with existing and new joint venture partners in
connection with the development of new AmeriHost Inn hotels;
o Improve hotel operation results through a combination of selling
hotels, revenue generation initiatives, and cost control measures;
-28-
o Increase the fees we receive from Cendant, including the one-time
development incentive fee and the recurring royalty sharing fees, from
selling of our hotels to third parties, and as a result of Cendant's
efforts from growing the number of AmeriHost Inn franchises through
their own sales;
o Restructure our lease agreements with PMC;
o Obtain longer term corporate level financing than our historical
one-year operating line-of-credit, to better match our financing
sources with our business plan of developing, building and selling
AmeriHost Inn hotels; and
o Obtain growth capital to finance both the equity and debt required for
the anticipated development projects.
SUMMARY OF SECOND QUARTER 2004 RESULTS
Total revenues increased 21.5% during the second quarter of 2004 compared to the
second quarter of 2003, due primarily to the sale of four Consolidated AmeriHost
Inn hotels in the second quarter of 2004 versus the sale of one Consolidated
AmeriHost Inn hotel during the second quarter of 2003. Total revenues from the
operations of Consolidated AmeriHost Inn hotels decreased from $11.0 million to
$9.6 million during the second quarter of 2004, due primarily to the reduction
in the number of Consolidated AmeriHost Inn hotels operated by the Company as a
result of the sale of ten hotels in the second half of 2003 and the first half
of 2004, partially offset by an increase in same room revenues from these hotels
of 2.7% for the second quarter of 2004 compared to 2003. Revenues from the
development and construction segment also decreased during the second quarter of
2004, as we recognized less revenue on the one AmeriHost Inn hotel we were
building for a joint venture in the second quarter of 2004, versus the one hotel
we built for a joint venture in 2003. Incentive and royalty sharing revenues
increased 41.5% to approximately $317,000 in the second quarter of 2004. We
recorded net income of $54,845 for the second quarter of 2004, compared to a net
loss of $3.4 million in 2003. These results include non-cash hotel impairment
provisions recorded in the second quarter of 2004 and 2003, and discontinued
operations related to non-AmeriHost Inn hotels which have been recorded in
connection with the implementation of the plan for hotel disposition as
discussed below. The results for the three and six months ended June 30, 2004
and 2003 are summarized as follows:
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ----------------------------
2004 2003 2004 2003
--------- ----------- ----------- -----------
Net income (loss) from continuing
operations, before impairment $ 525,313 $ 206,597 $ (215,347) $ (646,409)
Impairment provision, net of tax (75,183) (2,738,707) (267,263) (2,798,707)
--------- ----------- ----------- -----------
Net income (loss) from continuing
operations 450,130 (2,532,110) (482,610) (3,445,116)
Discontinued operations (a) (395,285) (825,676) (1,037,951) (1,395,190)
--------- ----------- ----------- -----------
Net income (loss) $ 54,845 $(3,357,786) $(1,520,561) $(4,840,306)
========= =========== =========== ===========
Net loss per share - Diluted:
From continuing operations $ 0.09 $ (0.51) $ (0.10) $ (0.69)
From discontinued operations (0.08) (0.16) (0.20) (0.28)
--------- ----------- ----------- -----------
$ 0.01 $ (0.67) $ (0.30) $ (0.97)
========= =========== =========== ===========
(a) Includes hotel impairment provision related to non-AmeriHost Inn
hotels to be sold of approximately $319,000 and $517,000, net of tax,
for the three months ended June 30, 2004 and 2003, respectively, and
$566,000 and $517,000, net of tax for the six months ended June 30,
2004 and 2003 (Notes 13 and 14).
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, or GAAP, requires management
to use judgment in the application of accounting policies, including making
estimates and assumptions. We base our estimates on historical experience and on
various other assumptions believed to be reasonable under the circumstances.
These judgments affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses
-29-
during the reporting periods. If our judgment or interpretation of the facts and
circumstance relating to various transactions had been different, it is possible
that different accounting policies would have been applied resulting in a
different presentation of our financial statements. From time to time, we
evaluate our estimates and assumptions. In the event estimates or assumptions
prove to be different from actual results, adjustments are made in subsequent
periods to reflect more current information. Below is a discussion of certain
accounting policies that we consider critical in that they may require complex
judgment in their application or require estimates about matters that are
inherently uncertain. A complete discussion of the accounting policies we
consider critical are contained in our Annual Report on Form 10-K for the year
ended December 31, 2003, under the heading "Management's Discussion and Analysis
- - Critical Accounting Policies," and should be read in conjunction with this
report on Form 10-Q.
Consolidation Policy
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries and entities in which we have a majority or
controlling interest. All significant intercompany accounts and transactions
have been eliminated.
Minority-owned joint ventures in which we maintain a non-controlling ownership
interest are accounted for by the equity method. Our share of each joint
venture's income or loss, including gains and losses from capital transactions,
is reflected on our consolidated statement of operations as "Equity in income
and (losses) from unconsolidated joint ventures."
Revenue Recognition
Hotel operations
The revenue from the operation of a Consolidated hotel is recognized as part of
the hotel operations segment when earned.
Hotel sales
Our intention is to operate the consolidated AmeriHost Inn hotels until a buyer
is found at an appropriate price. We may actively try to sell the hotel during
the construction period, upon opening, or anytime thereafter. When the sale of a
consolidated AmeriHost Inn hotel is consummated, we record the hotel sale price
as revenue and the net cost basis of the hotel asset as expense, as part of our
ongoing operational activity.
Hotel development and construction
Development fee revenue from construction/renovation projects with unaffiliated
third parties and unconsolidated joint ventures is recognized using the
percentage-of-completion method. However development fee revenue is not
recognized until certain development hurdles are met; such as the execution of a
land purchase contract and the debt and equity financing commitments.
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.
When we build a hotel for an unconsolidated joint venture, a portion of the
profit is deferred and included on our consolidated balance sheet as deferred
income. The deferral is computed based on our ownership percentage in the joint
venture and the construction profit (as it is recognized on the percentage of
completion basis). We recognize the deferred income over the estimated useful
life of the related hotel asset.
Hotel management services
We recognize management fee revenue when we perform 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. We recognize the management fee
revenue in the hotel management segment as the related hotel revenue is earned.
-30-
Employee leasing
We recognize employee leasing revenue when we staff hotels, and perform related
services, for unrelated third parties and unconsolidated joint ventures. We
recognize the employee leasing revenue in the employee leasing segment as the
related payroll cost is incurred.
Incentive and royalty sharing
Cendant has agreed to pay us a development incentive fee, under certain
conditions, every time we sell one of our existing or newly developed AmeriHost
Inn hotels to a buyer who executes an AmeriHost Inn franchise agreement with
Cendant. 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.
Sale and Leaseback of Hotels
During 1998 and 1999, we sold 30 hotels to PMC Commercial Trust, a real estate
investment trust, for approximately $73 million. Upon the sale of the hotels,
our subsidiary simultaneously entered into agreements to lease back each of the
hotels from the PMC. The leases are for an initial term of 15 years, including a
five-year renewal at the option of either PMC or us, as provided in an amendment
dated January 2001, and provide for rent in the current amount of 10.51% of the
original sale price, increased annually 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. Upon the sale of a hotel, which is owned by PMC to an unaffiliated
third party, the remaining unamortized deferred income is recognized as gain on
sale of fixed assets in our consolidated financial statements. We are currently
in discussions with PMC to restructure the lease agreements and provide for the
sale of all the leased hotels (For a more detailed discussion of the PMC
transaction, see "Executive Overview - hotel and corporate level financing"
above). As a result of a temporary sales agreement executed in the second
quarter of 2004, one of the leased hotels was accounted for as a capital lease
in accordance with SFAS No. 13, as of June 30, 2004, and classified as "held for
sale".
Impairment of Long-Lived Assets
We periodically review the carrying value of certain 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, we 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, we
would determine the fair value by using quoted market prices, if available for
such assets, or if quoted market prices are not available, we would discount the
expected future cash flows of such assets.
In July 2003, we implemented a plan to sell approximately 25 to 30 hotels over a
two year period. In connection with the implementation of the plan to sell
hotels, and in accordance with Statement of Financial Accounting Standard (SFAS)
No. 144, "Accounting for Long-Lived Assets," we have recorded non-cash
impairment charges during 2004 and 2003, related to the hotels targeted for
sale. The non-cash impairment charges relating to consolidated non-AmeriHost Inn
hotels anticipated to be sold, have been included in "discontinued operations."
The non-cash impairment charge represents an adjustment to reduce the carrying
value of certain hotel assets to the estimated sales prices, net of estimated
costs to sell.
Based on the implementation of this plan for hotel dispositions, the hotel
assets identified for sale, which are being actively marketed and expected to be
sold within a twelve month period, have been classified as "held for sale" on
the accompanying consolidated balance sheet as of June 30, 2004. Hotels
identified as part of the plan of disposition, which are not currently marketed,
and are not expected to be sold within the next twelve months, have not been
classified as "held for sale." The debt that is expected to be paid off as a
result of these hotel sales has been classified as current liabilities in the
accompanying consolidated financial statements. The results of the operations of
business components which have been disposed of or classified as "held for sale"
are to be reported as discontinued operations if such operations and cash flow
have been or will be eliminated from our ongoing operations. Accordingly, the
disposition of non-AmeriHost Inn hotels have been treated as discontinued
operations. However, the disposition of AmeriHost Inn hotels, although
classified as "held for sale" on the accompanying consolidated balance sheet,
have not been treated as discontinued operations due to the ongoing royalty fees
to be earned by us after their disposition. In addition, in accordance with this
literature, we have ceased depreciating the hotel assets that have been
classified as "held for sale."
-31-
If the Company determines that a property is no longer for sale, or if a
property does not sell, after a certain period of time, under certain
conditions, a depreciation expense adjustment may be recorded at that time, up
to the amount of depreciation that would have been recorded during the period
that the asset was classified as "held for sale." During the fourth quarter of
2003, two AmeriHost Inn hotels previously classified as "held for sale" were
reclassified back to operating assets since we no longer were actively marketing
these properties for sale. In accordance with SFAS 144, depreciation was
recorded through December 31, 2003, as if the hotels were never classified as
"held for sale". Certain hotels may be marketed for sale for more than one year
beginning in the third quarter of 2004, if not sold. However, market conditions
and contemplated sale terms have changed for these hotels, including asking
price adjustments in certain cases, and we continue to actively market these
hotels for sale, with the expectation that these properties will be sold within
the next twelve months. Therefore, we anticipate that these hotels will continue
to be classified as "held for sale," until sold.
HOTEL DISPOSITION PLAN
In 2001 and 2002, we sold, or have facilitated the sale for joint ventures or a
landlord, 17 hotel properties. However, during 2003, new senior management, and
the board of directors, determined that the sale of a significantly higher
number of hotel properties would assist us achieving our financial and growth
objectives, as well as support our liquidity. The sale of the hotels is expected
to:
o provide liquidity for operational and ongoing capital expenditure
needs;
o reduce outstanding debt;
o increase operating cash flow of the hotel operations segment;
o accelerate the generation and realization of development incentive and
royalty-sharing fees from our agreements with Cendant; and
o provide capital for future new hotel development and/or acquisition
and conversion of existing hotels.
In July 2003, we adopted a strategic plan to sell approximately 25 to 30 hotel
properties over a two year period. The properties to be sold include 20 to 25
AmeriHost Inns and six non-AmeriHost hotels that are wholly or partially-owned.
