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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, 2003
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
incorporation or organization) Identification No.)
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 14, 2003, 4,998,189 shares of the registrant's common stock were
outstanding.
================================================================================
ARLINGTON HOSPITALITY, INC.
FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 2003
INDEX
PART I: Financial Information Page
----
Item 1 -- Financial Statements
Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002 4
Consolidated Statements of Operations for the Six Months
Ended June 30, 2003 and 2002 6
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2003 and 2002 7
Notes to Consolidated Financial Statements 9
Item 2 -- Management's Discussion and Analysis of Financial Condition 16
and Results of Operations
Item 3 -- Quantitative and Qualitative Disclosures About Market Risk 26
Item 4 -- Controls and Procedures 26
PART II: Other Information
Item 6 -- Exhibits and Reports on Form 8-K 27
Signatures 27
1
Part I: Financial Information
Item 1: Financial Statements
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
June 30, December 31,
2003 2002
--------------- -------------
ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 4,204,410 $ 3,969,515
Accounts receivable, less allowance of $150,000
at June 30, 2003 and December 31, 2002 (including
approximately $22,000 and $166,000 from related parties) 1,531,938 2,064,463
Notes receivable, current portion -- 100,000
Prepaid expenses and other current assets 402,985 975,432
Refundable income taxes 1,193,551 1,574,776
Costs and estimated earnings in excess of billings on
uncompleted contracts 569,463 1,479,101
Assets held for sale -- non-AmeriHost Inn hotels 12,075,880 --
Assets held for sale -- AmeriHost Inn hotels 27,683,102 --
------------ ------------
Total current assets 47,661,329 10,163,287
------------ ------------
Investments in and advances to unconsolidated
hotel joint ventures 3,598,630 4,291,504
------------ ------------
Property and equipment:
Land 7,002,362 13,418,378
Buildings 39,230,409 76,849,071
Furniture, fixtures and equipment 15,123,745 26,553,701
Construction in progress 319,948 6,447,039
Leasehold improvements 2,406,717 2,760,906
------------ ------------
64,083,181 126,029,095
Less accumulated depreciation and amortization 15,684,081 26,417,755
------------ ------------
48,399,100 99,611,340
------------ ------------
Notes receivable, less current portion 1,020,792 782,083
Deferred income taxes 5,654,000 2,427,000
Other assets, net of accumulated amortization of
approximately $1,388,000 and $1,259,000 2,532,380 2,658,500
------------ ------------
9,207,172 5,867,583
------------ ------------
$108,866,231 $119,933,714
============ ============
(continued)
3
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
June 30, December 31,
2003 2002
--------------- ----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED)
Current liabilities:
Accounts payable $ 2,163,318 $ 3,965,028
Bank line-of-credit 4,400,000 6,384,287
Accrued payroll and related expenses 315,887 827,353
Accrued real estate and other taxes 2,594,957 1,969,297
Other accrued expenses and current liabilities 1,302,596 1,974,350
Current portion of long-term debt 7,840,814 4,038,301
Liabilities of assets held for sale -- non-AmeriHost Inn hotels 11,161,147 --
Long-term debt of assets held for sale -- AmeriHost Inn hotels 25,741,339 --
------------- -------------
Total current liabilities 55,520,058 19,158,616
------------- -------------
Long-term debt, net of current portion 29,170,108 72,203,688
------------- -------------
Deferred income 11,270,781 10,867,418
------------- -------------
Commitments and contingencies
Minority interests 249,207 333,888
------------- -------------
Shareholders' equity:
Preferred stock, no par value; authorized 100,000 shares;
none issued -- --
Common stock, $.005 par value; authorized 25,000,000 shares; issued and
outstanding 5,019,588 shares at June 30,
2003, and 4,962,817 shares at December 31, 2002 25,098 24,814
Additional paid-in capital 13,310,559 13,184,564
Retained earnings (deficit) (242,705) 4,597,601
------------- -------------
13,092,952 17,806,979
Less:
Stock subscriptions receivable (436,875) (436,875)
------------- -------------
12,656,077 17,370,104
------------- -------------
$ 108,866,231 $ 119,933,714
============= =============
See notes to consolidated financial statements.
4
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
================================================================================
Three Months Ended June 30, Six Months Ended June 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 11,013,514 $ 11,685,234 $ 19,536,021 $ 20,845,162
Other hotels 509,345 651,551 846,180 1,005,310
Development and construction 617,283 3,007,221 2,097,261 4,810,971
Hotel sales and commissions 2,590,457 1,540,451 9,033,747 4,900,317
Management services 117,301 262,772 228,455 496,709
Employee leasing 541,275 867,814 1,058,682 1,720,175
Incentive and royalty sharing 223,994 146,805 429,649 256,369
Office building rental 178,995 156,318 356,223 317,988
------------ ------------ ------------ ------------
15,792,164 18,318,166 33,586,218 34,353,001
------------ ------------ ------------ ------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 7,733,013 7,824,102 15,397,422 15,403,551
Other hotels 437,399 546,434 887,488 1,084,444
Development and construction 544,350 2,626,326 2,136,477 4,623,893
Hotel sales and commissions 2,093,614 1,497,732 7,334,431 3,528,680
Management services 74,826 184,297 139,759 338,827
Employee leasing 524,792 856,165 1,026,714 1,676,802
Office building rental 46,865 28,798 96,417 45,621
------------ ------------ ------------ ------------
11,454,859 13,563,854 27,018,708 26,701,818
------------ ------------ ------------ ------------
4,337,305 4,754,312 6,567,510 7,651,183
Depreciation and amortization 1,032,098 1,099,653 2,066,133 2,133,374
Leasehold rents -- hotels 1,270,127 1,271,990 2,540,254 2,619,489
Corporate general and administrative 515,007 386,435 962,838 773,594
Impairment provision (Note 13) 4,564,512 -- 4,664,512 --
------------ ------------ ------------ ------------
Operating income (loss) (3,044,439) 1,996,234 (3,666,227) 2,124,726
Other income (expense):
Interest expense (1,144,709) (1,249,035) (2,240,103) (2,526,939)
Interest income 120,922 134,392 240,881 258,222
Other income 43,353 (21,710) 42,021 39,237
Gain on sale of property -- -- -- 327,076
Equity in net income and (losses)
of affiliates (199,816) (208,551) (274,262) (121,583)
------------ ------------ ------------ ------------
Income (loss) before minority
interests and income taxes (4,224,689) 651,330 (5,897,690) 100,739
Minority interests in (income) loss of
consolidated partnerships (53,329) (46,757) (81,692) (46,601)
------------ ------------ ------------ ------------
Income (loss) before income taxes (4,278,018) 604,573 (5,979,382) 54,138
Income tax expense (benefit) (1,711,000) 245,000 (2,392,000) 25,000
------------ ------------ ------------ ------------
Net income (loss) from continuing
operations (2,567,018) 359,573 (3,587,382) 29,138
Discontinued operations, net of
tax (Note 14) (790,767) (125,505) (1,252,924) (552,822)
------------ ------------ ------------ ------------
Net income (loss) $ (3,357,785) $ 234,068 $ (4,840,306) $ (523,684)
============ ============ ============ ============
Net income (loss) per share (Note 4):
Basic $ (0.67) $ 0.05 $ (0.97) $ (0.11)
Diluted $ (0.67) $ 0.05 $ (0.97) $ (0.11)
See notes to consolidated financial statements.
5
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
================================================================================
2003 2002
------------ ------------
Cash flows from operating activities:
Cash received from customers $ 35,947,775 $ 39,145,568
Cash paid to suppliers and employees (25,992,393) (30,134,918)
Interest received 219,000 281,545
Interest paid (2,245,876) (2,893,044)
Income taxes received (paid) 381,225 (119,523)
------------ ------------
Net cash provided by operating activities 8,309,731 6,279,628
------------ ------------
Cash flows from investing activities:
Distributions, and collections on advances,
from affiliates 426,264 263,836
Purchase of property and equipment (3,773,828) (12,066,782)
Purchase of investments in, and advances
to, minority owned affiliates (611,740) (1,268,212)
Acquisitions of partnership interests,
net of cash acquired (Note 7) -- (796,786)
Net (Issuance) collections on notes receivable (138,709) 6,721
Proceeds from sale of assets 962,541 (6,700)
------------ ------------
Net cash used in investing activities (3,135,472) (13,867,923)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 4,743,561 9,660,858
Principal payments on long-term debt (7,734,663) (3,654,444)
Net (repayments) proceeds from line of credit (1,984,287) 362,585
Distributions to minority interest (90,255) (112,819)
(Purchase) issuance of common stock 126,280 (311)
Other -- --
------------ ------------
Net cash (used in) provided by financing activities (4,939,364) 6,255,869
------------ ------------
Net increase (decrease) in cash 234,895 (1,332,426)
Cash and cash equivalents, beginning of year 3,969,515 4,748,156
------------ ------------
Cash and cash equivalents, end of period $ 4,204,410 $ 3,415,730
============ ============
(continued)
6
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30,
(UNAUDITED)
================================================================================
2003 2002
----------- -----------
Reconciliation of net loss to net
cash provided by operating activities:
Net loss $(4,840,306) $ (523,684)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 2,737,338 2,729,830
Equity in net (income) loss of affiliates and
amortization of deferred income 274,262 121,583
Interest from unconsolidated joint ventures (81,539) (43,053)
Minority interests in net income of subsidiaries 5,574 37,121
Amortization of deferred gain (646,617) (527,304)
Deferred income taxes (3,227,000) 360,000
Issuance of common stock -- 190
Gain on sale of property and equipment 68,917 (327,076)
Proceeds from sale of hotels 9,033,747 4,456,081
Income from sale of hotels (1,681,998) (927,401)
Provision for impairment 5,526,581
Changes in assets and liabilities, net
of effects of acquisition:
Decrease in accounts receivable 389,258 366,110
Decrease in prepaid expenses and
other current assets 518,131 570,756
Decrease (increase) in refundable income taxes 381,225 (824,523)
Decrease (increase) in costs and estimated earnings
in excess of billings 909,638 (659,800)
Increase in other assets (423,391) (141,615)
(Decrease) increase in accounts payable (1,642,722) 450,277
(Decrease) increase in accrued payroll and other accrued
expenses and current liabilities (48,255) 322,016
Decrease in accrued interest (5,773) (18,268)
Increase in deferred income 1,062,661 858,388
----------- -----------
Net cash provided by operating activities $ 8,309,731 $ 6,279,628
=========== ===========
See notes to consolidated financial statements.