Since inception of the plan, we have sold 13 hotels including the sale of 7
hotels during the six months ended June 30, 2004. Below is a summary of the
sales made under the plan:
(in thousands)
Net cash
Number proceeds Mortgage Cendant
of after mortgage debt Incentive
hotels Payoff reduction Fees (1)
------- -------------- --------- ---------
Consolidated hotels:
AmeriHost Inn hotels 6 $ 3,735 $10,509 $ 1,076
Other brand hotels -- -- -- --
------- ------- ------- -------
6 3,735 10,509 1,076
------- ------- ------- -------
Unconsolidated hotels:
AmeriHost Inn hotels 0 -- -- --
Other brand hotels 1 611 -- --
------- ------- ------- -------
1 611 -- --
------- ------- ------- -------
Total, for the six months ended
June 30, 2004 7 $ 4,346 $10,509 $ 1,076
======= ======= ======= =======
Total, since the implementation of the
strategic plan to sell hotels 13 $ 9,158 $19,225 $ 2,116
======= ======= ======= =======
(1) These fees are deferred for financial statement reporting purposes,
and amortized as revenue over a 76-month period.
An integral part of our growth plan, profitability, and liquidity is our ability
to sell hotels, including those under the plan for disposition, as well as our
other existing hotels, and hotels we develop in the future.
-32-
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2004, COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2003
The following tables set forth our selected operations data for the three months
ended June 30, 2004 and 2003. This data should be read in conjunction with our
financial statements in Item 1 of this Form 10-Q.
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
---------------------- ---------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- -------- ----------
Revenue:
AmeriHost Inn hotel operations $ 9,592 51.6% $11,045 72.1% (13.2%)
Development and construction 390 2.1% 617 4.0% (36.8%)
Hotel sales 7,438 40.0% 2,591 17.0% 187.1%)
Management services 102 0.6% 117 0.8% (12.9%)
Employee leasing 561 3.0% 541 3.5% 3.6%
Incentive and royalty sharing 317 1.7% 224 1.5% 41.5%
Office building rental 175 1.0% 179 1.1% (2.0%)
------- ------ ------- ------ -------
18,575 100.0% 15,314 100.0% 21.3%
------- ------ ------- ------ -------
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
---------------------- ---------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- -------- ----------
Operating costs and expenses:
AmeriHost Inn hotel operations 7,101 38.2% 7,762 50.7% (8.5%)
Development and construction 642 3.5% 544 3.5% 17.9%
Hotel sales 6,080 32.7% 2,093 13.7% 195.1%
Management services 25 0.1% 75 0.5% (66.1%)
Employee leasing 525 2.8% 525 3.4% 0.0%
Office building rental 35 0.2% 47 0.3% (25.6%)
------- ------ ------- ------ -------
14,408 77.6% 11,046 72.1% 31.3%
------- ------ ------- ------ -------
Depreciation and amortization 514 2.8% 956 6.2% (47.1%)
Leasehold rents - hotels 1,197 6.4% 1,219 8.0% (1.9%)
Corporate general & administrative 713 3.8% 515 3.4% 38.4%
Impairment provision 125 0.7% 4,565 29.8% (97.3%)
------- ------ ------- ------ -------
Operating income (loss) $ 1,618 8.7% $(2,987) (19.5%) 150.9%
======= ====== ======= ====== =======
Segment Data:
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
---------------------- ---------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- -------- ----------
Operating Income (Loss) by Segment:
AmeriHost Inn hotel operations $ 845 4.5% $ 1,171 7.6% (27.8%)
Non-cash impairment provision (125) (0.7%) (4,564) (29.8%) (97.3%)
Development and construction (253) (1.4%) 72 0.5% (451.6%)
Hotel sales 1,358 7.3% 497 3.2% 153.7%
Management services 67 0.4% 31 0.2% 115.8%
Employee leasing 36 0.2% 16 0.1% 124.7%
Incentive and royalty sharing 317 1.7% 224 1.5% 41.5%
Office building rental 101 0.5% 91 0.6% 9.9%
Corporate general & administrative (726) (3.8%) (525) (3.5%) 38.3%
------- ------ ------- ------ -------
Operating income (loss) $ 1,618 8.7% $(2,987) (19.5%) 150.9%
======= ====== ======= ====== =======
-33-
Three Months Ended Three Months Ended
June 30, 2004 June 30, 2003
------------------ ------------------
Operating Income (Loss) as a
percentage of segment revenue:
AmeriHost Inn hotel operations 8.8% 10.6%
Non-cash impairment provision N/A N/A
Development and construction (64.9%) 11.7%
Hotel sales 18.3% 19.2%
Management services 65.8% 26.6%
Employee leasing 6.4% 2.9%
Incentive and royalty sharing 100.0% 100.0%
Office building rental 57.4% 51.2%
Corporate general & administrative N/A N/A
------- -------
Total operating income (loss) 8.7% (19.5%)
======= =======
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the
sale of Consolidated AmeriHost Inn hotels from April 1, 2003 through June 30,
2004, whereby the operations of these hotels were included in our hotel
operations segment during all or part of the second quarter of 2003; however
such hotels were not included during all or part of the 2004 second quarter. The
decrease in revenues from Consolidated AmeriHost Inn hotels was partially offset
by a 2.7% increase in same room revenues for the Consolidated AmeriHost Inn
hotels, during the second quarter, including those that we sold, through the
date of sale. On a macro basis, our hotel revenues typically follow the general
U.S. economic trends. However, the current economic recovery has lagged in the
Midwestern U.S., which is where the Company's hotels are primarily located. Our
hotels are also affected by local market conditions and trends, including
increased competition from newly constructed hotels. The increase in same room
revenue experienced during the second quarter of 2004, compared to 2003, was the
result primarily of higher occupancy rates while average room rates remained
stable. We believe that as the total number of AmeriHost Inn hotels in the brand
increases, the greater the benefits will be at all AmeriHost locations from
marketplace recognition and repeat business. Our new business plan will
primarily focus on building new hotels in larger, growing markets where many of
our competitors already exist or where we anticipate a certain level of
additional hotel development.
Hotel development and construction revenues are directly related to the number
of hotels being developed and constructed for minority-owned entities or
unrelated third parties, and the timing of the construction period. We completed
the construction of one hotel for a minority-owned entity during the second
quarter of 2004, and one (other) minority-owned hotel during the second quarter
of 2003, and the revenue recognized was based on the construction progress
achieved on each project during the quarter.
Hotel sales revenue increased as a result of the sales of four wholly owned
AmeriHost Inn hotels during the second quarter of 2004, at an aggregate price
that was greater than the sale of one wholly owned AmeriHost Inn hotel during
the second quarter of 2003. The sale of the four wholly owned AmeriHost Inn
hotels in the 2004 second quarter generated net hotel revenues of approximately
$7.4 million compared to $2.6 million from the sale of the one hotel in the
second quarter of 2003. We intend to continue to build and sell AmeriHost Inn
hotels in order to generate increased fees under the agreement with Cendant
while enhancing our operating results and cash flow.
Hotel management services revenue decreased slightly, due primarily to the sale
of one hotel by a joint venture during the second quarter of 2004, which had a
management contract with the Company, and the acquisition of a joint venture
hotel under a management contract in 2003.
Employee leasing revenue increased, due primarily to an increase in hotel
employee payroll costs, which is the basis for the employee leasing revenue.
-34-
Incentive and royalty sharing revenue increased as a result of the sale of
additional AmeriHost Inn hotels and the increase in the number of non-Company
owned AmeriHost Inn hotels franchised with Cendant. Approximately $228,000 and
$159,000 was recognized during the second quarter of 2004 and 2003,
respectively, from the amortization of development incentive fees. We also
recorded approximately $89,000 and $65,000 in royalty sharing revenue during the
three months ended June 30, 2004 and 2003, respectively. We received
approximately $659,000 and $221,000 in development incentive fees related to
AmeriHost Inn hotel sales during the three months ended June 30, 2004 and 2003,
respectively.
Office building rental revenue consisting of leasing activities from our office
building, decreased slightly due to the termination of the lease with one
tenant, partially offset by annual increases as stipulated in the various lease
agreements with the remaining tenants, and the leasing of additional office
space during 2003. We occupy approximately 27% of the rentable square feet, as
reduced in 2003 as part of a restructuring. Approximately 50% of the space is
leased to unrelated third parties pursuant to long-term lease agreements, and we
are working with a national commercial real estate broker who is very active in
leasing office space in the Chicago Metropolitan area, to assist us in leasing
the rest of the available space. To date, we have not leased any of the
additional available space.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased,
primarily due to the higher aggregate net depreciated cost basis of the
AmeriHost Inn hotels sold in the second quarter of 2004 versus 2003 offset by a
decrease in operating costs and expenses from the Consolidated AmeriHost Inn
hotels. A decrease in the total amount of operating costs in the hotel
operations segment was due primarily to the fewer number of AmeriHost Inn hotels
included in this segment -- 43 hotels at June 30, 2004, as compared to 53 hotels
at June 30, 2003. Operating costs and expenses as a percentage of revenues for
the consolidated AmeriHost Inn hotels increased due primarily to increases in
certain costs including salaries and wages, sales and marketing, maintenance,
and energy, partially offset by decreases in real estate tax expense and
insurance.
Operating costs and expenses for the hotel development and construction segment
increased, consistent with the construction progress for the hotel development
activity for the second quarter of 2004, compared to 2003. In addition, the
operating expenses increased due to personnel additions in the business
development area, as part of the Company's strategic business plan to accelerate
the pace of new hotel development, and the additional support needed for the
plan for hotel disposition. Operating costs and expenses in the hotel
development segment as a percentage of segment revenue increased during 2004 due
to the lower revenue from third party and joint venture development activity,
and the higher operating costs.
Hotel sales operating expenses increased as a result of the higher aggregate net
depreciated cost basis related to the sales of four wholly owned AmeriHost Inn
hotels during the second quarter of 2004, versus the net depreciated cost basis
of the one wholly owned AmeriHost Inn hotel sold during the second quarter of
2003. The net depreciated cost basis is expensed upon consummation of the sale.
Hotel management services segment operating costs and expenses decreased
primarily due to a focused effort to reduce costs and the restructuring
beginning in the third quarter of 2003, partially offset by the expansion of
sales and marketing activity designed to increase hotel revenues. Employee
leasing operating costs and expenses remained flat during the three months ended
June 30, 2004, compared to 2003.
Office building rental operating costs and expenses consisted primarily of
expenses related to the management of our office building. The decrease in
operating expenses from the second quarter of 2003 to 2004 was due primarily to
a change in the allocation of certain of the office building costs among the
other operating segments. The new allocation method was adopted based on an
internal review to more accurately reflect the segment occupancy expense.
Depreciation and amortization expense decreased, primarily due to the
classification of certain assets as "held for sale," which properties were not
depreciated beginning in July 2003, the date of this determination, in
accordance with the relevant accounting literature, and the sale of consolidated
AmeriHost Inn hotels during the last twelve months. Consequently, the hotels
classified as "held for sale" were depreciated for all of the second quarter of
2003, if open, and not the second quarter of 2004.
Leasehold rents - hotels decreased slightly during the second quarter of 2004
compared to the second quarter of 2003, due to the purchase of one leased
AmeriHost Inn hotel and the termination of another non-AmeriHost Inn hotel lease
upon its expiration during the third quarter of 2003, partially offset by annual
rent increases pursuant to the lease agreements.
-35-
Corporate general and administrative expense increased due primarily to
increases in professional fees, corporate finance staff, directors and officers
liability insurance, and non-cash director expenses in the form of restricted
stock. Professional fees include legal services, and analytical and financial
consulting services incurred in connection with our ongoing discussions with PMC
and the related potential lease restructuring, as well as investment banking
services incurred in connection with reviewing the Company's business plan and
related strategies for the purpose of assisting the Company in optimally
structuring and obtaining new debt or equity financing, as needed. During the
second quarter of 2004, we expensed $125,000 in services performed by the
investment banker/financial advisor. As previously disclosed in prior SEC
filings, we added a Vice President of Finance in December 2003 to assist us in
all aspects of corporate accounting and financial analysis. Director expenses
include director fees, which were revised in 2003 to be competitive with other
public companies of a similar size, including non-cash compensation in the form
of restricted common stock.
The hotel impairment provision was recorded primarily in connection with our
plan for the disposition of certain hotel assets, as adopted in July 2003 that
we have marketed for sale as discussed above. The amount in 2004 represents
additional adjustments for certain AmeriHost Inn hotel assets to decrease the
carrying value of the assets to the anticipated market value, net of closing
costs, based on our most recent analysis and market information.
OPERATING INCOME BY SEGMENT. The following discussion of operating income by
segment excludes any corporate general and administrative expense and the
non-cash hotel impairment charges.
Operating income from consolidated AmeriHost Inn hotels decreased, due primarily
to:
o the sale of consolidated AmeriHost Inn hotels during the past 12
months which operated with an operating income;
o the increase of certain expenses, including salaries and wages, sales
and marketing, maintenance, and energy.
These factors were partially offset by:
o the sale of consolidated AmeriHost Inn hotels during the past 12
months which operated with an operating loss;
o the 2.7% increase in same room revenues for the consolidated AmeriHost
Inn hotels;
o the decrease in depreciation expense due to the implementation of the
plan for hotel disposition;
o the decrease of certain expenses, including real estate taxes and
insurance.
We believe that aggregate hotel revenue growth is critical to improving the
results of our hotel operations. As such, if our revenue enhancement programs
are not successful, or if the economic recovery now underway is not sustained,
or if the recovery does not have a corresponding improvement in the lodging
industry and our hotels, it could have a significant, negative impact on our
results of operation and financial condition.
The hotel development and construction segment incurred an operating loss during
the second quarter of 2004, versus a slight operating income in 2003, due to the
decrease in hotel development and construction activity for third parties and
minority-owned entities during 2004, compared with 2003, and an increase in
operating expenses. The operating expenses increased due to personnel additions
in the business development area, as part of the Company's strategy business
plan to accelerate the pace of new hotel development, and the additional support
needed for the plan for hotel disposition.
Operating income from hotel sales increased due to the sale of four AmeriHost
Inn hotels at a greater total profit during the second quarter of 2004, versus
the sale of the one AmeriHost Inn hotel during the second quarter of 2003.
The increase in hotel management services segment operating income during 2004
was due primarily to the decreased operating expenses partially offset by an
increase in the area of sales and marketing. Employee leasing operating income
increased slightly, due primarily to the increase in revenue. Office building
rental operating income increased, attributable to the change in allocation of
expenses among our other business segments.
INTEREST EXPENSE. The decrease in interest expense during the three months ended
June 30, 2004 compared to three months ended June 30, 2003 was attributable to
the reduction in our overall level of debt as a result primarily of (i) the sale
of consolidated hotels and the use of proceeds to payoff the related mortgage
debt and a portion of our operating line-of-credit, and (ii) interest rate
reductions on floating rate debt, partially offset by the mortgage financing of
newly constructed or acquired consolidated hotels, and a higher interest rate on
our operating line-of-credit. Interest expense does not include
-36-
interest incurred on hotels under development and construction. We capitalize
interest expense incurred during the pre-includes both interest charges from a
direct construction loan, plus interest computed at our incremental borrowing
rate on opening construction period of a consolidated hotel project, as part of
the total development cost. The amount capitalized the total costs incurred to
date in excess of the construction loan funding.
GAIN ON SALE OF ASSETS. As part of our strategy to focus primarily on the
development and sale of new AmeriHost Inn hotels, we intend to sell all our
owned, non-AmeriHost Inn hotels. One of the unconsolidated non-AmeriHost Inn
hotels was sold during the second quarter of 2004 and one consolidated
non-AmeriHost Inn hotel was sold during the second quarter of 2003. Any gain or
loss on the sale of these hotels is reported as "equity in income (loss) of
affiliates," for unconsolidated joint ventures, or as "discontinued operations,"
for consolidated non-AmeriHost Inn hotels, in the period in which the sale is
consummated.
CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during the
three months ended June 30, 2004, compared to the three months ended June 30,
2003, was primarily attributable to the improved operating results of the hotels
owned by the unconsolidated joint ventures. Distributions from affiliates were
approximately $22,000 during the three months ended June 30, 2004, compared to
approximately $5,000 during the three months ended June 30, 2003.
DISCONTINUED OPERATIONS. Discontinued operations includes the operations, net of
tax, of consolidated non-AmeriHost Inn hotels sold, or to be sold pursuant to
the plan for hotel dispositions, or leased with an accelerated termination date.
These non-AmeriHost Inn hotels are expected to be disposed of during the next
twelve months. Discontinued operations for the three months ended June 30, 2004
includes five hotels, compared to eight hotels during the three months ended
June 30, 2003. In addition, discontinued operations includes approximately
$531,000 and $862,000 during the three months ended June 30, 2004 and 2003,
respectively, in non-cash impairment charges pursuant to the plan of
disposition. The impairment amount included in 2004 relates primarily to one
hotel which is over 25 years old with exterior corridors and will require a
significant amount of capital expenditures over the next few years. The
operations of this hotel have declined significantly over the past several
months, as a result of a change in brand affiliation and the addition of newer
hotels in its local market. This decline has had a negative impact on the value
of the hotel, resulting in the impairment charge. In addition, the hotel lease
for a non-AmeriHost Inn hotel was amended, which accelerated the termination
date from 2010 to 2005, or earlier. As a result, the depreciation of the
leasehold improvements and furniture, fixtures and equipment at this hotel was
accelerated beginning January 1, 2004 to reflect the revised termination date.
Approximately $229,000 was recorded as incremental depreciation during the
second quarter of 2004 from the lease amendment. Exclusive of the impairment
charges, and the incremental depreciation, the pretax operating results of the
hotels included in "discontinued operations" improved significantly, from a loss
of approximately $514,000 during the three months ended June 30, 2003 to income
of approximately $101,000 during the three months ended June 30, 2004. This
improvement was the result primarily of the disposition of three non-AmeriHost
Inn hotels, each of which operated at a pretax loss during the three months
ended June 30, 2003.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2004, COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2003
The following tables set forth our selected operations data for the six months
ended June 30, 2004 and 2003. This data should be read in conjunction with our
financial statements in Item 1 of this Form 10-Q.
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
---------------------- ---------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- -------- ----------
Revenue:
AmeriHost Inn hotel operations $17,412 49.0% $19,567 59.7% (11.0%)
Development and construction 1,591 4.5% 2,097 6.4% (24.2%)
Hotel sales 14,277 40.2% 9,034 27.6% 58.0%
Management services 203 0.6% 228 0.7% (11.2%)
Employee leasing 1,123 3.2% 1,059 3.2% 6.1%
Incentive and royalty sharing 600 1.7% 430 1.3% 39.7%
Office building rental 349 1.0% 356 1.1% (1.9%)
------- ------ ------- ------ -------
35,555 100.0% 32,771 100.0% 8.5%
======= ====== ======= ====== =======
-37-
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
---------------------- ---------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- -------- ----------
Operating costs and expenses:
AmeriHost Inn hotel operations $14,130 39.7% $15,486 47.3% (8.8%)
Development and construction 2,122 6.0% 2,137 6.5% (0.7%)
Hotel sales 11,624 32.7% 7,334 22.4% 59.8%
Management services 116 0.3% 140 0.4% (17.2%)
Employee leasing 1,070 3.0% 1,027 3.1% 4.2%
Office building rental 76 0.2% 96 0.3% (21.2%)
------- ------ ------- ------ -------
29,138 82.0% 26,220 80.0% 11.5%
------- ------ ------- ------ -------
Depreciation and amortization 1,067 3.0% 1,915 5.8% (44.3%)
Leasehold rents - hotels 2,393 6.7% 2,438 7.5% (1.9%)
Corporate general & administrative 1,580 4.5% 963 2.9% 64.1%
Impairment provision 445 1.3% 4,664 14.3% (90.5%)
------- ------ ------- ------ -------
Operating income (loss) $ 932 2.6% (3,429) (10.5%) 124.4%
======= ====== ======= ====== =======
Segment Data:
Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
---------------------- ---------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- -------- ----------
Operating Income (Loss) by Segment:
AmeriHost Inn hotel operations $ (53) (0.1%) $ (121) (0.4%) 56.2%
Non-cash impairment provision (445) (1.3%) (4,665) (14.2%) 90.5%
Development and construction (534) (1.5%) (41) (0.1%) (1,195.1%)
Hotel sales 2,653 7.5% 1,699 5.2% 50.4%
Management services 67 0.2% 66 0.2% 2.6%
Employee leasing 53 0.1% 31 0.1% 70.4%
Incentive and royalty sharing 600 1.7% 430 1.3% 39.7%
Office building rental 194 0.5% 179 0.5% 8.4%
Corporate general & administrative (1,603) (4.5%) (1,007) (3.1%) (59.2%)
------- ------ ------- ------ ---------
Operating income (loss) $ 932 2.6% $(3,429) (10.5%) 124.4%
======= ====== ======= ====== =========
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Six Months Ended Six Months Ended
June 30, 2004 June 30, 2003
---------------- ----------------
Operating Income (Loss) as a
percentage of segment revenue:
AmeriHost Inn hotel operations (0.3%) (0.6%)
Non-cash impairment provision N/A N/A
Development and construction (33.6%) (2.0%)
Hotel sales 18.6%
Management services 33.2% 28.7%
Employee leasing 4.7% 2.9%
Incentive and royalty sharing 100.0% 100.0%
Office building rental 55.4% 50.2%
Corporate general & administrative N/A N/A
------ ------
Total operating income (loss) 2.6% (10.5%)
====== ======
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the
sale of Consolidated AmeriHost Inn hotels from January 1, 2003 through June 30,
2004, whereby the operations of these hotels were included in our hotel
operations segment during all or part of the first six months of 2003; however
such hotels were not included during all or part of the first six months of
2004. The decrease in revenues from Consolidated AmeriHost Inn hotels was
partially offset by a 1.9% increase in same room revenues for the Consolidated
AmeriHost Inn hotels, during the six months ended June 30, 2004, including those
that we sold, through the date of sale. On a macro basis, our hotel revenues
typically follow the general U.S. economic trends. However, the current economic
recovery has lagged in the Midwestern U.S., which is where the Company's hotels
are primarily located. Our hotels are also affected by local market conditions
and trends, including increased competition from newly constructed hotels. We
believe that as the total number of AmeriHost Inn hotels in the brand increases,
the greater the benefits will be at all AmeriHost locations from marketplace
recognition and repeat business. Our new business plan will primarily focus on
building new hotels in larger, growing markets where many of our competitors
already exist or where we anticipate a certain level of additional hotel
development.
Hotel development and construction revenues are directly related to the number
of hotels being developed and constructed for minority-owned entities or
unrelated third parties, and the timing of the construction period. We completed
the construction of one hotel for a minority-owned entity during the first six
months of 2004, and one (other) minority-owned hotel during the first six months
of 2003, and the revenue recognized was based on the construction progress
achieved on each project during these periods.
Hotel sales revenue increased as a result of the sales of six wholly owned
AmeriHost Inn hotels during the first six months of 2004, at an aggregate price
that was greater than the sale of three wholly owned AmeriHost Inn hotels during
the first six months of 2003. The sale of the six wholly owned AmeriHost Inn
hotels in the first six months of 2004 generated net hotel revenues of
approximately $14.3 million compared to $9.0 million from the sale of the three
hotels in the first six months of 2003. We intend to continue to build and sell
AmeriHost Inn hotels in order to generate increased fees under the agreement
with Cendant while enhancing our operating results and cash flow.
Hotel management services revenue decreased, due primarily to the sale of one
hotel by a joint venture during the first six months of 2004, which had a
management contract with the Company, and the acquisition of a joint venture
hotel under a management contract in 2003.
Employee leasing revenue increased, due primarily to an increase in hotel
employee payroll costs, which is the basis for the employee leasing revenue.