7
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
================================================================================
1. BASIS OF PREPARATION:
The financial statements included herein have been prepared by the
Company, without audit. In the opinion of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments,
which consist only of adjustments necessary to present fairly the
financial position of Arlington Hospitality, Inc. and subsidiaries as
of June 30, 2003 and December 31, 2002, and the results of its
operations for the three and six months ended June 30, 2003 and 2002,
and cash flows for the six months ended June 30, 2003 and 2002. The
results of operations for the three and six months ended June 30, 2003,
are not necessarily indicative of the results to be expected for the
full year. The accompanying consolidated financial statements should be
read in conjunction with the consolidated financial statements and the
notes thereto included in the Company's 2002 Annual Report on Form
10-K. Certain reclassifications have been made to the 2002 financial
statements in order to conform with the 2003 presentation.
2. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the
Company, its wholly-owned subsidiaries, and entities in which the
Company has a controlling ownership interest. Significant intercompany
accounts and transactions have been eliminated.
3. CRITICAL ACCOUNTING POLICIES:
The Company's critical accounting policies are described in its 2002
Form 10-K.
4. EARNINGS (LOSS) PER SHARE:
Basic earnings per share ("EPS") is calculated by dividing the income
(loss) available to common shareholders by the weighted average number
of common shares outstanding for the period, without consideration of
common stock equivalents. Diluted EPS gives effect to all dilutive
common stock equivalents outstanding for the period. The Company
excluded the dilutive effect of stock options for both periods
presented below, and excluded the impact of convertible partnership
interests for the three and six-month period ending June 30, 2003,
since they had an anti-dilutive effect on the EPS computations. The
calculations of basic and diluted earnings (loss) per share are
presented below. The hotel impairment charges during 2003 relate to the
implementation of a plan for the disposition of certain hotels (Note
13).
8
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
================================================================================
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income (loss) from continuing
operations, before impairment $ 171,494 $ 359,573 $ (788,870) $ 29,138
Impairment provision, net of tax (2,738,512) -- (2,798,512) --
----------- ----------- ----------- -----------
Net income (loss) from continuing
operations $(2,567,018) $ 359,573 $(3,587,382) $ 29,138
Discontinued operations (a) (790,767) (125,505) (1,252,924) (552,822)
----------- ----------- ----------- -----------
Net income (loss) (3,357,785) 234,068 (4,840,306) (523,684)
Impact of convertible
partnership interests -- -- -- (15,943)
----------- ----------- ----------- -----------
Net income (loss) available to
common shareholders $(3,357,785) $ 234,068 $(4,840,306) $ (539,627)
=========== =========== =========== ===========
Weighted average common
shares outstanding 5,019,588 4,958,077 5,011,478 4,958,079
Dilutive effect of convertible
partnership interests and
common stock equivalents -- 75,514 -- 84,975
Dilutive common shares outstanding 5,019,588 5,033,591 5,011,478 5,043,054
=========== =========== =========== ===========
Net income (loss) per share -- Basic:
From continuing operations $ (0.51) $ 0.08 $ (0.72) $ --
From discontinued operations (0.16) (0.03) (0.25) (0.11)
----------- ----------- ----------- -----------
$ (0.67) $ 0.05 $ (0.97) $ (0.11)
=========== =========== =========== ===========
Net income (loss) per share -- Diluted:
From continuing operations $ (0.51) $ 0.07 $ (0.72) $ --
From discontinued operations (0.16) (0.02) (0.25) (0.11)
----------- ----------- ----------- -----------
$ (0.67) $ 0.05 $ (0.97) $ (0.11)
=========== =========== =========== ===========
(a) Includes hotel impairment provision related to non-AmeriHost Inn
hotels to be sold of approximately $517,000, net of tax (Notes 13 and
14).
5. INCOME TAXES:
Deferred income taxes are provided on the differences in the bases of
the Company's assets and liabilities determined for tax and financial
reporting purposes and relate principally to depreciation of property
and equipment and deferred income. A valuation allowance has not been
recorded to reduce the deferred tax assets, as the Company expects to
realize all components of the deferred tax asset in future periods.
The income tax benefit for the three and six months ended June 30, 2003
and 2002 was based on the Company's estimate of the effective tax rate
expected to be applicable for the full year. The Company expects the
effective tax rate to approximate the Federal and state statutory
rates.
6. HOTEL LEASES:
The Company leases 24 hotels as of June 30, 2003, including 22 hotels
leased from a REIT (Note 9), the operations of which are included in
the Company's consolidated financial statements. All of these leases
are triple net and provide for monthly base rent payments ranging from
$14,000 to $27,000. The expiration
9
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
================================================================================
dates on the leases range from August 31, 2003 through March 2014. The
Company does not intend to extend or renew the lease for a
non-AmeriHost Inn hotel expiring August 31, 2003.
The two leases, other than the REIT leases, each provide for an option
to purchase the underlying hotel. One lease, with an expiration date of
May 31, 2010, provides for a purchase price of $4,000,000, which
approximated the fair value at the lease commencement, subject to
increases in the CPI index. The other lease, which expires on August
31, 2003, provides for a purchase option price of $3,030,000. However,
the Company does not intend to exercise its purchase option under
either lease.
7. LIMITED PARTNERSHIP BUYOUT AND GUARANTEED DISTRIBUTIONS:
On September 18, 2000, in connection with the approval of all joint
venture partners regarding the sale of the AmeriHost Inn brand and
franchising rights to Cendant Corporation, the Company entered into an
agreement to purchase the remaining ownership interests in three
existing joint ventures at specified prices and to issue options to
purchase a total of 125,000 shares of the Company's common stock to the
partners of these ventures, canceling existing options to purchase
60,000 shares of the Company's common stock held by these partners. A
director of the Company, and parties related to him, were partners in
each of these three joint ventures.
The first joint venture acquisition was completed in 2001. The second
was completed during the second quarter of 2002 at a cost to the
Company of approximately $800,000. The final acquisition, with a
specified purchase price of approximately $830,000, is scheduled to be
completed before August 31, 2003. Upon completion of this transaction,
the assets and liabilities of this joint venture, with balances of $1.8
million and $1.3 million as of June 30, 2003, respectively, will be
presented on a consolidated basis in the Company's financial
statements. Similar to other joint ventures that the Company had been
forming at the time, the Company was the general partner in these three
joint ventures and had guaranteed minimum annual distributions to the
limited partners, including the director of the Company, and parties
related to him. Upon the consummation of the final joint venture
acquisition, the Company will no longer have any joint ventures in
which it has guaranteed a minimum return to its partners.
8. INVESTMENTS:
The Company, through wholly-owned subsidiaries, is a general partner or
managing member in 14 joint ventures as of June 30, 2003. The Company's
subsidiaries are secondarily liable for the obligations and liabilities
of these joint ventures. As of June 30, 2003, these joint ventures had
$29.3 million outstanding under mortgage loan agreements. Approximately
$6.3 million of this amount has been included in the Company's
consolidated financial statements as of June 30, 2003, because it
relates to joint ventures in which the Company has a majority or
controlling ownership interest, leaving approximately $22.9 million in
off-balance sheet mortgage debt with unconsolidated joint ventures. If
the Company subsequently obtains a majority or controlling ownership
interest in a joint venture, the joint venture's debt will be included
in the Company's consolidated financial statements. Of this $22.9
million of financing, the Company also has provided approximately $18.2
million in guarantees to the lenders. Other partners have also
guaranteed $10.8 million of these financings. One unconsolidated joint
venture mortgage loan in the amount of approximately $1.7 million at
June 30, 2003, which is one of the loans guaranteed by the Company,
matures in 2003. The Company expects the joint venture to sell this
hotel, extend the loan, or refinance the loan prior to its maturity.
Unless the properties collateralizing the debt are sold, the remaining
joint venture mortgage loans mature after 2004.
In January 2003, Interpretation No. 46, "Consolidation of Variable
Interest Entities", was issued. The Company is required to adopt the
requirements of this Interpretation for interim periods beginning after
June 15, 2003. This Interpretation clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial
Statements", and 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 on 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, on a consolidated basis in its financial
statements beginning with the consolidated financial statements issued
for
10
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
================================================================================
the quarterly period ended September 30, 2003. The consolidation of
these joint ventures is expected to add approximately $6.8 million in
assets and $6.1 million in liabilities to the Company's consolidated
balance sheet. As of June 30, 2003, the Company had investments in, and
advances to, these joint ventures of approximately $819,000, which was
presented as such under the equity method of accounting in the
accompanying consolidated financial statements.