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Incentive and royalty sharing revenue increased as a result of the sale of
additional AmeriHost Inn hotels and the increase in the number of non-Company
owned AmeriHost Inn hotels franchised with Cendant. Approximately $437,000 and
$299,000 was recognized during the first six months of 2004 and 2003,
respectively, from the amortization of development incentive fees. We also
recorded approximately $163,000 and $131,000 in royalty sharing revenue during
the six months ended June 30, 2004 and 2003, respectively. We received
approximately $1.1 million and $919,000 in development incentive fees related to
AmeriHost Inn hotel sales during the six months ended June 30, 2004 and 2003,
respectively.
Office building rental revenue consisting of leasing activities from our office
building, decreased due to the termination of the lease with one tenant,
partially offset by annual increases as stipulated in the various lease
agreements with the remaining tenants, and the leasing of additional office
space during 2003. We occupy approximately 27% of the rentable square feet, as
reduced in 2003 as part of a restructuring. Approximately 50% of the space is
leased to unrelated third parties pursuant to long-term lease agreements, and we
are working with a national commercial real estate broker who is very active in
leasing office space in the Chicago Metropolitan area to assist us in leasing
the rest of the available space. To date, we have not leased any of the
additional available space.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased,
primarily due to the higher aggregate net depreciated cost basis of the
AmeriHost Inn hotels sold in the first six months of 2004 versus 2003, offset by
a decrease in operating costs and expenses from the Consolidated AmeriHost Inn
hotels. A decrease in the total amount of operating costs in the hotel
operations segment was due primarily to the fewer number of AmeriHost Inn hotels
included in this segment -- 43 hotels at June 30, 2004, as compared to 53 hotels
at June 30, 2003. Operating costs and expenses as a percentage of revenues for
the consolidated AmeriHost Inn hotels increased due primarily to increases in
certain costs during the first six months of 2004, including salaries and wages,
sales and marketing, energy and maintenance costs, partially offset by decreases
in insurance and real estate taxes.
Operating costs and expenses for the hotel development and construction segment
decreased as a result of the decrease in hotel development activity for the
first six months of 2004, compared to 2003. This decrease was offset by an
increase in other operating expenses due to personnel additions in the business
development area, as part of the Company's strategic business plan to accelerate
the pace of new hotel development, and the additional support needed for the
plan for hotel disposition. Operating costs and expenses in the hotel
development segment as a percentage of segment revenue increased during 2004 due
to the lower revenue from third party and joint venture development activity,
and the higher operating costs.
Hotel sales operating expenses increased as a result of the higher aggregate net
depreciated cost basis related to the sales of six wholly owned AmeriHost Inn
hotels during the first six months of 2004, versus the net depreciated cost
basis of the three wholly owned AmeriHost Inn hotels sold during the first six
months of 2003. The net depreciated cost basis is expensed upon consummation of
the sale.
Hotel management services segment operating costs and expenses decreased
primarily due to a focused effort to reduce costs and the restructuring
beginning in the third quarter of 2003, partially offset by the expansion of
sales and marketing activity designed to increase hotel revenues. Employee
leasing operating costs and expenses increased due to the increased payroll
costs during the six months ended June 30, 2004, compared to 2003.
Office building rental operating costs and expenses consisted primarily of
expenses related to the management of our office building. The decrease in
operating expenses from the first six months of 2003 to 2004 was due primarily
to a change in the allocation of certain of the office building costs among the
other operating segments. The new allocation method was adopted based on an
internal review to more accurately reflect the segment occupancy expense.
Depreciation and amortization expense decreased, primarily due to the
classification of certain assets as "held for sale," which properties were not
depreciated beginning in July 2003, the date of this determination, in
accordance with the relevant accounting literature, and the sale of consolidated
AmeriHost Inn hotels during the last twelve months. Consequently, the hotels
classified as "held for sale" were depreciated for all of the first six months
of 2003, if open, and not the first six months of 2004.
Leasehold rents - hotels decreased slightly during the first six months of 2004
compared to the first six months of 2003, due to the purchase of one leased
AmeriHost Inn hotel and the termination of another non-AmeriHost Inn hotel lease
upon its expiration during the third quarter of 2003, partially offset by annual
rent increases pursuant to the lease agreements.
-40-
Corporate general and administrative expense increased due primarily to
increases in professional fees, corporate finance staff, directors and officers
liability insurance, and non-cash director expenses in the form of restricted
stock. Professional fees include legal services, analytical and financial
consulting services incurred in connection with our ongoing discussions with PMC
and the related potential lease restructuring as well as investment banking
services in connection with reviewing the Company's business plan and related
strategies. As previously disclosed in prior SEC filings, we added a Vice
President of Finance in December 2003 to assist us in all aspects of corporate
accounting and financial analysis. Director expenses include director fees,
which were revised during the first quarter of 2003 to be competitive with other
public companies of a similar size, including non-cash compensation in the form
of restricted common stock.
The hotel impairment provision was recorded primarily in connection with our
plan for the disposition of certain hotel assets, as adopted in July 2003 that
we have marketed for sale as discussed above. The amount in 2004 represents
additional adjustments for certain AmeriHost Inn hotel assets to decrease the
carrying value of the assets to the anticipated market value, net of closing
costs, based on our most recent analysis and market information.
OPERATING INCOME BY SEGMENT. The following discussion of operating income by
segment excludes any corporate general and administrative expense and the
non-cash hotel impairment charges.
Operating loss from consolidated AmeriHost Inn hotels improved slightly, due
primarily to:
o the sale of consolidated AmeriHost Inn hotels during the past 12
months which operated with an operating loss;
o the decrease in depreciation expense due to the implementation of the
plan for hotel disposition;
o the decrease of certain expenses, including real estate taxes, and
insurance.
These factors were partially offset by:
o the sale of consolidated AmeriHost Inn hotels during the past 12
months which operated with operating income;
o the increase of certain expenses, including salaries and wages, sales
and marketing, maintenance, and energy.
We believe that aggregate hotel revenue growth is critical to improving the
results of our hotel operations. As such, if our revenue enhancement programs
are not successful, or if the economic recovery now underway is not sustained,
or if the recovery does not have a corresponding improvement in the lodging
industry and our hotels, it could have a significant, negative impact on our
results of operation and financial condition.
The hotel development and construction segment incurred a greater operating loss
during the first six months of 2004, versus 2003, due to the decrease in hotel
development and construction activity for third parties and minority-owned
entities during 2004, compared with 2003, and an increase in operating expenses.
The operating expenses increased due to personnel additions in the business
development area, as part of the Company's strategy business plan to accelerate
the pace of new hotel development, and the additional support needed for the
plan for hotel disposition.
Operating income from hotel sales increased due to the sale of six AmeriHost Inn
hotels at a greater total profit during the first six months of 2004, versus the
sale of three AmeriHost Inn hotels during the first six months of 2003.
The increase in hotel management services segment operating income during the
first six months of 2004 was due primarily to the decreased operating expenses
partially offset by an increase in sales and marketing expenses. Employee
leasing operating income increased, due primarily to the increase in revenue.
Office building rental operating income increased, attributable to the change in
allocation of expenses among our other business segments.
INTEREST EXPENSE. The decrease in interest expense during the six months ended
June 30, 2004 compared to six months ended June 30, 2003 was attributable to the
reduction in our overall level of debt as a result primarily of (i) the sale of
consolidated hotels and the use of proceeds to payoff the related mortgage debt
and a portion of our operating line-of-credit, and (ii) interest rate reductions
on floating rate debt, partially offset by the mortgage financing of newly
constructed or acquired consolidated hotels, and a higher interest rate on our
operating line-of-credit. Interest expense does not include interest incurred on
hotels under development and construction. We capitalize interest expense
incurred during the pre-opening construction period of a consolidated hotel
project, as part of the total development cost. The amount capitalized includes
both interest charges from a direct construction loan, plus interest computed at
our incremental borrowing rate on the total costs incurred to date in excess of
the construction loan funding.
-41-
GAIN ON SALE OF ASSETS. As part of our strategy to focus primarily on the
development and sale of new AmeriHost Inn hotels, we intend to sell all our
owned, non-AmeriHost Inn hotels. One of the unconsolidated non-AmeriHost Inn
hotels was sold during the first six months of 2004 and one consolidated
non-AmeriHost Inn hotel was sold in the first six months of 2003. Any gain or
loss on the sale of these hotels is reported as "equity in income (loss) of
affiliates," for unconsolidated joint ventures, or as "discontinued operations,"
for consolidated non-AmeriHost Inn hotels, in the period in which the sale is
consummated.
CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during the
six months ended June 30, 2004, compared to the six months ended June 30, 2003,
was primarily attributable to the improved operating results of the hotels owned
by the unconsolidated joint ventures. Distributions from affiliates were
approximately $39,000 during the six months ended June 30, 2004, compared to
approximately $9,000 during the six months ended June 30, 2003.
DISCONTINUED OPERATIONS. Discontinued operations includes the operations, net of
tax, of consolidated non-AmeriHost Inn hotels sold, or to be sold pursuant to
the plan for hotel dispositions, or leased with an accelerated termination date.
These non-AmeriHost Inn hotels are expected to be disposed of during the next
twelve months. Discontinued operations for the six months ended June 30, 2004
includes five hotels, compared to eight hotels during the six months ended June
30, 2003. In addition, discontinued operations includes approximately $943,000
and $862,000 during the six months ended June 30, 2004 and 2003, respectively,
in non-cash impairment charges pursuant to the plan of disposition. The
impairment amount included in 2004 relates primarily to one hotel which is over
25 years old with exterior corridors and will require a significant amount of
capital expenditures over the next few years. The operations of this hotel have
declined significantly over the past several months, as a result of a change in
brand affiliation and the addition of newer hotels in its local market. This
decline has had a negative impact on the value of the hotel, resulting in the
impairment charge. In addition, the hotel lease for a non-AmeriHost Inn hotel
was amended, which accelerated the termination date from 2010 to 2005, or
earlier. As a result, the depreciation of the leasehold improvements and
furniture, fixtures and equipment at this hotel was accelerated beginning
January 1, 2004 to reflect the revised termination date. Approximately $458,000
was recorded as incremental depreciation during the first six months of 2004
from the lease amendment. Exclusive of the impairment charges, and the
incremental depreciation, the pretax loss from the operations of the hotels
included in "discontinued operations" improved significantly, from a loss of
approximately $1.5 million during the six months ended June 30, 2003 to a loss
of approximately $329,000 during the six months ended June 30, 2004. This
improvement was the result primarily of the disposition of three non-AmeriHost
Inn hotels, each of which operated at a pretax loss during the six months ended
June 30, 2003.
OFF-BALANCE SHEET ARRANGEMENTS. Through wholly-owned subsidiaries, we are a
general partner or managing member in 15 joint ventures as of June 30, 2004. As
a general partner, we are secondarily liable for the obligations and liabilities
of these joint venture partnerships. As of June 30, 2004, these joint ventures
had $27.1 million outstanding under mortgage loan agreements, compared to $26.7
million for joint ventures as of December 31, 2003. Approximately $4.8 million
of this amount has been included in our consolidated financial statements as of
June 30, 2004, reflecting the debt owed by joint ventures in which we have a
majority or controlling ownership interest, leaving approximately $22.3 million
in off-balance sheet mortgage debt owed by unconsolidated joint ventures. If we
subsequently obtain a majority or controlling ownership interest in a joint
venture, or if we conclude that a joint venture meets the provisions of FIN 46R
as outlined below, the joint venture's debt will be included in our consolidated
financial statements. Of this $22.3 million of financing, we also have provided
approximately $18.7 million in guarantees to the lenders. Other partners have
also guaranteed $13.9 million of these financings, which may ultimately impact
the exposure on our guarantees. One unconsolidated joint venture mortgage loan
in the amount of approximately $1.7 million at June 30, 2004 matures on November
1, 2004. Unless the properties collateralizing the debt are sold, the remaining
joint venture mortgage loans mature after 2004. [See also "Liquidity and Capital
Resources" below.] In connection with our plan to increase hotel development
through joint ventures, we anticipate that the total off-balance sheet mortgage
debt on joint ventures in which we have an ownership interest, will increase.
The level of guarantees we provide on this debt may also increase accordingly,
however this will be determined on a project by project basis, and provided only
if deemed appropriate.
From time to time, we advance funds to these 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. Interest is accrued in all loans, and
paid to us periodically. The advances totaled $1.6 million at June 30, 2004, and
are included in investments in and advances to unconsolidated hotel joint
ventures in our consolidated financial statements. We expect the joint ventures
to repay these advances primarily from the sale of the related hotels, and cash
flow generated from hotel operations, however there is no guarantee that we will
recover the entire amount outstanding.
-42-
During the first quarter of 2004, a joint venture owning a non-AmeriHost Inn
hotel, in which we have a 50% ownership interest, amended its partnership
agreement. The amendment (i) provided for all future capital calls to be funded
by the other partner, with no funding obligation to us and without dilution of
our ownership interest, (ii) clarified our first priority distributions upon the
sale of the hotel, (iii) mandated that the hotel be marketed for sale, and (iv)
transferred the hotel management responsibilities to an affiliate of our joint
venture partner.
During the second quarter of 2004, we entered into an agreement with a joint
venture partner to pursue an offer by a third party to purchase the hotel from
the joint venture, which also provides for modifications, under certain
circumstances, to two other joint ventures with this partner. The joint ventures
are owned 25% by the Company and 75% by the joint venture partner and the joint
venture with the offer to purchase has assets of $2.0 million and liabilities of
$1.2 million as of June 30, 2004. The agreement provides that upon the sale of
the hotel, if consummated, the joint venture partner would receive a minimum
amount from the net proceeds, and any deficiency would be funded by us. Based on
the contemplated purchase price offered by the third party, the joint venture
partner's share of the net distributable proceeds upon the sale of the hotel
would be in excess of the minimum amount as stipulated in the agreement. We are
assessing whether or not this joint venture would be considered a Variable
Interest Entity in accordance with FIN 46R, and the value of the guarantee
computed in accordance with FIN45 was deemed immaterial. If the joint venture
partner receives the minimum amount under this agreement, the joint venture
partner's right to receive distributions from these other two joint ventures
will be limited. All three joint venture arrangements were further modified
subsequent to June 30, 2004, providing for the sale of all three hotels owned by
these joint ventures, with certain disproportionate distributions to be made
depending upon the order sold. Upon the sale of all three hotels, total
distributions to us and to the joint venture partner are expected to be
substantially the same as under the original joint venture agreements.
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," which addresses how a business
enterprise should evaluate whether or not it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of
Variable Interest Entities," which was issued in January 2003. We are required
to adopt the requirements of FIN 46R for interim periods ending after December
15, 2004. This Interpretation requires that we present any variable interest
entities in which it has a majority variable interest on a consolidated basis in
our financial statements. We are continuing to assess the provisions of this
Interpretation and the impact to us of adopting this Interpretation. Therefore
the following amounts may change based upon additional analysis. Due to the
adoption of this Interpretation, we expect that we will begin to present our
investments in three joint ventures in which we have a majority variable
interest, as determined in accordance with the provisions of this
Interpretation, on a consolidated basis in our financial statements beginning
with the consolidated financial statements issued for the quarterly period ended
December 31, 2004. The consolidation of these joint ventures is expected to add
approximately $7.2 million in assets and $5.6 million in liabilities to our
consolidated balance sheet. As of June 30, 2004, we had investments in, and
advances to, these joint ventures of approximately $1.6 million, which was
presented as such under the equity method of accounting in our consolidated
financial statements. We expect that we will continue to present all of our
other unconsolidated investments under the equity method.
LIQUIDITY AND CAPITAL RESOURCES
General
Our principal liquidity needs for the next twelve months are to:
o fund normal recurring expenses;
o meet debt service requirements including the repayment or refinancing
of approximately $2.4 million of hotel mortgage indebtedness that
matures within the twelve month period;
o meet the obligations under our operating line-of-credit, including the
$500,000 reduction on its maximum availability by February 28, 2005;
o meet lease payment obligations of approximately $5.4 million,
primarily to PMC Commercial Trust, subject to ongoing discussions as
described herein; and
o fund capital expenditures, primarily hotel and office building
improvements of approximately $1.5 million to $2.1 million on an
annual basis, based on our current portfolio;
-43-
To the extent available, we also need funds for the following growth activities:
o fund equity contributions on joint venture development projects; and
o for wholly-owned hotel development projects, if any, fund development
costs not covered under construction loans.
In addition, we are obligated to either facilitate the sale of a hotel owned by
PMC, or purchase it from PMC for a total purchase price of $2.6 million by
October 31, 2004, as extended. This hotel is currently under contract for sale
to a third party and the sale transaction is expected to be consummated prior to
October 31, 2004. We are currently in discussions with PMC, regarding several of
the specific terms within the lease agreements, and have entered into a
temporary sales letter agreement which addresses this obligation, however there
can be no assurance that this obligation will be terminated or extended if the
hotel is not sold to a third party by October 31, 2004. If the hotel is not sold
to a third party, and we choose not to purchase the hotel from PMC, our rent on
the entire 21 hotel portfolio will increase by approximately $127,000 per year.
In connection with our discussions with PMC, we entered into a temporary sales
letter agreement dated May 18, 2004. This agreement provides for the extension
of the final hotel sale to a third party, or purchase obligation by us, pursuant
to the January 2001 amendment, until October 31, 2004. If the hotel is not sold
to a third party by October 31, 2004, we would be subject to the rent increase
discussed above, or would need to purchase this hotel at the specified price,
using mortgage debt to be obtained and cash from operations or working capital,
if available. In either event, we will have no further obligation under the
January 2001 amendment. Upon the sale of this hotel, the individual hotel lease
would be terminated, and pursuant to this temporary agreement, PMC would receive
the sale proceeds, net of closing costs, plus a termination fee from us. If the
total proceeds to PMC, including the termination fee, are less than the
specified value contained in the original lease, the shortfall becomes our
obligation bearing interest at the rate of 8.5% on an annual basis, due May 1,
2005. If the total proceeds to PMC, including the termination fee, are more than
the specified value, the excess will be used to reduce the specified values for
the remaining leased hotels, which is the basis for the monthly rent payments.
Due to this modification, the lease was accounted for as a capital lease as of
June 30, 2004.
We expect to fund these liquidity needs and obligations using cash flows
generated by operations, particularly from hotel sales, and by financing
activities. Hotel revenue, hotel development fees, proceeds from the sale of
hotels, including fees received from Cendant, and other income from operations
are our principal sources of cash flow used to pay the hotel and corporate
operating expenses and obligations mentioned above. We also have a corporate
line-of-credit, however, the availability under this facility is decreasing from
its current maximum of $4.0 million to $3.5 million by the end of February 2005.
As of June 30, 2004 the line-of-credit had an outstanding balance of $3.25
million. We have engaged the investment banking/financial advisory firm of
Houlihan, Lokey, Howard & Zukin to review our business plan and related
strategies, and are assessing alternative sources of debt and equity financing,
including longer-term alternatives to our corporate line-of-credit, however,
there can be no assurance that we will obtain any such debt or equity financing
on acceptable terms, if any.
The net cash flow from the operations of many of our hotels has been
insufficient to support their related mortgage debt payments, or lease payments,
primarily to PMC, as well as necessary and ongoing capital expenditures. In
addition, our hotel development activity for joint ventures has also decreased
over the past two years, with only one joint venture project completed in 2003
and one joint venture project completed thus far in 2004. As a result, the cash
flow from all of our business segments, with the largest amount funded by the
sale of hotel properties, has been utilized to maintain liquidity and meet the
line-of-credit availability reductions. A smaller amount has been used for
investment in new hotel development.
We believe that during the next twelve months, in order to maintain our
liquidity, it is critical for us to continue to sell hotel properties. In
addition, we seek to increase income from our existing hotel properties by
focusing on new revenue enhancement opportunities, and aggressive cost controls.
For the first six months of 2004, we achieved an increase in same room hotel
operations revenue, primarily the result of higher occupancy rates, with average
room rates remaining stable. However, these increases were offset by higher
operating costs, primarily in the areas of salaries and wages, sales and
marketing, and maintenance. If the current economic recovery continues,
including the Midwestern U.S. economy where the recovery has lagged and where
our hotels are primarily located, and we are successful in controlling costs, it
should result in improved hotel operating margins. However, even with continued
moderate increases in hotel revenues, we anticipate that the net cash flow from
the operation of many of our hotels will still be insufficient to support their
financing costs and ongoing capital expenditures. We have also focused on
reducing our financing costs, including our current hotel lease payments for a
non-AmeriHost Inn hotel. In addition, we have been in discussions with PMC
requesting a reduction in our subsidiary's monthly lease payment related to 21
hotels, as well as other modifications.
Our principal liquidity needs for periods beyond twelve months are to fund
normal recurring expenses, debt service payments, lease payment obligations, and
ongoing capital expenditures. In addition, we will need to fund the cost of new
-44-
developments, property acquisitions, scheduled debt maturities, major
renovations, expansions and other non-recurring capital improvements. We expect
to satisfy these needs using one or more of the following:
o construction loans;
o long-term secured and unsecured indebtedness;
o revenue from all our operating segments, including hotel development
and sales of real estate;
o joint ventures;
o issuances of additional common stock and/or other equity securities;
and
o our revolving line of credit.
In addition to meet our normal operational and growth oriented liquidity needs,
other contingencies may also have a significant impact on us, including the
impact of seasonality on our hotel operations and hotels sales, and the
inability to pay off mortgage loans when maturing. See "Risk Factors" below and
in our Report on Form 10-K for the year ended December 31, 2003.
Our hotels are seasonal in nature, with the second and third calendar quarters
being the strongest from a cash flow standpoint, and the fourth and first
calendar quarters being the weakest. In addition, the buyers of our hotels tend
to purchase hotels on a seasonal basis, wanting to acquire the property just in
time for the stronger summer season. As the sale of hotel properties is a
critical part of our liquidity, our inability to sell during the winter months
could have a negative impact on our liquidity, if we do not generate strong cash
flow from our other segments, or if we do not have adequate financing sources.
We believe our revenues, together with proceeds from financing activities, will
continue to provide the necessary funds for our short-term liquidity needs.
However, material changes in these factors, including factors that could inhibit
our ability to sell hotels under acceptable terms and within certain time
frames, or ability to secure new hotel level or corporate level debt, or joint
venture equity, may adversely affect net cash flows. Such changes, in turn,
would adversely affect our ability to fund debt service, lease obligations,
capital expenditures, and other liquidity needs. In addition, a material adverse
change in our cash provided by operations may affect the financial performance
covenants under our unsecured line of credit and certain mortgage notes.
Cash Flow Summary
The following summary discussion of our cash flows is based on the consolidated
statements of cash flows in "Item 1 - Financial Statements."
Cash and cash equivalents were approximately $4.0 million and $3.6 million at
June 30, 2004 and December 31, 2003, respectively, or an increase of
approximately $0.4 million. The increase was a result of the following increases
and decreases in cash flows:
Six Months ended June 30,
(in thousands)
----------------------------------
Increase
2004 2003 (Decrease)
-------- -------- ----------
Net cash provided by operating activities $ 13,142 $ 8,310 $ 4,832
Net cash used in investing activities (429) (3,136) 2,707
Net cash used in financing activities (12,338) (4,939) (7,399)
-------- -------- --------
Increase in cash $ 375 $ 235 $ 140
======== ======== ========
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Cash provided by operating activities
We have four main sources of cash from operating activities:
o revenues from hotel operations;
o revenues from the sale of hotel assets;
o fees from development, construction and renovation projects, and
o hotel development incentive fees and royalty sharing pursuant to the
Cendant transaction.