The Company has determined that its combined effective economic
ownership is at least 90% in each of these joint ventures at June 30,
2003. The Company expects that it will continue to present all of its
other unconsolidated investments under the equity method.
9. SALE/LEASEBACK OF HOTELS:
In 1998 and 1999, the Company completed the sale of 30 AmeriHost Inn
hotels to a Real Estate Investment Trust ("REIT") for $73 million. Upon
the sales to the REIT, the Company entered into agreements to lease
back the hotels for an initial term of ten years, with two five-year
renewal options. The lease payments are fixed at 10% of the sale price
for the first three years. Thereafter, the lease payments are subject
to a CPI increase with a 2% annual maximum. The Company has deferred
the gain on the sale of these hotels pursuant to sale/leaseback
accounting. The deferred gain is being recognized on a straight-line
basis over the remaining term of the lease, as extended, as a reduction
of leasehold rent expense. As of June 30, 2003, the aggregate remaining
unamortized deferred gain was approximately $7.0 million.
In January 2001, the Company amended the master lease with the REIT to
provide for the sale of eight hotels by the lessor under specified
terms, and to extend the initial lease term by five years. The
amendment provides for four increases in rent payments of 0.25% each,
if these eight hotels are not sold to an unrelated third party or to
the Company by the dates specified. As of June 30, 2003, the first two
scheduled rent increases were not effective due to the sale of hotels
by the REIT. However if the Company does not either facilitate the sale
to a third party, or purchase from the REIT, one hotel prior to
September 15, 2003, the third 0.25% rent increase becomes effective.
The Company intends to purchase this hotel using cash of approximately
$556,000, including a $250,000 deposit made in June 2003, and mortgage
financing already committed by the REIT of approximately $1.7 million.
The REIT sold one of its hotels to an unrelated third party during the
six months ended June 30, 2002. Consequently, the Company terminated
the lease with the REIT for this hotel and recognized a commission from
the sale of this hotel, which is classified as hotel sales and
commissions in the accompanying consolidated financial statements. The
unamortized deferred gain related to the initial sale of this hotel was
recognized upon termination of the applicable lease.
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, consisting of hotel
management activities, (5) employee leasing, consisting of the leasing
of employees to various hotels, (6) incentive and royalty sharing fees
due from Cendant Corporation, 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, as of and for the six months ended June 30, 2003 and
2002, which is the information utilized by the Company's decision
makers in managing the business:
11
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
================================================================================
Revenues 2003 2002
-------- ------------- -------------
Hotel operations $ 20,382,201 21,850,472
Hotel development and construction 2,097,261 4,810,971
Hotel sales and commissions 9,033,747 4,900,317
Hotel management 228,455 496,709
Employee leasing 1,058,682 1,720,175
Incentive and royalty sharing 429,649 256,369
Office building rental 356,223 317,988
------------- -------------
$ 33,586,218 $ 34,353,001
============= =============
Operating costs and expenses 2003 2002
---------------------------- ------------- -------------
Hotel operations $ 16,284,910 $ 16,487,995
Hotel development and construction 2,136,477 4,623,893
Hotel sales and commissions 7,334,431 3,528,680
Hotel management 139,759 338,827
Employee leasing 1,026,714 1,676,802
Office building rental 96,417 45,621
------------- -------------
$ 27,018,708 $ 26,701,818
============= =============
Operating income
----------------
Hotel operations:
AmeriHost Inn hotels $ (74,191) $ 1,160,461
Other hotels (283,596) (373,229)
Impairment provision (4,664,512) --
Hotel development and construction (41,212) 184,072
Hotel sales and commissions 1,699,316 1,371,638
Hotel management 65,668 131,292
Employee leasing 30,830 42,190
Incentive and royalty sharing 429,649 256,369
Office building rental 178,692 194,747
Corporate (1,006,871) (842,814)
------------- -------------
$ (3,666,227) $ 2,124,726
============= =============
Identifiable assets
-------------------
Hotel operations $ 93,198,668 $ 105,567,673
Hotel development and construction 1,292,800 2,176,523
Hotel management 530,364 52,689
Employee leasing 152,279 (99,161)
Office building rental 6,475,228 6,694,182
Corporate 7,216,892 8,161,535
------------- -------------
$ 108,866,231 $ 122,553,441
============= =============
Capital expenditures
--------------------
Hotel operations, including new
construction of company owned hotels $ 3,763,792 $ 11,788,467
Hotel development and construction -- --
Hotel management 7,380 7,998
Employee leasing -- --
Office building rental 799 255,672
Corporate 1,857 14,645
------------- -------------
$ 3,773,828 $ 12,066,782
============= =============
12
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
================================================================================
Depreciation/Amortization
- -------------------------
Hotel operations $1,914,825 $1,955,756
Hotel development and construction 1,996 3,005
Hotel management 23,028 26,590
Employee leasing 1,137 1,184
Office building rental 81,114 77,620
Corporate 44,033 69,219
---------- ----------
$2,066,133 $2,133,374
========== ==========
11. BANK LINE OF CREDIT:
The Company had $4,400,000 and $6,384,287 outstanding on its bank
operating line-of-credit at June 30, 2003 and December 31, 2002,
respectively. The operating line of credit provides for a maximum
amount available of $6.5 million and is collateralized by substantially
all the assets of the Company, subject to first mortgages from other
lenders on hotel assets, bears interest at the rate of prime plus 2.5%
per annum, with a minimum rate of 6.75% per annum (effective rate as of
June 30, 2003), and matures April 30, 2004. The maximum commitment
under the line-of-credit will be reduced to $6.0 million on September
29, 2003, and to $5.5 million on February 27, 2004. The Company is also
required to maintain certain financial covenants, including minimum net
income, minimum tangible net worth, a maximum leverage ratio and a
minimum debt service coverage ratio. The line-of-credit agreement was
amended to eliminate the non-cash financial impact of the plan for
disposition of hotels on the covenant calculations (Note 13).
12. LONG-TERM DEBT:
The Company's plan to sell certain AmeriHost Inn hotel assets (Note 13)
is expected to result in the payoff of the related mortgage debt in the
amount of approximately $25.7 million, which has been classified in
current liabilities in the accompanying consolidated balance sheet as
of June 30, 2003. This amount includes approximately $794,000 which
would be contractually due within the next twelve months regardless of
the plan for hotel disposition. In addition, approximately $7.8 million
is classified as the Company's current portion of long-term debt which
is not related to the assets held for sale, including two hotel
mortgages in the amount of approximately $2.7 million, and the office
building mortgage in the amount of approximately $5.2 million, which
are due within the next twelve months. The Company expects these loans
to be repaid through the sale of the hotels, or refinanced prior to
maturity. The mortgage loans bear interest at the floating rates of
prime minus 0.25% and prime plus 2.5% per annum, and the office
building loan bears interest at the floating rate of LIBOR plus 2.25%.
If necessary, the Company believes it can extend or refinance these
mortgages at similar interest rates.
The Company has secured a $20 million construction line of credit
facility, which provides for both construction financing as well as
long-term mortgage financing. The Company utilizes this facility
primarily for the construction of wholly-owned AmeriHost Inn
properties, as approved by the lender on a project-by-project basis. As
of June 30, 2003, approximately $11.4 million has been utilized for
four hotel projects and has already been, or will be, automatically
converted to long-term financing. The Company has until October 31,
2003, as extended, to utilize this facility for new construction
projects. Any new hotel projects with the financing committed under
this facility prior to October 31, 2003 will automatically convert to
the long-term financing when construction is completed. The Company is
currently negotiating with this lender for a new or enhanced
construction line of credit facility.
Certain of the Company's hotel mortgage notes and the Company's office
building mortgage note contain financial covenants, principally minimum
net worth requirements, debt to equity ratios, and minimum debt service
coverage ratios. These financial covenants are typically measured
annually, based upon the Company's fiscal year end. The Company is not
aware of any covenant violations as of June 30, 2003.
13. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS:
The Company sold three wholly-owned AmeriHost Inn hotels during the six
months ended June 30, 2003. Net sale proceeds from these hotels was
approximately $9.0 million, which has been included in hotel sales
13
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
================================================================================
and commission revenue in the accompanying consolidated financial
statements. The 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. In
addition, approximately $5.6 million in mortgage debt was paid off with
proceeds from the sale of these hotels.
Also, during the second quarter of 2003, a joint venture in which the
Company had a controlling ownership interest, and was therefore
consolidated in the Company's financial statements, sold its
non-AmeriHost Inn hotel. This sale resulted in the reduction of the
joint venture's mortgage debt of approximately $925,000, which was paid
off with the proceeds from the sale, and a pretax loss of approximately
$86,000. An impairment provision of $450,000 had been recorded for this
hotel in 2002. The bank that provided the mortgage debt to this joint
venture, which was paid off as a result of this sale, is owned by a
director of the Company. In addition, a joint venture in which the
Company has a minority ownership interest sold its hotel asset during
the first quarter of 2003. The Company accounts for this joint venture
by the equity method and has included its share of the gain from this
sale in equity in net income and (losses) of unconsolidated joint
ventures in the accompanying consolidated financial statements.
Effective July 10, 2003, the Company has implemented a plan to sell
approximately 25 to 30 hotel properties over the next two years. The
properties to be sold include 20 to 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 a national hotel brokerage
firm to market most of the properties and manage the sales process.