To a lesser extent, we have these additional sources of cash from operating
activities:
o fees from management contracts,
o fees from employee leasing services, and
o rental income from the ownership of an office building.
Hotel operations
Approximately 10% of our hotel operations revenue not received at checkout 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.
We have implemented a number of initiatives to increase revenue at our hotels,
including Internet and local marketing programs. In addition, we have
implemented cost control initiatives, especially in the areas of labor,
insurance, utilities, and maintenance, which are the areas that have increased
significantly over the past few years. We have started to implement energy
control systems at a few hotels and anticipate expanding this program. In
addition, we initiated a new property and casualty insurance program in the
fourth quarter of 2003, which has resulted in significant decreases in this
cost. We have entered into discussions with PMC with the objective to improve
the operating results and cash flow generated by these leased hotels through a
permanent reduction in the monthly lease payment. Currently, our subsidiary's
lease obligation for these 21 hotels is approximately $5.3 million per year,
significantly greater than the operating cash flow generated from these hotels
before the rent payment (for a more detailed description of the PMC transaction,
see "Executive Overview" above). However, there can be no assurance that we will
be successful in any such restructuring, or that a restructuring will result in
improved operational results for these hotels.
Sale of hotels
We typically receive 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. However, in certain instances, we have
provided seller financing in the form of a note to the buyer with specified
interest and repayment terms.
During the first six months of 2004, net proceeds from the sale of six wholly
owned AmeriHost Inn hotels, after the payoff of the related mortgage debt was
$3.7 million. We intend to continue to sell hotels, as discussed above under
"Hotel Disposition Plan and Restructuring." However, there can be no assurance
that we will be able to sell hotel assets under terms acceptable to us, and the
timing and estimated proceeds from any such sales could differ materially from
that anticipated.
Historically, we have experienced greater activity in hotels for sale from
prospective buyers during the second and third calendar quarters, versus the
first and fourth quarters, consistent with the seasonality of the hotel
operations. The timing of hotel sales can be affected by numerous factors, many
of which are beyond our control. For example, many of our historical buyers
obtain debt financing under various U.S. Small Business Administration ("SBA")
loan guarantee programs. Due to federal budget issues, certain SBA programs, and
all loans being underwritten and documented under this program, can be
significantly delayed. The seasonality of the hotel sales, as well as the delays
from numerous factors, including buyer financing, can create significant
liquidity issues for us, especially at times when our hotel operations cash flow
may be minimal or negative, after debt service and lease obligations, as during
the winter months.
-46-
Currently, we expect to realize net cash proceeds of approximately $2.6 to $2.9
million from the sale of the remaining hotels in our strategic plan for hotel
disposition, after the payoff of the related mortgage debt, and exclusive of any
Cendant fees. Five hotels are currently under contract for sale, which are
expected to be consummated within the next six (6) months. Under the terms of
the contracts, these anticipated sales are expected to generate approximately
$12.1 million in gross proceeds and the reduction of mortgage debt of
approximately $11.3 million. However, there can be no assurance that these hotel
sales will be consummated as anticipated. Any forecasted amounts from these
sales could differ from the final amounts included in the Company's quarterly
and annual financial statements when issued.
Hotel development
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 our construction draws, we typically do not pay our contractors until
we receive our draw from the equity or lending source.
Developing hotels for joint ventures in which we have an ownership interest, and
third parties, has historically provided stronger returns and cash flow,
compared to the longer term returns from developing and operating hotels for our
own account. In addition, our equity contribution is much less for a joint
venture development project, as most of the cash equity is contributed by our
partners. However, many of the same factors affecting hotel operations, as
discussed above, have also had an impact on our ability to develop hotels for
third parties and for joint ventures, and as a result, this development activity
has declined from 2001 to 2004. Our business plan is focused on expanding hotel
development for joint ventures beginning in 2004, accelerating further in 2005
and beyond. An improving economy and increasing demand for hotel lodging will
assist us in achieving our hotel development objectives. We currently have
several sites in the pre-construction development phase, to be utilized for
joint venture projects. For one hotel project, we have secured the land, we have
a commitment from a joint venture partner to fund the majority of the initial
equity contribution, and we have a mortgage loan commitment for the remaining
development cost. We also have four other land parcels under contract to
purchase, where we are completing our due diligence on these sites prior to
acquisition, and are negotiating purchase contracts for additional sites, to be
used for hotel development projects. We anticipate that our joint venture
partners will fund the majority of the equity contribution required for these
projects. Our goal is to significantly increase this activity in the future,
provided that we can find acceptable sites to locate the hotels, find acceptable
joint venture partners with sufficient equity, maintain sufficient liquidity to
make our share of capital contributions, as needed, and that the joint venture
can obtain the necessary mortgage debt financing on acceptable terms.
Fees from Cendant
The development incentive fee from Cendant is a one-time fee typically received
within 20 days of the simultaneous closing of the sale of an AmeriHost Inn hotel
and the execution by the buyer of a franchise agreement with Cendant, including
all proper documentation, and subject to certain conditions. Royalty sharing
payments from Cendant are received monthly, based on the actual royalty payments
received by Cendant from all AmeriHost Inn hotel franchisees, except those
operated by us.
We received approximately $1.1 million and $919,000 from AmeriHost Inn hotels
sold during the six months ended June 30, 2004 and 2003, respectively, in
development incentive fees. These fees may be refundable to Cendant if the buyer
of our AmeriHost Inn hotel defaults under their franchise agreement with Cendant
during the first 76 months. However, any such amounts due would be reduced by a
portion of any damages recovered by Cendant and would only be paid by us an
offset against future fees earned. To date, there have been no defaults, and we
have not had to repay any incentive fees.
We recognized royalty sharing fees revenue from Cendant in the amount of
approximately $163,000 in the first six months of 2004, compared to
approximately $131,000 during the first six months of 2003, which is based on
the royalty fees Cendant receives for all non-Arlington Hospitality AmeriHost
Inn hotels in their franchise system. We will receive royalty sharing payments
through 2025 under the terms of the agreement with Cendant, including fees from
AmeriHost Inn hotels that are not developed or operated by us. While we expect
this cash flow to increase as the AmeriHost Inn brand is expanded, there can be
no assurance that Cendant will be able to sell additional AmeriHost Inn
franchises, or that we will be able to sell existing or newly developed
AmeriHost Inn hotels to third party operators.
-47-
Cendant must approve the franchise applications of the buyers of our AmeriHost
Inn hotels, which approval is based solely on Cendant's evaluation of the
buyers' experience and ability to effectively operate the hotels, the physical
condition of the hotels, and other factors. If we choose to sell an AmeriHost
Inn hotel, where the buyer does not execute an AmeriHost Inn franchise
agreement, we may be subject to liquidated damages to Cendant under our
franchise agreements, which is computed as a percentage of room revenue or a
fixed amount per room, and their would be no incentive fee nor ongoing revenue
sharing fees paid to us by Cendant.
Other sources
We receive management fees and employee leasing fees which result in a
relatively smaller amount of cash flow, after the payment of related expenses in
comparison to the activities discussed above. These fees and cash flow could
increase as we develop and manage more hotels for joint ventures, as
anticipated. In addition, we receive rental income from the other tenants in our
office building. Owning our office building assists us in minimizing our own
corporate headquarter occupancy costs.
Cash used in investing activities
Cash is used in investing activities to fund acquisitions, invest in joint
ventures, to make loans to affiliated hotels for the purpose of construction,
renovation and working capital, for new hotel development, for recurring and
nonrecurring capital expenditures, and from time to time, for the purchase of
our own common stock. We selectively invest in new projects that meet our
investment criteria and enable us to take advantage of our development and
property management skills.
Cash used in investing activities for the six months ended June 30, 2004 and
2003, consisted of the following:
(in thousands)
----------------------
2004 2003
-------- --------
Investments in unconsolidated joint ventures, net
of distributions and collections on advances
from affiliates $ 414 $ (185)
Purchase of property and equipment (940) (3,774)
Issuance of notes receivable, net of collections 97 (139)
-------- --------
Total $ (429) $ (4,098)
======== ========
The purchase of property and equipment includes all ongoing capital expenditures
as well as approximately $3.2 million for construction, furniture and fixtures
costs incurred in the first six months of 2003 for three new hotel projects,
which opened in 2003. We were not constructing any hotels for the Company's own
account during the first six months of 2004. We expect these costs to be lower
than historically, as we focus on new development for joint ventures and others.
From time to time, we advance funds to these joint ventures for working capital
and renovation projects. During the first six months of 2004, we collected
approximately $444,000 from joint ventures in which we are a partner, net of
advances, which were initially advanced primarily for working capital purposes,
including the repayment of advances as a result of the sale of one hotel. We
expect the joint ventures to repay the outstanding advances primarily through
the sale of the hotel, and cash flow generated from hotel operations, however in
certain cases, we may not realize the entire amounts advanced. We anticipate
that these advances will be repaid to us prior to any distributions to our
partners. In 2004, we expect to continue advancing funds to certain joint
ventures for working capital purposes. If we do not continue to support these
joint ventures for working capital needs and debt service, it may create
defaults under their mortgage agreements, which in most cases have been
guaranteed by us.
In addition, during the first six months of 2004, we invested approximately
$189,000 in new and existing joint ventures, and received approximately $39,000
in distributions from joint ventures.
-48-
Cash used in financing activities
Cash used in financing activities was $12.3 million during the six months ended
June 30, 2004, compared to $4.9 million during the six months ended June 30,
2003, summarized as follows:
(in thousands)
----------------------
2004 2003
-------- --------
Principal Payments on long-term debt $(11,729) $ (7,735)
Net proceeds (repayments) on operating line of
credit (600) (1,984)
Common stock repurchases -- --
Distributions to minority interests (180) (90)
The cash used in financing activities was
partially offset by: --
Proceeds from issuance of long-term debt -- 4,744
Issuance of common stock 171 126
-------- --------
Total $(12,338) $ (4,939)
======== ========
Principal payments on long-term debt include the payoffs of mortgages upon the
sale of hotel properties of approximately $10.5 million the first six months of
2004, and $6.6 million in the first six months of 2003. We paid off 10 hotel
mortgages in 2003, and six additional hotel mortgages in the first six months of
2004. Proceeds from the issuance of long-term debt includes $-0- in 2004 and
$4.7 million in 2003, as a result of opening three newly constructed
consolidated AmeriHost Inn hotels during 2003. Future hotel development is
dependent upon our ability, or our joint ventures' ability, to attain mortgage
debt financing. Lenders typically advance mortgage debt at the rate of 60% - 75%
of total project value. Assuming the total value of a new hotel development is
$5.0 million, the typical mortgage loan amount would range from $3.0 million to
$3.75 million. There can be no assurance that we, or our joint ventures, will be
able to obtain such mortgage financing on acceptable terms, to support our
growth objectives.
Our board of directors has authorized a common stock buy back, at any time and
without notice, of up to 1,000,000 shares under certain conditions and
consistent with securities laws governing these buybacks. In addition, in 2003
we executed a reverse-forward stock split whereby the shares held by
shareholders owning less than 100 shares on the effective date were redeemed and
converted into the right to receive cash from the Company. The shareholders
owning at least 100 shares were not impacted. As a result of the reverse-forward
split, approximately 33,000 shares were converted to the right to receive $3.83
per share, or a total of approximately $128,000, of which approximately $22,000
was funded through December 31, 2003 and approximately $23,000 was funded during
the first six months of 2004. We consider the reverse-forward split a one-time
transaction, and we do not anticipate a similar transaction in the foreseeable
future. All shares that we have repurchased or redeemed have been retired.
Mortgage Debt
Historically, we have used local, regional, and national lenders to finance
hotel projects. Mortgage financing is a critical component of the hotel
development process and we are continually seeking financing sources for new
construction and long term permanent mortgage financing to assist us in the
development of AmeriHost Inn hotels.