These hotels are in addition to the five properties under contract for
sale as of August 1, 2003. The Company expects this plan to reduce debt
(Notes 11 and 12) and generate cash to pursue development and other
strategic objectives as well as increase 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
that any sales will be consummated, or as to the timing or terms of any
sales that are consummated.
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," the Company has recorded a
$5.4 million pre-tax, non-cash impairment charge as of June 30, 2003,
related to certain of the hotels targeted for sale. Approximately
$862,000 pre-tax of the non-cash impairment charge relates to the
consolidated non-AmeriHost Inn hotels anticipated to be sold, and has
been included in "discontinued operations" (Note 14). 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.
SFAS 144 also requires long-lived assets to be sold to be classified as
"held for sale" in the period in which certain criteria are met,
including the probable sale of the asset within one year. Based on the
implementation of this plan for hotel dispositions, the hotel assets
identified for sale have been classified as "held for sale" on the
accompanying consolidated balance sheet as of June 30, 2003. The debt
which is expected to be paid off (Note 12) 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 the
Company's ongoing operations. Accordingly, the disposition of
non-AmeriHost Inn hotels have been treated as discontinued operations
(Note 14). However, the disposition of AmeriHost Inn hotels, although
classified as "held for sale" on the accompanying consolidated balance
sheet, has not been treated as discontinued operations due to the
ongoing royalty fees to be earned by the Company after their
disposition.
14. DISCONTINUED OPERATIONS:
The Company has reclassified its consolidated statements of operations
for the three and six months ended June 30, 2003 and 2002, and its
consolidated balance sheet as of June 30, 2003, as a result of
implementing SFAS 144 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 (Note 13). The
non-AmeriHost Inn hotels held for sale are expected to be sold within
the next twelve months. 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,
14
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
================================================================================
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 AmeriHost Inn hotels, which provides for a revenue
stream from Cendant Corporation, the owner of the AmeriHost Inn brand,
after the properties are sold to a new or existing AmeriHost Inn
franchisee. 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,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Hotel Operations:
Revenue $ 1,935,134 $ 2,325,074 $ 3,298,768 $ 4,227,868
Costs and expenses 1,691,550 1,957,669 3,308,329 4,014,838
----------- ----------- ----------- -----------
243,584 367,405 (9,561) 213,030
Depreciation and amortization 354,580 306,488 673,168 596,456
Leasehold rents -- hotels 64,850 64,850 129,700 199,163
Hotel impairment provision 862,069 -- 862,069 --
----------- ----------- ----------- -----------
Operating income (loss) (1,037,915) (3,933) (1,674,498) (582,589)
Other income (expense):
Interest expense (201,858) (202,067) (401,433) (347,837)
Other income (expense) (938) (938) (1,876) (1,876)
Gain on sale of property (86,235) -- (86,235) --
----------- ----------- ----------- -----------
Loss from discontinued
operations, before minority
interests and income taxes (1,326,946) (206,938) (2,164,042) (932,302)
Minority interests in (income) loss
of consolidated joint ventures 8,179 (3,567) 76,118 9,480
----------- ----------- ----------- -----------
Loss from discontinued operations,
before income taxes (1,318,767) (210,505) (2,087,924) (922,822)
Income tax expense (benefit) (528,000) (85,000) (835,000) (370,000)
----------- ----------- ----------- -----------
Net loss from discontinued
operations $ (790,767) $ (125,505) $(1,252,924) $ (552,822)
=========== =========== =========== ===========
The assets and liabilities of the one non-AmeriHost Inn hotel sold in
2003, and five consolidated non-AmeriHost Inn hotels to be sold
pursuant to the plan for hotel disposition, and which are included in
discontinued operations, have been classified as held for sale and
liabilities related to assets held for sale in the accompanying
consolidated balance sheet as of June 30, 2003. Condensed balance sheet
information for these hotels is as follows:
15
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
================================================================================
June 30,
2003
-----------
ASSETS
Current assets:
Cash and cash equivalents $ 488,691
Accounts receivable 165,148
Prepaid expenses and other current assets 32,435
-----------
Total current assets 686,274
-----------
Property and equipment 18,416,009
Less accumulated depreciation and amortization 6,750,717
-----------
11,665,292
-----------
Other assets, net of accumulated amortization 213,005
-----------
$12,564,571
===========
LIABILITIES
Current liabilities:
Accounts payable $ 158,988
Accrued payroll and other expenses 503,531
Current portion of long-term debt 1,381,470
-----------
Total current liabilities 2,043,989
Long-term debt, net of current portion 9,117,158
Minority interests -
-----------
$11,161,147
===========
15. SUPPLEMENTAL CASH FLOW DATA:
The following represents the supplemental schedule of noncash investing
and financing activities for the years ended June 30:
2003 2002
------------- --------------
Notes received in connection with the
sale of hotels $ 250,000 $ -
============= ==============
Interest paid, net of interest capitalized $ 2,647,000 $ 2,893,000
============= ==============
16. INCENTIVE AND ROYALTY FEES:
Cendant Corporation ("Cendant"), the owner of the AmeriHost Inn brand,
has agreed to pay the Company a development incentive fee each time the
Company sells one of its existing AmeriHost Inn hotels to a buyer who
executes an AmeriHost Inn franchise agreement with Cendant. In
addition, this fee also will be paid to the Company for new hotels that
the Company develops which are then sold to a buyer who executes a
franchise agreement with Cendant. This fee applies to the first 370
hotels sold by the Company during the 15-year term of the agreement. To
date, the Company has collected the fee on 20 hotels. Since the
potential for reimbursement exists, 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.
17. ISSUANCE OF COMMON STOCK:
The Company applies APB No. 25, Accounting for Stock Issued to
Employees, and related interpretations, and the intrinsic method,
in accounting for options granted to employees.
16
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2003
================================================================================
In connection with his employment agreement, during the first quarter
of 2003, the Chief Executive Officer exercised a right to purchase
40,000 newly issued Rule 144 restricted shares of common stock for
approximately $126,000.
18. SUBSEQUENT EVENTS:
In conjunction with the implementation of the plan for hotel
dispositions (Note 13) and the anticipated reduction in hotel
ownership, starting in July 2003, the Company announced a plan to
reduce its corporate and regional operations staff by 13 people, or
approximately 20 percent, over the next six months. In addition, the
Company's corporate office space needs will be reduced. The Company
owns the building that houses its corporate offices, and plans to
re-lease the vacated space.
The Company expects to incur total non-recurring restructuring charges
of approximately $140,000 over the next six months, which include
severance benefits, insurance benefits, outplacement services, legal
and office reconfiguration costs.
Subsequent to June 30, 2003, the Company sold one wholly owned
AmeriHost Inn hotel at a gain, and used approximately $3.1 million of
proceeds from this sale to pay off the related mortgage debt. This sale
transaction will be reported in the Company's third quarter 2003
statement of operations.
Subsequent to June 30, 2003, the Company, and its partners, funded a
joint venture hotel project. The joint venture then acquired a parcel
of land and closed on its mortgage financing which provides for
construction as well as permanent long-term financing. The joint
venture has recently commenced construction on an AmeriHost Inn hotel.
The Company expects to account for this joint venture by the equity
method.
Subsequent to June 30, 2003, the Company has repurchased 27,300 shares
of its common stock on the open market for cash of approximately
$90,000.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Quarterly Report on Form 10-Q 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.
Forward-looking statements are statements that are not historical, including
statements regarding management's intentions, beliefs, expectations,
representations, plans or predictions of the future, and are typically
identified by words such as "believe," "expect," "anticipate," "intend,"
"estimate," "may," "will," "should," and "could." There are numerous risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking statements including, without limitation:
o our ability to locate suitable sites for the development of hotels;
o cyclical overbuilding in the lodging industry;
o uncertainties relating to the timing, consummation and final terms
of hotel sales;
o the need for capital improvements in hotels that we own;
o the results and operations of franchisors of our hotels, primarily
Cendant Corporation;
o the availability of capital to finance growth or to refinance
existing or maturing debt;
o changing levels of demand for hotel rooms and related services, as
currently evidenced since the downturn in economic conditions and
the September 11, 2001 terrorist attacks;
o unexpected or ongoing increases in hotel expenses, such as
insurance, energy and the costs of wages or benefits;
o geopolitical events affecting travel in the United States;
o competition in the lodging industry, including competition within
our local markets, from other branded and independent hotels, and as
a result of the regional and national hotel industry trends;
o the recurring and extraordinary costs of necessary renovations of
hotels;
o the effect of national and regional economic conditions;
o changes in the law, such as new or amended environmental
regulations; and
o the historical cyclicality of the lodging industry.
All forward-looking statements included in this report are based on information
available at the time of the report, and we assume no obligation to update any
forward-looking statement.
OVERVIEW
We are engaged in the development and sale of AmeriHost Inn hotels, and the
ownership, operation and management of AmeriHost Inn hotels and other mid-price
hotels. As of June 30, 2003, we had 62 AmeriHost Inn hotels open, of which 52
were wholly-owned or leased, one was majority-owned, and nine were
minority-owned. During the past 12 months, we built and opened five AmeriHost
Inn hotels in which we have an ownership interest. Several additional hotels are
in various stages of development, including one AmeriHost Inn hotel which
recently commenced construction. Same room revenues for all AmeriHost Inn hotels
we owned and operated, including unconsolidated minority-owned hotels, are
presented below. These results relate to the AmeriHost Inn hotels that have been
operating for at least 13 full months during the periods presented.
Three Months Six Months Twelve Months
Ended Ended Ended
June 30, 2003 June 30, 2003 June 30, 2003
------------- ------------- -------------
Occupancy -- current period 60.9% 55.4% 58.0%
Occupancy -- prior period 61.3% 55.6% 56.8%
Increase (decrease) (0.7%) (0.4%) 2.1%
Average Daily Rate -- current period $57.65 $56.42 $57.14
Average Daily Rate -- prior period $57.86 $56.79 $57.76
Increase (decrease) (0.4%) (0.7%) (1.1%)
RevPAR -- current period $35.11 $31.23 $33.11
RevPAR -- prior period $35.46 $31.58 $32.80
Increase (decrease) (1.1%) (1.2%) 0.9%
18
SUMMARY OF HOTELS. The table below sets forth information regarding our hotels
at June 30, 2003.
Open Under
Hotels Construction Total
----------------- ---------------- ----------------
Hotels Rooms Hotels Rooms Hotels Rooms
------- ------ ------ ------- ------ ------
Consolidated (1):
AmeriHost Inn hotels 53 3,422 - - 53 3,422
Other brands 7 940 - - 7 940
------- ------ ------ ------- ------ ------
60 4,362 - - 60 4,362
------- ------ ------ ------- ------ ------
Unconsolidated:
AmeriHost Inn hotels 9 634 - - 9 634
Other brands 2 228 - - 2 228
------- ------ ------ ------- ------ ------
11 862 - - 11 862
------- ------ ------ ------- ------ ------
Totals:
AmeriHost Inn hotels 62 4,056 - - 62 4,056
Other brands 9 1,168 - - 9 1,168
------- ------ ------ ------- ------ ------
71 5,224 - - 71 5,224
======= ====== ====== ======= ====== ======
(1) Consolidated hotels are those in which we have a 100% or controlling
ownership interest or a leasehold interest.
Excluding hotels under development, we had an ownership interest in 71 hotels at
June 30, 2003, versus 75 hotels at June 30, 2002. Total consolidated hotels
decreased to 60 hotels at June 30, 2003, versus 63 hotels at June 30, 2002. The
increased ownership from the development of AmeriHost Inn hotels for our own
account and for joint ventures in which we have a non-controlling minority
ownership interest, and the acquisition of a non-controlling ownership in a
non-core hotel, was more than offset by the sale of AmeriHost Inn hotels to
franchisees of Cendant Corporation ("Cendant"), the owner of the AmeriHost Inn
brand, and the sale of two non-AmeriHost Inn hotels. We also have several
additional new AmeriHost Inn hotel projects in various stages of development.
SOURCES OF REVENUE. Revenues from hotel operations consist of the revenues from
all consolidated hotels. Consolidated hotels are those hotels in which we have a
100% or controlling ownership or leasehold interest, and are consolidated in our
financial statements. Unconsolidated hotels are those hotels in which we have a
minority or non-controlling ownership or leasehold interest, and are accounted
for by the equity method. Non-core hotels are those hotels operated as
independent of a franchise affiliation, or under a national franchise
affiliation other than the AmeriHost Inn brand, such as Days Inn, Ramada Inn,
and Howard Johnson Express. Development and construction revenues consist of
fees for new construction and renovation activities we perform for
unconsolidated hotels and unrelated third parties. We record commissions and
revenue from the sale of our consolidated AmeriHost Inn hotels, based upon the
net sale price, as these sales are considered part of our strategy of building
and selling hotels, and therefore expanding the AmeriHost Inn brand. We receive
revenue from management and employee leasing services provided to unconsolidated
hotels and unrelated third parties. Incentive and royalty sharing fees consist
of the amortization of one-time development incentive fees received upon the
sale of an AmeriHost Inn hotel to a third party who enters into an AmeriHost Inn
franchise agreement, and our portion of the franchise royalty fees paid by all
non-Arlington Hospitality owned AmeriHost Inn hotels to Cendant Corporation, the
owner of the AmeriHost Inn brand. Finally, we also own the office building in
which our headquarters is located, and receive revenues as landlord from the
third-party tenants in the building.
SUMMARY OF SECOND QUARTER AND YEAR-TO-DATE RESULTS. Total revenues decreased
13.8% and 2.2% for the three and six months ended June 30, 2003, respectively,
primarily due to decreases in hotel operations and hotel development revenues.
Total revenues from Consolidated AmeriHost Inn hotels decreased during the three
and six months ended June 30, 2003, due primarily to the sale of hotels and a
0.8% decrease in same room revenue for these hotels. Revenues from the
development segment decreased during the three and six months ended June 30,
2003, due to the decrease in hotel development activity for minority-owned and
third party entities. Revenues from hotel sales and commissions increased during
the three and six months ended June 30, 2003, as a result of the sale of three
AmeriHost Inn hotels during the first six months of 2003, including one in the
second quarter, at prices higher than the three AmeriHost Inn hotels, including
one leased hotel, which were sold during the first six months of 2002. Revenues
from hotel management and employee leasing segments decreased during both the
three and six month periods ended June 30, 2003, compared to the same periods in
2002, due primarily to the reduction of hotels under
19
management contracts. We recorded a net loss of ($3.4) million and ($4.8)
million for the three and six months ended June 30, 2003, compared to net income
of approximately $234,000 and a net loss of approximately ($524,000) for the
three and six months ended June 30, 2002. These results include non-cash hotel
impairment provisions in 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 and hotel development
repositioning as discussed below. The results for the three and six months
periods are summarized as follows:
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- -------------------------------
2003 2002 2003 2002
------------- ------------- -------------- ---------------
Net income (loss) from continuing
operations, before impairment $ 171,494 $ 359,573 $ (788,870) $ 29,138
Impairment provision, net of tax (2,738,512) - (2,798,512) -
------------- ------------- --------------- ---------------
Net income (loss) from continuing
operations $ (2,567,018) $ 359,573 $ (3,587,382) $ 29,138
Discontinued operations (790,767) (125,505) (1,252,924) (552,822)
------------- ------------- --------------- ---------------
Net income (loss) $ (3,357,785) $ 234,068 $ (4,840,306) $ (523,684)
============= ============= =============== ===============
Net income (loss) per share -- Diluted:
From continuing operations $ (0.51) $ 0.07 $ (0.72) $ -
From discontinued operations (0.16) (0.02) (0.25) (0.11)
------------ ------------ --------------- ---------------
$ (0.67) $ 0.05 $ (0.97) $ (0.11)
============ ============ =============== ===============
CENDANT AGREEMENT. On September 30, 2000, we sold the AmeriHost Inn brand and
franchising rights to Cendant. In connection with this sale we entered into
agreements with Cendant that provide for both short-term and long-term incentive
payments to us as the AmeriHost Inn brands are expanded, including:
o for the 25-year term of a royalty-sharing agreement, favorable royalty
payment terms on any AmeriHost Inn hotels we own or lease and operate,
including hotels owned through joint ventures with prior approval from
Cendant;
o for the 25-year term of the royalty-sharing agreement, the sharing of
royalties received by Cendant from all AmeriHost Inn hotels in the
franchise system excluding those we own or lease and operate; and
o for the 15-year term of a development agreement, a hotel development
incentive fee each time an AmeriHost Inn hotel we own/lease and
operate is sold to an operator who becomes a Cendant franchisee. We
received approximately $221,000 and $919,000 in development incentive
fees during the second quarter and first six months of 2003,
respectively, which were deferred and are being amortized over a
76-month period.
HOTEL DISPOSITION PLAN AND RESTRUCTURING
We have adopted a strategic plan to sell approximately 25 to 30 hotel properties
over the next two years. The properties to be sold include 20 to 25 AmeriHost
Inns and six non-AmeriHost hotels that are wholly or partially-owned or in which
we have an ownership interest. These hotels are in addition to any properties
currently under contract for sale, and the five hotels sold in the first six
months of 2003.
The sale of the hotels is expected to:
o reduce outstanding debt;
o increase operating cash flow;
o accelerate the generation and realization of sales and
royalty-sharing fees related to our agreements with Cendant;
o provide capital for future hotel development; and o provide
capital to repurchase common stock at attractive prices.
20
We expect that the sale of the hotels under contract and those to be sold as
part of the strategic plan will generate net cash of approximately $11.5 million
to $14.7 million, after the repayment of the related mortgage debt secured by
the individual properties. In addition, we believe that the sales will improve
operating cash flow by approximately $1.6 million, pre-tax, annually. Upon
successful completion of the sale of the properties in the plan and the
properties already under contract, we expect to own or lease 30 to 35 AmeriHost
Inn hotels and two non-AmeriHost Inn hotels, excluding any new hotels we
develop.
By selling the hotels, we hope to redeploy our assets into activities that will
earn higher returns, such as hotel development for third parties and joint
ventures. By 2005 we would like our joint venture development activity to grow
to an annual rate of 10 to 15 joint venture hotels. Developing hotels through
joint ventures requires less capital from the Company, compared to a wholly
owned project, allowing us to build more hotels. In addition, the Company
intends to develop larger hotels, which is expected to create operational
efficiencies, and increase the cash flow from the Cendant agreements through
larger development incentive fees and greater royalty sharing payments.