The table below summarizes our mortgage notes payable as of June 30, 2004 and
December 31, 2003:
(in thousands)
--------------------------
June 30, December 31,
2004 2003
-------- ------------
Outstanding balance:
Fixed rate $ 20,747 $ 22,678
Variable rate 32,702 42,500
-------- --------
Total $ 53,449 $ 65,178
======== ========
-49-
(in thousands)
--------------------------
June 30, December 31,
2004 2003
-------- ------------
Percent of total debt:
Fixed rate 38.82% 34.79%
Variable rate 61.18% 65.21%
-------- --------
Total 100.0% 100.00%
======== ========
Weighted average interest rate at
end of period:
Fixed rate 7.57% 7.60%
Variable rate 5.14% 5.64%
-------- --------
Total 6.02% 6.24%
======== ========
The variable rate debt shown above bears interest based on various spreads over
the Prime Rate or the London Interbank Offered Rate. The Company's plan to sell
certain hotel assets is expected to result in the payoff of the related mortgage
debt in the amount of approximately $29.2 million, which has been classified in
current liabilities in the accompanying consolidated balance sheet as of June
30, 2004. This amount includes (i) one hotel loan in the amount of $1.5 million
with a maturity date of August 30, 2004, which can be extended to December 31,
2004, if needed, (ii) one hotel loan in the amount of $908,000 which matures in
January 2005, and (iii) approximately $1.0 million in principal payments which
are contractually due within the next twelve months regardless of the plan for
hotel disposition. The hotel with the mortgage loan maturing in August 2004, is
currently under contract for sale as part of our plan for hotel disposition,
with the proceeds to be used to payoff the mortgage loan. Since the net proceeds
from the sale is expected to be less than the mortgage balance, the lender has
agreed to a reduced payoff amount, contingent upon the consummation of the sale,
and has indicated that the maturity date would be extended, if needed, to allow
sufficient time for a sale transaction to close. However, there can be no
assurance that a sale will be consummated. We also expect the hotel mortgage
loan which matures in January 2005 to be repaid prior to maturity with proceeds
from the sale of the hotel, as it is also being actively marketed as part of our
plan for hotel disposition. If these hotels are not sold by their maturity
dates, we are currently obligated to payoff the mortgage notes using funds from
other sources, if available, including mortgage refinancings with other lenders,
or if not paid off, we would be in default of the mortgage agreements, absent
any other agreement with these lenders. There can be no assurance that these
hotels will be sold by their loan maturity dates, or that alternative financing
will be available if needed. If these hotels are not sold prior to their loan
maturity dates, and absent an extension by the current lenders, or a refinancing
with another lender, it could have a significant impact on our liquidity.
With respect to our office building mortgage and mortgages on hotels that are
not held for sale, approximately $1.1 million is classified in current
liabilities, which is the principal amortization due within the next twelve
months. The office building in which our headquarters is located, has a mortgage
loan which matures January 1, 2006, and bears interest at the floating rate of
either prime minus 0.25% or LIBOR plus 2.25%, as determined by us.
Certain of our hotel mortgage notes and our office building mortgage note
contain financial covenants, principally minimum net worth requirements, debt to
equity ratios, and minimum debt service coverage ratios. These financial
covenants are typically measured annually, based upon our fiscal year end. We
were in compliance with all covenants as of June 30, 2004. However, the mortgage
loan agreements for three wholly owned hotels with an aggregate outstanding
balance of approximately $6.6 million are subject to certain financial covenants
for the year ended December 31, 2004. Unless the results of operations at these
hotels improve during the remainder of 2004, we believe that we may not be able
to satisfy these financial covenants, absent a waiver from the lenders. All
three of these hotels are currently being actively marketed for sale in
connection with our strategic plan to sell hotel assets, with one subject to an
executed sale contract. As such, the mortgage balances are included as current
liabilities, under the caption "Liabilities of assets held for sale" in the
accompanying consolidated financial statements. If we are unable to satisfy the
financial covenants, and have not otherwise obtained a waiver with respect to
these financial covenants, refinanced the indebtedness or sold the underlying
property with the proceeds used to payoff the mortgage, by December 31, 2004, a
lender may be able to exercise their rights and remedies under the respective
mortgage loan agreements, including, without limitation, the right to accelerate
the then-outstanding loan balances.
-50-
Other Mortgage debt guaranteed by the Company
We are a general partner or managing member in 15 joint ventures as of June 30,
2004, 12 of which had mortgage debt. The following is a summary of the mortgage
debt held by the various types of joint ventures:
(in thousands)
-------------------------------------------------------
No. of hotels Balance Outstanding Guarantee Balance
------------- ------------------- -----------------
Consolidated joint ventures
in which we have a majority
or controlling interest 2 $ 4,760 $ 952
Unconsolidated joint ventures
in which we are a general partner 1 1,766 1,266
Unconsolidated joint ventures
in which we are a managing
member of a limited liability company 9 20,541 16,467
-------- -------- --------
12 $ 27,067 $ 18,685
======== ======== ========
The mortgage balances for the two consolidated joint ventures have been included
in "liabilities of assets held for sale - other brands" in our consolidated
balance sheet as of June 30, 2004.
The mortgage balances for the unconsolidated joint ventures have not been
included in our consolidated balance sheet. Other partners have also guaranteed
a portion of these financings, which may ultimately reduce the exposure on our
guarantees.
Approximately $6.2 million of the mortgage debt with unconsolidated joint
ventures relates to four properties that have been identified to be sold as part
of our strategic hotel disposition plan. One mortgage in the amount of
approximately $1.7 million matures in November 2004. This mortgage had matured
on November 1, 2003, however the lender extended the maturity for one year, and
waived a covenant violation for the minimum debt service coverage ratio for
2003. This hotel is included in the hotel disposition plan, with the net
proceeds to be used to pay off the mortgage. However, if the joint venture is
unable to sell the hotel prior to the loan maturity, on acceptable terms, and if
the lender is unwilling to extend the maturity date of the loan, or if
acceptable alternative financing is not available, it could create a default on
behalf of the joint venture whereby the lender would look to us for repayment of
the loan under our guarantee, possibly creating significant liquidity issues for
us (see also, "Off Balance Sheet Arrangements").
Operating line-of-credit
At June 30, 2004, we had $3.25 million outstanding under our operating
line-of-credit with LaSalle Bank NA. During the second quarter, we executed a
one-year renewal with LaSalle Bank for this facility through April 30, 2005 at
an initial maximum availability of $4.0 million. The reduction from the previous
level of $5.5 million was the result of the sale of two hotel properties during
the first quarter of 2004 with the proceeds used to pay down the line of credit
balance. In addition, the terms require that the maximum availability under the
facility be reduced to $3.5 million on February 28, 2005, and also provides
LaSalle Bank with the right to reduce the maximum availability further, based on
future hotel sales, or as deemed necessary. The renewed facility bears interest
at the rate of 10% per annum, and is collateralized by substantially all the
assets of the Company, subject to first mortgages from other lenders on hotel
assets. The credit line provides for the maintenance of certain financial
covenants, including minimum tangible net worth, a maximum leverage ratio,
minimum debt service coverage ratio, and minimum net income.
We are pursuing longer term financing options with other lenders that are
consistent with our business plan of developing, building and selling AmeriHost
Inn hotels. We have engaged the investment banking/financial advisory firm of
Houlihan, Lokey, Howard & Zukin to review the Company's business plan and
related strategies including obtaining new debt or equity financing, as needed.
However, there can be no assurance that we will obtain an alternative credit
facility of longer duration or other debt or equity financing, under terms and
conditions that we deem satisfactory, if at all.
-51-
Lease Purchase Obligation
Under the terms of our existing arrangement with PMC, if we do not either
facilitate the sale to a third party, or purchase from PMC, one of our leased
hotels at a price of approximately $2.6 million by October 31, 2004, as
extended, a rent increase of approximately $127,000 on an annual basis, becomes
effective. This hotel is currently under contract for sale to a third party, and
the transaction is expected to be consummated prior to October 31, 2004. If the
hotel is not sold to a third party, we would be subject to the rent increase, or
we would need to purchase this hotel at the specified price using a combination
of mortgage debt, the source of which has not yet been identified, and cash from
operations or working capital, if available. In either event, we will have no
further hotel purchase obligation under the PMC Agreement. As discussed in the
"Executive Overview - hotel and corporate level financing," we are in the
process of addressing this purchase obligation, including the execution of a
temporary sales letter agreement with PMC, as part of our ongoing discussions
with PMC, however there can be no assurance that an alternative agreement will
be in place prior to October 31, 2004, or that such an alternative agreement
will include an extension of this obligation, if needed.
SEASONALITY
The lodging industry, in general, is seasonal by nature. Our 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 many of our hotels are located, as well as general business and leisure
travel trends. This seasonality can be expected to continue to cause quarterly
fluctuations in our revenues. Quarterly earnings also may be adversely affected
by events beyond our 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 our management fees are based upon a percentage
of the hotel's total gross revenues, we are further susceptible to seasonal
variations. We have also experienced greater interest in hotel sales from
prospective buyers during the second and third calendar quarters, consistent
with the seasonality of hotel operations.
GOVERNMENT REGULATION
The impact of government regulations, and related risks, are discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2003, and
should be read in conjunction with this quarterly report on Form 10-Q.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," which addresses how a business
enterprise should evaluate whether or not it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of
Variable Interest Entities", which was issued in January 2003. The Company is
required to adopt the requirements of FIN 46R for interim periods ending after
December 15, 2004. This Interpretation requires that the Company present any
variable interest entities in which it has a majority variable interest on a
consolidated basis in its financial statements. The Company is continuing to
assess the provisions of this Interpretation and the impact to the Company of
adopting this Interpretation. Therefore the following amounts may change based
upon additional analysis. Due to the adoption of this Interpretation, the
Company expects that it will begin to present its investments in four joint
ventures in which it has a majority variable interest, as determined in
accordance with the provisions of this Interpretation, on a consolidated basis
in its financial statements beginning with the consolidated financial statements
issued for the quarterly period ended December 31, 2004. The consolidation of
these joint ventures is expected to add approximately $7.2 million in assets and
$5.6 million in liabilities to the Company's consolidated balance sheet. As of
June 30, 2004, the Company had investments in, and advances to, these joint
ventures of approximately $1.6 million, which was presented as such under the
equity method of accounting in the accompanying consolidated financial
statements. The Company expects that it will continue to present all of its
other unconsolidated investments under the equity method.
SUBSEQUENT EVENTS
Subsequent to June 30, 2004, the Company sold one wholly owned non-AmeriHost Inn
hotel at an immaterial gain with approximately $1.4 million of mortgage debt
assumed by the buyer of the hotel. This sale transaction will be reported in the
Company's third quarter 2004 statement of operations.
-52-
We have three hotel joint ventures, whereby we own 25% and the same joint
venture partner owns 75% of each venture. The joint venture agreements require
the approval of both partners with respect to the sale of the hotels. In July
2004, we and the joint venture partner entered into a supplemental agreement
that provides for the sale of each of the three hotels, under certain
circumstances, which is consistent with our strategic plan for hotel
disposition. Depending upon the order in which the hotels are sold, certain
disproportionate distributions may be made to the joint venture partner upon the
sale of a hotel, with an offsetting reduction in distributions to the joint
venture partner upon the sale of the remaining hotel(s). Upon the sale of all
three hotels, total distributions to us and to the joint venture partner are
expected to be substantially the same as under the original joint venture
agreements. Based upon the initial analysis, we expect that two of these joint
ventures will be considered variable interest entities in accordance with FIN
46R, and will be consolidated in our financial statements upon adoption of FIN
46R. We are required to adopt FIN 46R for interim periods ending after December
15, 2004. The consolidation of the two joint ventures is expected to add $3.8
million in assets and $3.6 million in liabilities to the consolidated financial
statements as of December 31, 2004.