In accordance with Statement of Financial Accounting Standard (SFAS) No. 144,
"Accounting for Long-Lived Assets," we have recorded a $5.4 million pre-tax,
non-cash impairment charge in the second quarter of 2003, related to some of the
hotels targeted for sale, including approximately $4.6 million pre-tax related
to AmeriHost Inn hotels and approximately $862,000 pre-tax related to other
branded hotels. In total, we expect to record an overall book gain, net of the
non-cash impairment charge, from all hotels presently under contract and those
slated to be sold, ranging from approximately $1.3 million to $4.5 million,
pre-tax. The hotels expected to be sold at a gain will be reported as of the
date the sale transactions close for each of these hotels. There can be no
assurance that the anticipated sales will be consummated on terms satisfactory
to us. The anticipated results from these sales could differ materially from the
final amounts included in our quarterly and annual financial statements when
they are issued. Our line-of-credit agreement contains certain financial
covenants related to tangible net worth, debt to equity ratio and cash flow to
debt service ratio. Our lender has agreed to exclude the impact of the non-cash
impairment charges from these covenant calculations.
We have reported discontinued operations for the two non-core, non-AmeriHost Inn
hotels sold during the periods presented and the five consolidated properties
currently marketed for sale. We have reclassified our consolidated statements of
operations for the three and six months ended June 30, 2003 and 2002, and our
consolidated balance sheet as of June 30, 2003, as a result of implementing SFAS
144 to reflect discontinued operations of consolidated non-AmeriHost Inn hotels
sold during this period, or to be sold pursuant to the disposition plan. This
reclassification has no impact on our net income or net income per common share.
Operations of non-AmeriHost Inn hotels held for sale which are owned by joint
ventures, and which are accounted for using the equity method of accounting, are
not "discontinued operations" under the provisions of SFAS 144. The sales of our
AmeriHost Inn hotels are not treated as discontinued operations due to our
long-term royalty sharing agreement for all AmeriHost Inn hotels, which provides
for a revenue stream after the properties are sold to a new or existing
AmeriHost Inn franchisee. The non-cash impairment charge of approximately
$862,000 pre-tax, related to two of the consolidated non-AmeriHost Inn hotels to
be sold, has also been included in "discontinued operations" on the accompanying
consolidated statement of operations. The remaining three non-AmeriHost Inn
hotels to be sold pursuant to this plan are expected to be sold at a total gain
of approximately $426,000, which will be recorded in the consolidated financial
statements upon the sale of each of these hotels.
In conjunction with the implementation of our hotel disposition plan and the
anticipated reduction in hotel ownership, we have undertaken a restructuring
under which we expect to reduce our corporate and regional operations staff by
13 people, or approximately 20%. This move is expected to result in annual
savings of approximately $580,000 in labor and related costs. We expect these
savings to be partially offset by the addition of personnel in the hotel
development and financial areas, as described below. In addition, as part of the
restructuring:
o we have not replaced several corporate positions which had been
vacated as a result of normal attrition during the last three
months, saving us approximately $165,000 annually in payroll and
related costs;
o we have not filled several positions which had been budgeted for
in 2003; and
o our corporate office space needs will be reduced, which will
allow us to re-lease the vacated space.
The reduction in staff in connection with the restructuring, coupled with the
hiring of additional personnel described below, is designed to change the
composition of our staff to reflect our future direction, which we believe will
better position us for growth. We expect to incur non-recurring restructuring
charges of approximately $140,000 over the next six months. These charges
reflect costs of items such as severance benefits, insurance benefits,
outplacement services, legal services and office reconfiguration.
21
Concurrently with the restructuring, we are increasing our business and hotel
development team to assist in expanding new hotel development, primarily through
joint ventures, and to identify other business opportunities. We are currently
replacing and enhancing the roles of two executive hotel development and
construction positions recently vacated, and adding two more individuals in the
financial and market analysis area. These new and enhanced positions are
expected to bring additional depth and knowledge in hotel development,
acquisitions and capital markets.
OPERATING RISKS
Our revenues and investments are nearly all in a single industry -- the lodging
industry. As a result, our operations and results have been, and will be,
adversely affected by one or more of the risks inherent in the lodging industry.
These risks, include, but are not limited to: competition and seasonality;
cyclical overbuilding; the results and operations of franchisors utilized by our
hotels, primarily Cendant; changing levels of demand for hotel rooms and related
services, as currently evidenced since the downturn in economic conditions and
the September 11, 2001, terrorist attacks; unexpected or ongoing increases in
hotel expenses, such as insurance, energy and the costs of wages and benefits;
demographic and other market changes which impact customer preferences; changes
in governmental regulations that impact the hotel's cost of doing business; the
inability to fully reduce hotel expenditures to cover hotel revenue shortfalls;
the recurring and extraordinary costs of necessary renovations and refurbishment
of hotels; and the impact of geopolitical events.
If the present economic and lodging industry slowdown or concerns over
geopolitical events worsens significantly, or continues for a protracted period
of time, declines in the occupancy levels or average daily rates of our hotels
could have a material adverse effect on our operating results.
CRITICAL ACCOUNTING POLICIES
Our critical accounting policies are described in our 2002 Form 10-K.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2003, COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 2002
The following tables set forth our selected operations data for the three month
periods ended June 30, 2003 and 2002. This data should be read in conjunction
with our financial statements in Item 1 on this Form 10-Q.
Three Months Ended Three Months Ended
June 30, 2003 June 30, 2002
------------------------- ------------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- ----------- ----------- ----------- ----------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 11,014 69.8% $ 11,685 63.8% (5.7%)
Other hotels 509 3.2% 652 3.6% (21.8%)
Development and construction 617 3.9% 3,007 16.4% (79.5%)
Hotel sales and commissions 2,591 16.5% 1,540 8.4% 68.2%
Management services 117 0.7% 263 1.4% (55.4%)
Employee leasing 541 3.4% 868 4.7% (37.6%)
Incentive and royalty sharing 224 1.4% 147 0.8% 52.6%
Office building rental 179 1.1% 156 0.9% 14.5%
----------- ----------- ----------- ----------- -----------
15,792 100.0% 18,318 100.0% (13.8%)
----------- ----------- ----------- ----------- -----------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 7,733 48.9% 7,824 42.7% (1.2%)
Other hotels 437 2.8% 547 3.0% (20.0%)
Development and construction 544 3.4% 2,626 14.2% (79.3%)
Hotel sales and commissions 2,094 13.3% 1,498 8.2% 39.8%
Management services 75 0.5% 184 1.0% (59.4%)
Employee leasing 525 3.3% 856 4.7% (38.7%)
Office building rental 47 0.3% 29 0.2% 62.7%
----------- ----------- ----------- ----------- -----------
11,455 72.5% 13,564 74.0% (15.5%)
----------- ----------- ----------- ----------- -----------
22
4,337 27.5% 4,754 26.0% (8.8%)
Depreciation and amortization 1,032 6.5% 1,100 6.0% (6.1%)
Leasehold rents -- hotels 1,270 8.0% 1,272 6.9% (0.1%)
Corporate general & administrative 515 3.3% 386 2.2% 33.3%
Impairment provision 4,564 29.0% - - -
----------- ----------- ----------- ----------- -----------
Operating income (loss) $ (3,044) (19.3%) $ 1,996 10.9% (252.5%)
============ =========== =========== =========== ===========
Operating Income by Segment:
Hotel operations:
AmeriHost Inn hotels $ 1,163 7.4% $ 1,743 9.5% (33.3%)
Other hotels (49) (0.3%) (42) (0.2%) (17.2%)
Non-cash impairment provision (4,564) (29.0%) - - -
Development and construction 72 0.5% 379 2.1% (81.0%)
Hotel sales and commissions 497 3.1% 43 0.2% 1,063.1%
Management services 31 0.2% 65 0.4% (52.3%)
Employee leasing 16 0.1% 11 0.1% 43.6%
Incentive and royalty sharing 224 1.4% 146 0.8% 52.6%
Office building rental 91 0.6% 86 0.5% 5.9%
Corporate general & administrative (525) (3.3%) (435) (2.5%) (20.6%)
----------- ----------- ----------- ----------- -----------
Operating income (loss) $ (3,044) (19.3%) $ 1,996 10.9% (252.5%)
============ =========== =========== =========== ===========
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the
sale of seven Consolidated AmeriHost Inn hotels to Cendant franchisees,
partially offset by the opening of four newly constructed AmeriHost Inn hotels.
The hotel operations segment included the operations of 54 AmeriHost Inn hotels
and one non-AmeriHost Inn hotel comprising 3,637 rooms at June 30, 2003,
compared to 55 AmeriHost Inn hotels and one non-AmeriHost Inn hotel comprising
3,759 rooms at June 30, 2002. We have experienced an increase in competition in
certain markets, primarily from newly constructed hotels. As a result, there is
increased downward pressure on occupancy levels and average daily rates. We
believe that as the number of AmeriHost Inn hotels increases, the greater the
benefits will be at all locations from marketplace recognition and repeat
business. In addition, we typically build new hotels in growing markets where we
anticipate a certain level of additional hotel development.
Hotel development 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 were constructing one
hotel for a minority-owned entity during the three months ended June 30, 2003,
compared to one minority-owned hotel and one unrelated third party hotel during
the three months ended June 30, 2002. However, we also had several additional
projects in various stages of pre-construction development during both
three-month periods.
We closed on the sale of one wholly owned AmeriHost Inn hotel during the three
months ended June 30, 2003, at a price which was higher than the one wholly
owned AmeriHost Inn hotel sold during the three months ended June 30, 2002. We
intend to continue to build and sell AmeriHost Inn hotels in order to maximize
the value inherent in the Cendant transaction while enhancing net income and
cash flow. Several hotels are currently under contract to sell, with additional
hotels anticipated to be sold pursuant to the plan of disposition discussed
above.
Hotel management revenue decreased, due primarily to the decrease in the number
of hotels managed for third parties and minority-owned entities, which was 7
hotels, representing 554 rooms, at June 30, 2003, versus 12 hotels, representing
903 rooms, at June 30, 2002.