In connection with our discussions with PMC to restructure the leases for 21
hotels, the temporary letter agreement which deferred the payment of a portion
of the monthly rent for the months of March through July 2004, was extended
through August 31, 2004.
RISK FACTORS
The following important factors, among others, have affected, and may in the
future continue to affect, our business, results of operations and financial
condition, and could cause our operating results to differ materially from those
expressed in any forward-looking statements made by us or on our behalf
elsewhere in this report. These risk factors should be read in conjunction with
the risk factors set forth in our Annual Report on Form 10-K for the year ended
December 31, 2003, and our Report on Form 10-Q for the three months ended March
31, 2004 under the heading "Management's Discussion and Analysis - Risk
Factors."
We have substantial debt and lease obligations, which could limit our
flexibility or otherwise adversely affect our financial condition.
We have a significant amount of debt and obligations under long-term leases,
such as the leases with PMC, requiring us, or our subsidiaries, to dedicate a
substantial portion of our, or their, cash flow from operations to make these
required payments. These payments reduce the cash flow otherwise available to
fund capital expenditures, expansion efforts and other general corporate needs.
For the last three years our cash flow from hotel operations, after the payment
of mortgage debt service, lease obligations, and ongoing capital expenditures,
has been negative and we have used the proceeds from the sale of hotels to
primarily fund these payments and other operational expenses. There is no
assurance that we will generate positive cash flow from hotel operations. If our
hotel operating cash flow or other sources of cash is not sufficient to fund our
expenditures or to make our debt and lease payments, we will have to raise
additional funds through:
o the sale of capital stock;
o additional borrowings; or
o selling a greater number of assets and sooner than planned.
We cannot assure you that any of these sources would be available to us on
acceptable terms, if at all. An inability to fund our operating or capital
needs, including our debt and lease payments, would have a material adverse
effect on our results of operations and financial condition. Further, pursuant
to the renewal of our existing line-of-credit for a one-year period, the
proceeds from the sale of hotel properties was used to repay draws on the line
as the maximum availability on this credit facility decreased to $4.0 million
from $5.5 million. In addition, the maximum availability will be further reduced
to $3.5 on February 28, 2005. There is no assurance that this line will be
sufficient to meet our needs or that we would be able to obtain a replacement
line on terms and conditions acceptable to us, if at all.
Additionally, our loan facility for new construction expired on October 31,
2003. If we are unable to obtain alternative new construction financing, or
other hotel debt arrangements, on acceptable terms, our ability to develop new
hotels will be significantly limited and our future prospects will be adversely
affected.
-53-
If we are not able to restructure our lease agreements with PMC Commercial
Trust, our financial results may suffer.
One of our wholly-owned subsidiaries is the lessee for 21 hotels with PMC. We
have guaranteed the obligations under these leases. To date, we have been making
a significant portion of the lease payments for our subsidiary, since the cash
flow generated by these hotels has been insufficient to cover the annual lease
payment obligation of approximately $5.3 million. On March 12, 2004, we and our
subsidiary entered into an interim agreement with PMC. This interim agreement,
as extended, temporarily deferred a portion of the March through July 2004
payments required under the leases. The full rent payment was made for August
2004. This interim agreement has been extended through August 31, 2004, and
provides for the payment of the deferred portions to PMC in four equal monthly
installments beginning September 1, 2004. If this interim agreement is not
renewed or extended, or a revised agreement not entered into, the terms of the
original agreement will return in effect. Thus, if the operations of the hotels
subject to the leases do not improve sufficiently, we will either have to
continue subsidizing the lease payments or take other actions to restructure the
leases. Any such actions could cause us to default under other credit agreements
or our agreement with Cendant. Any such default would have a material adverse
effect on our results of operations, financial condition and prospects.
Additionally, the lease provides for the sale of eight unidentified hotels to
third parties or to the Company under specified terms. The lease provides for
four increases in rent payments of 0.25% each, if these hotels are not sold to a
third party or purchased by us by the dates specified. As of June 30, 2004, the
first three scheduled rent increases were avoided due to the sale of hotels by
PMC to us. The fourth 0.25% increase of approximately $127,000 on an annual
basis becomes effective if we do not either facilitate the sale to a third
party, or purchase from PMC, one specified hotel at a price of approximately
$2.6 million by October 31, 2004. We have entered into a temporary sales letter
agreement which addresses this obligation. However, if the hotel is not sold to
a third party by October 31, 2004, there can be no assurance that we will be
able to extend the obligation on favorable terms. Failure to extend the
obligation, if needed, may have a material adverse effect on our results of
operations, financial condition and prospects.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our long-term debt obligations. We have some cash flow exposure on our long-term
debt obligations to changes in market interest rates. We primarily enter into
long-term debt obligations in connection with the development and financing of
hotels. We maintain a mix of fixed and floating debt to mitigate our exposure to
interest rate fluctuations. We do not enter into any market risk sensitive
investments for trading purposes.
Our management believes that fluctuations in interest rates in the near term
would not materially affect our consolidated operating results, financial
position or cash flows as we have limited risks related to interest rate
fluctuations.
The table below provides information about financial instruments that are
sensitive to changes in interest rates, for each interest rate sensitive asset
or liability as of June 30, 2004. As the table incorporates only those exposures
that existed as of June 30, 2004, it does not consider those exposures or
positions that 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 $ 3,250,000 10.00%
Mortgage debt - fixed rate $ 20,747,447 7.57%
Mortgage debt - variable rate $ 32,701,488 5.14%
If market rates of interest on our variable debt increased by 10%, the increase
in interest expense on the variable rate debt would be approximately $168,000
annually.
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ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, as amended) as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that these disclosure controls and procedures were effective.
Additionally, there has been no change in our internal control over financial
reporting during our most recent fiscal quarter that has materially affected, or
is reasonably likely to materially affect, our internal control over financial
reporting.
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PART II
ITEM 2. CHANGES IN SECURITIES; USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY.
The following table sets forth information regarding shares of our common stock
that we repurchased during the six months ended June 30, 2004.
Total No. Of Shares Maximum No. Of Shares
Total No. Purchased as Part Of That May Yet Be
Of Shares Average Price Publicly Announced Purchased Under the
Period Purchased(1) Paid Per Share(2) Plans or Programs Plans or Programs(3)
------ ------------ ----------------- -------------------- ---------------------
April 2004 170 $3.83 170 21,873
May 2004 272 $3.83 272 21,601
June 2004 58 $3.83 58 21,543
- ------------
(1) All of the purchases in the table were made pursuant to our reverse forward
stock split, which was approved by our stockholders on October 29, 2003 and
announced on October 30, 2003. The transaction was effective on November
28, 2003, and the holdings of all affected shareholders were converted to a
right to receive cash as of this date, and the redemption of the related
shares was recorded in 2003. However, certain redemption payments were
still being made in 2004 as indicated above.
(2) The price per share cashed out as a result of the reverse-forward stock
split was $3.83, the average official closing price of our common stock on
the Nasdaq National market over the thirty trading days immediately
preceding the effective date of the split, which was November 28, 2003.
(3) Does not include up to 963,200 shares, which may be repurchased pursuant to
the Company's common stock buyback authorization (see "Management's
Discussion and Analysis - Liquidity and Capital Resources" under the
subheading "cash used in financing activities").
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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)
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 between Arlington Hospitality, Inc.
and AmeriHost Inn Franchising Systems, Inc. (a subsidiary of
Cendant Corporation)
10.11 Royalty Sharing Agreement between Arlington Hospitality, Inc.
and AmeriHost Inn Franchising Systems, Inc. (a subsidiary of
Cendant Corporation)
10.12 Development Agreement between Arlington Hospitality, Inc. and
AmeriHost Inn Franchising Systems, Inc. (a subsidiary of
Cendant Corporation)
The following exhibits were included in the Registrant's Report on Form 10-Q
filed November 14, 2002:
Exhibit No. Description
- ----------- -----------
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 exhibit was included in the Registrant's Report on Form 10-K filed
March 31, 2003:
Exhibit No. Description
- ----------- -----------
10.14 Line of credit agreement with LaSalle Bank, NA
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The following exhibits were included in the Registrant's Proxy Statement for
Annual Meeting of Shareholders filed on September 26, 2003, and are incorporated
by reference herein:
Exhibit No. Description
- ----------- -----------
3.2 Seventh Certificate of Amendment of Restated Certificate of
Incorporation of Arlington Hospitality, Inc., attached as
exhibit F
3.3 Eighth Certificate of Amendment of Restated Certificate of
Incorporation of Arlington Hospitality, Inc., attached as
exhibit G
10.15 2003 Non-Employee Director Restricted Stock Plan, attached as
exhibit D
10.16 2003 Long Term Incentive Plan, attached as exhibit E
The following exhibits were included in the Registrant's Report on Form 10-Q
filed November 14, 2003:
Exhibit No. Description
- ----------- -----------
3.4 By-laws of Arlington Hospitality, Inc. as revised on September
8, 2003
3.5 Amendment to By-laws of Arlington Hospitality, Inc. dated
September 8, 2003
10.17 Employment agreement between Arlington Hospitality, Inc. and
Stephen Miller dated July 25, 2003
10.18 Amendment to employment agreement between Arlington
Hospitality, Inc. and Stephen Miller dated September 10, 2003
10.19 Employment agreement between Arlington Hospitality, Inc. and
James B. Dale dated January 12, 2001 and Amendment No. 1
thereto dated October 29, 2001.
10.20 Supplemental retention and performance agreement between
Arlington Hospitality, Inc. and James B. Dale dated December
1, 2002
10.21 Employment agreement between Arlington Hospitality, Inc. and
Richard A. Gerhart dated July 1, 2002
10.22 Supplemental retention and performance agreement between
Arlington Hospitality, Inc. and Richard A. Gerhart dated
December 1, 2002
The following exhibits were included in the Registrant's Report on Form 10-K
filed March 31, 2004:
Exhibit No. Description
- ----------- -----------
10.23 Amended and Restated Master Lease Agreement dated January 24,
2001 between Arlington Hospitality, Inc. and PMC Commercial
Trust
10.24 Amended and Restated Loan and Security Agreement dated April
30, 2003 between Arlington Hospitality, Inc. and LaSalle Bank
N.A.
21.1 Subsidiaries of the Registrant
The following exhibits were included in the Registrant's Report on Form 10-Q
filed May 14, 2004.
Exhibit No. Description
- ----------- -----------
10.25 Second Amendment to Amended and Restated Loan and Security
Agreement dated April 30, 2004 between Arlington Hospitality,
Inc. and LaSalle Bank N.A.
The following exhibits are included in this Report on Form 10-Q filed August 13,
2004:
Exhibit No. Description
- ----------- -----------
10.26 Temporary sales letter agreement dated May 18, 2004 between
Arlington Hospitality, Inc. and PMC Commercial Trust.
31.1 Certification of Chief Executive Officer Pursuant to SEC Rules
13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to SEC Rules
13a-15(e) and 15(d)-15(e), as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
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Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the three months
ended June 30, 2004:
Date Filed Description
- ----------- -----------
April 1, 2004 Press release announcing fourth quarter and full year 2003
financial results.
April 22, 2004 Press release announcing March 2004 results and the opening of
an Amerihost Inn Hotel in Weirton, WV.
May 4, 2004 Press release announcing the renewal of the Company's
line-of-credit and the extension of the temporary agreement
with the landlord of 21 of its hotel properties.
May 17, 2004 Press release announcing April 2004 results. Press release
announcing that the Company will hold a conference call to
discuss first quarter financial results. Press release
announcing first quarter 2004 financial results.
June 14, 2004 Press release announcing the extension of its temporary
agreement with the landlord of 21 of its hotels. Press release
announcing May 2004 results and the sale of three hotels.
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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
By: /s/ Keith P. Morris
------------------------------------
Keith P. Morris
Vice President Finance
August 13, 2004
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