Employee leasing revenue decreased, due primarily to the reduction in rooms
managed for minority-owned entities and unrelated third parties as described
above, a concerted effort to decrease payroll costs which is the basis for the
employee leasing revenue, and the treatment of workers compensation insurance
cost in 2002 versus 2003.
Cendant pays us a development incentive fee each time we sell one of our
existing AmeriHost Inn hotels to a buyer who executes an AmeriHost Inn franchise
agreement with Cendant. These fees are deferred and recognized as revenue over a
76-month period. Cendant also pays us a portion of all royalty fees Cendant
receives from all of its AmeriHost Inn franchisees. Generally, Cendant receives
royalty fees from each of their franchisees based upon a percentage of guest
room revenue, ranging from 4% to 5%. In turn, Cendant pays us a portion of this
fee as stipulated in our agreement with Cendant. These royalty sharing revenues
are generally recorded when the related
23
royalty fee is earned. Development 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. We received approximately $221,000 and $535,000 during the three months
ended June 30, 2003 and 2002, respectively, in development incentive fees from
the sale of AmeriHost Inn hotels, with approximately $159,000 and $91,000
recognized during the three months ended June 30, 2003 and 2002, respectively,
from the amortization of this deferred income. We also recorded approximately
$65,000 and $56,000 in royalty sharing revenue during the second quarter of 2003
and 2002, respectively.
Office building rental consisting of leasing activities from our office
building, increased due to the leasing of additional office space in 2003 versus
2002. On October 1, 2001, we purchased the office building in which our
headquarters is located. The building contained approximately 50,000 rentable
square feet when acquired, and has been subsequently increased to approximately
56,000 rentable square feet through various building improvements. We occupy
approximately 19,000 square feet. Nearly all of the remaining space is leased to
unrelated third parties pursuant to long-term leases. Including our space, the
building is approximately 87% occupied. As part of the restructuring discussed
above, we anticipate a reduction in our office space needs, allowing us to lease
more of the building to unrelated third parties.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses decreased,
primarily due to decreases in operating costs and expenses from the hotel
operations and hotel development segments, as described below. A decrease in
operating costs in the hotel operations segment was due primarily to the fewer
number of hotels included in this segment -- 53 hotels at June 30, 2003, as
compared to 55 hotels at June 30, 2002. Operating costs and expenses as a
percentage of revenues for the Consolidated AmeriHost Inn hotels increased due
to several hotels operating during their initial stabilization period when
revenues are typically lower and significant start-up costs are incurred, as
well as increases primarily in the costs of insurance, real estate taxes and
ongoing maintenance.
Operating costs and expenses for the hotel development segment decreased,
consistent with the decrease in hotel development revenues for the three months
ended June 30, 2003, compared to the three months ended June 30, 2002. Operating
costs and expenses in the hotel development segment as a percentage of segment
revenue increased slightly during the three month period ended June 30, 2003 due
to the level of hotel construction activity from third parties and
minority-owned entities.
Hotel management segment operating costs and expenses decreased primarily due to
the decrease in the number of hotel rooms operated and managed for unrelated
third parties and minority-owned entities. Employee leasing operating costs and
expenses decreased during the three months ended June 30, 2002, compared to the
three months ended June 30, 2002, consistent with the decrease in segment
revenue for the three months ended June 30, 2003.
Office building rental operating costs and expenses consisted primarily of
expenses related to the management of our office building. Some of the office
building costs have been allocated to the other operating segments. On October
1, 2001, we purchased the office building in which our headquarters is located
and assumed the landlord duties for the other tenants.
Depreciation and amortization expense decreased slightly, primarily due to the
sale of consolidated AmeriHost Inn hotels during the last twelve months, offset
by the opening of newly constructed hotels, and the acquisition or consolidation
of existing hotels.
Leasehold rents - hotels remained consistent in the second quarter of 2003 with
the second quarter of 2002, as the portfolio of leased hotels was unchanged.
Corporate general and administrative expense increased due primarily to an
increase in professional fees and an increase in director expense associated
with a more active board and committee involvement as well as reimbursement of a
portion of the out of pocket costs and professional fees in the amount of
approximately $64,000 incurred by the Committee to Enhance Shareholder Value,
which was responsible for the election of two of our independent directors at
the 2002 annual meeting. This reimbursement was approved unanimously by all
disinterested members of the Company's Board.
The hotel impairment provision was recorded in connection with our plan for the
disposition of certain hotel assets that we intend to market for sale as
discussed above. The amount represents an adjustment for certain hotel assets to
decrease the carrying value of the assets, prior to the impairment adjustment,
to the anticipated market value, net of closing costs. The impairment adjustment
includes $4.6 million pre-tax related to AmeriHost Inn hotels to be sold which
has been included in operating income. An additional $862,000 pre-tax related to
non-AmeriHost Inn hotels
24
to be sold has been included in "discontinued operations" in the accompanying
consolidated statements of operations.
OPERATING INCOME BY SEGMENT. The following discussion of operating income by
segment is exclusive of any corporate general and administrative expense and the
non-cash hotel impairment charges. Operating income from Consolidated AmeriHost
Inn hotels decreased due to a decrease in same room revenues, the stabilization
of certain hotels, and increase in certain expenses, including insurance, real
estate taxes, and maintenance. Operating income from the hotel development
segment decreased due to the decrease in hotels developed and constructed for
third parties and minority-owned entities during the second quarter of 2003,
compared with the second quarter of 2002. Operating income from hotel sales and
commissions increased due to the sale of one AmeriHost Inn hotel at a
significant profit during the second quarter of 2003, versus the sale of one
AmeriHost Inn hotel at a smaller gain during the second quarter of 2002. The
decrease in hotel management segment operating income during the second quarter
of 2003, was due primarily to a reduction in the number of hotels managed.
Employee leasing operating income increased slightly, due primarily to the
decrease in employee leasing operating expenses. Office building rental
operating income increased, attributable to the leasing of additional office
space during the second quarter of 2003 compared to the second quarter of 2002.
INTEREST EXPENSE. The decrease in interest expense during the second quarter of
2003 compared to 2002 was attributable to the sale of AmeriHost Inn hotels. We
do not incur any interest expense on sold hotels after the date of sale. The
decrease from lower interest on floating rate debt was offset by the mortgage
financing of newly constructed or acquired consolidated hotels. 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.
CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during the
second quarter of 2003, compared to 2002, was primarily attributable to the
write down to net realizable value of property in a hotel partnership by
$100,000 during the second quarter of 2002, and the recognition of our share of
the operations in excess of our stated ownership interest as a result of our
position as general partner. Distributions from affiliates were $4,597 during
the three months ended June 30, 2003, compared to $4,225 during the three months
ended June 30, 2002.
INCOME TAX EXPENSE. We recorded income tax expense, which is directly related to
the pre-tax income during the second quarters of 2003 and 2002.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003, COMPARED TO THE
SIX MONTHS ENDED JUNE 30, 2002
The following tables set forth our selected operations data for the six month
periods ended June 30, 2003 and 2002. This data should be read in conjunction
with our financial statements in Item 1 on this Form 10-Q.
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
------------------------- ------------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- ----------- ----------- ----------- ----------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 19,536 58.2% $ 20,845 60.7% (6.3%)
Other hotels 846 2.5% 1,005 2.9% (15.8%)
Development and construction 2,097 6.2% 4,811 14.0% (56.4%)
Hotel sales and commissions 9,034 26.8% 4,901 14.4% 84.4%
Management services 228 0.7% 497 1.4% (54.0%)
Employee leasing 1,059 3.2% 1,720 5.0% (38.5%)
Incentive and royalty sharing 430 1.3% 256 0.7% 67.6%
Office building rental 356 1.1% 318 0.9% 12.0%
----------- ----------- ----------- ----------- -----------
33,586 100.0% 34,353 100.0% (2.2%)
----------- ----------- ----------- ----------- -----------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 15,397 45.8% 15,403 44.8% 0.0%
Other hotels 888 2.6% 1,084 3.2% (18.2%)
25
Development and construction 2,136 6.4% 4,624 13.5% (53.8%)
Hotel sales and commissions 7,334 21.8% 3,529 10.3% 107.9%
Management services 140 0.4% 339 1.0% (58.8%)
Employee leasing 1,027 3.1% 1,677 4.8% (38.8%)
Office building rental 96 0.3% 46 0.1% 111.3%
----------- ----------- ----------- ----------- -----------
27,018 80.4% 26,702 77.7% 1.2%
----------- ----------- ----------- ----------- -----------
6,568 19.6% 7,651 22.3% (14.2%)
Depreciation and amortization 2,066 6.2% 2,133 6.2% (3.2%)
Leasehold rents -- hotels 2,541 7.6% 2,619 7.6% (3.0%)
Corporate general & administrative 963 2.9% 774 2.3% 24.5%
Impairment provision 4,664 13.8% - - -
----------- ----------- ----------- ----------- -----------
Operating income (loss) $ (3,666) (10.9%) $ 2,125 6.2% (272.5%)
============ =========== =========== =========== ===========
Six Months Ended Six Months Ended
June 30, 2003 June 30, 2002
------------------------- ------------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- ----------- ----------- ----------- ----------
Operating Income by Segment:
Hotel operations:
AmeriHost Inn hotels $ (74) (0.3%) $ 1,160 3.4% (106.4%)
Other hotels (284) (0.9%) (373) (1.1%) 23.9%
Non-cash impairment provision (4,664) (13.8%) - - -
Development and construction (41) (0.1%) 184 0.5% (122.7%)
Hotel sales and commissions 1,699 5.1% 1,372 4.1% 23.9%
Management services 66 0.2% 131 0.4% (50.0%)
Employee leasing 31 0.1% 42 0.1% (26.9%)
Incentive and royalty sharing 429 1.3% 257 0.7% 67.6%
Office building rental 179 0.5% 195 0.6% (8.2%)
Corporate general & administrative (1,007) (3.0%) (843) (2.5%) (19.5%)
----------- ----------- ----------- ----------- -----------
Operating income (loss) $ (3,666) (10.9%) $ 2,125 6.2% (272.5%)
============ =========== =========== =========== ===========
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the
sale of seven Consolidated AmeriHost Inn hotels to Cendant franchisees, and a
1.4% decrease in same room revenues for these hotels, partially offset by the
opening of four newly constructed AmeriHost Inn hotels. We have experienced an
increase in competition in certain markets, primarily from newly constructed
hotels. As a result, there is increased downward pressure on occupancy levels
and average daily rates. We believe that as the number of AmeriHost Inn hotels
increases, the greater the benefits will be at all locations from marketplace
recognition and repeat business. In addition, we typically build new hotels in
growing markets where we anticipate a certain level of additional hotel
development.
Hotel development 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 were constructing one
hotel for a minority-owned entity during the six months ended June 30, 2003,
compared to one minority-owned hotel and one unrelated third party hotel during
the six months ended June 30, 2002. However, we also had several additional
projects in various stages of pre-construction development during both six-month
periods.
We closed on the sale of three wholly owned AmeriHost Inn hotels during the six
months ended June 30, 2003, and two wholly owned AmeriHost Inn hotels during the
six months ended June 30, 2002. In addition, the landlord sold one of the
AmeriHost Inn hotels leased to us during the first six months of 2002 We intend
to continue to build and sell AmeriHost Inn hotels in order to maximize the
value inherent in the Cendant transaction while enhancing net income and cash
flow.
Hotel management revenue decreased, due primarily to the decrease in the number
of hotels managed for third parties and minority-owned entities.
26
Employee leasing revenue decreased, due primarily to the reduction in rooms
managed for minority-owned entities and unrelated third parties as described
above, a concerted effort to decrease payroll costs which is the basis for the
employee leasing revenue, and the treatment of workers compensation insurance
cost in 2002 versus 2003.
Development 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. We received
approximately $919,000 and $771,000 during the six months ended June 30, 2003
and 2002, respectively, in development incentive fees from the sale of AmeriHost
Inn hotels, with approximately $300,000 and $167,000 recognized during the six
months ended June 30, 2003 and 2002, respectively, from the amortization of this
deferred income. We also recorded approximately $130,000 and $89,000 in royalty
sharing revenue during the first six months of 2003 and 2002, respectively.
Office building rental consisting of leasing activities from our office
building, increased due to the leasing of additional office space in 2003 versus
2002. On October 1, 2001, we purchased the office building in which our
headquarters is located. The building contained approximately 50,000 rentable
square feet when acquired, and has been subsequently increased to approximately
56,000 rentable square feet through various building improvements. We occupy
approximately 19,000 square feet. Nearly all of the remaining space is leased to
unrelated third parties pursuant to long-term leases. Including our space, the
building is approximately 87% occupied. As part of the restructuring discussed
above, we anticipate a reduction in our office space needs, allowing us to lease
more of the building to unrelated third parties.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses decreased,
primarily due to decreases in operating costs and expenses from the hotel
operations and hotel development segments as described below. A decrease in
operating costs in the hotel operations segment was due primarily to the fewer
number of hotels included in this segment -- 53 hotels at June 30, 2003, as
compared to 55 hotels at June 30, 2002. Operating costs and expenses as a
percentage of revenues for the consolidated AmeriHost Inn hotels increased due
to several hotels operating during their initial stabilization period when
revenues are typically lower and significant start-up costs are incurred, as
well as increases primarily in the costs of insurance, real estate taxes,
energy, general and administrative, and ongoing maintenance..
Operating costs and expenses for the hotel development segment decreased,
consistent with the decrease in hotel development revenues for the six months
ended June 30, 2003, compared to the six months ended June 30, 2002. Operating
costs and expenses in the hotel development segment as a percentage of segment
revenue increased during the six month period ended June 30, 2003 due to the
level of hotel construction activity from third parties and minority-owned
entities.
Hotel management segment operating costs and expenses decreased primarily due to
the decrease in the number of hotel rooms operated and managed for unrelated
third parties and minority-owned entities. Employee leasing operating costs and
expenses decreased during the six months ended June 30, 2002, compared to the
six months ended June 30, 2002, consistent with the decrease in segment revenue
for the six months ended June 30, 2003.
Office building rental operating costs and expenses consisted primarily of
expenses related to the management of our office building. Certain of the office
building costs have been allocated to the other operating segments. On October
1, 2001, we purchased the office building in which our headquarters is located
and assumed the landlord duties for the other tenants.
Depreciation and amortization expense decreased slightly, primarily due to the
sale of consolidated AmeriHost Inn hotels during the last twelve months, offset
by the opening of newly constructed hotels, and the acquisition or consolidation
of existing hotels.
Leasehold rents - hotels decreased slightly during the first six months of 2003
compared to the first six months of 2002, due to the disposition of one leased
hotel during the first quarter of 2002.
Corporate general and administrative expense increased due primarily to an
increase in professional fees and an increase in director expense associated
with a more active board and committee involvement as well as reimbursement of a
portion of the out of pocket costs and professional fees in the amount of
approximately $64,000 incurred by the Committee To Enhance Shareholder Value,
which was responsible for the election of two of our independent directors at
the 2002 annual meeting. This reimbursement was approved unanimously by all
disinterested members of the Company's Board.
27
The hotel impairment provision was recorded primarily in connection with our
plan for the disposition of certain hotel assets that we intend to market for
sale as discussed above. The amount represents an adjustment for certain hotel
assets to decrease the carrying value of the assets, prior to the impairment
adjustment, to the anticipated market value, net of closing costs. The
impairment adjustment includes $4.7 million pre-tax related to AmeriHost Inn
hotels to be sold which has been included in operating income. An additional
$862,000 pre-tax related to non-AmeriHost Inn hotels to be sold has been
included in "discontinued operations" in the accompanying statements of
operations.
OPERATING INCOME BY SEGMENT. The following discussion of operating income by
segment is exclusive of any corporate general and administrative expense and the
non-cash hotel impairment charges. Operating income from consolidated AmeriHost
Inn hotels decreased due to a decrease in same room revenues, the stabilization
of certain hotels, and increase in certain expenses, including insurance, real
estate taxes, energy, general and administrative, and maintenance. Operating
income from the hotel development segment decreased due to the decrease in
hotels developed and constructed for third parties and minority-owned entities
during the first six months of 2003, compared with the first six months of 2002.
Operating income from hotel sales and commissions increased due to the sale of
AmeriHost Inn hotels at a greater profit during the first six months of 2003,
versus the sale of AmeriHost Inn hotels during the first six months of 2002. The
decrease in hotel management segment operating income during the first six
months of 2003 was due primarily to a reduction in hotels managed. Employee
leasing operating income decreased slightly, due primarily to the decrease in
hotel employee payroll expenses. Office building rental operating income
decreased, attributable to the change in allocation of expenses to our other
business segments.
INTEREST EXPENSE. The decrease in interest expense during the first six months
of 2003 compared to 2002 was attributable to the sale of AmeriHost Inn hotels.
We do not incur any interest expense on sold hotels after the date of sale. The
decrease from lower interest on floating rate debt was offset by the mortgage
financing of newly constructed or acquired consolidated hotels. 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.
CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during the
first six months of 2003, compared to 2002, was primarily attributable to the
write down to net realizable value of property in a hotel partnership by
$100,000 during the second quarter of 2002, and the recognition of our share of
the operations in excess of our stated ownership interest as a result of our
position as general partner. Distributions from affiliates were $9,336 during
the six months ended June 30, 2003, compared to $10,310 during the six months
ended June 30, 2002.
INCOME TAX EXPENSE. We recorded income tax expense, which is directly related to
the pre-tax income during the first six months of 2003 and 2002.
OFF-BALANCE SHEET ARRANGEMENTS
Through wholly-owned subsidiaries, we are a general partner or managing member
in 14 joint ventures as of June 30, 2003. We are secondarily liable for the
obligations and liabilities of these joint ventures. As of June 30, 2003, these
joint ventures had $29.3 million outstanding under mortgage loan agreements.
Approximately $6.3 million of this amount has been included in our consolidated
financial statements as of June 30, 2003, since it is from joint ventures in
which we have a majority or controlling ownership interest, leaving
approximately $22.9 million in off-balance sheet mortgage debt with
unconsolidated joint ventures. If we subsequently obtain a majority or
controlling ownership interest in a joint venture, the joint venture's debt will
be included in our consolidated financial statements. Of this $22.9 million of
financing, we also have provided approximately $18.2 million in guarantees to
the lenders. Other partners have also guaranteed $10.8 million of these
financings. One unconsolidated joint venture mortgage loan in the amount of
approximately $1.7 million at June 30, 2003, which is one of the loans
guaranteed by us, matures in 2003. We expect that the joint venture may sell
this hotel, extend the loan, or refinance the loan prior to its maturity. The
remaining joint venture mortgage loans mature after 2004.
From time to time, we advance funds to joint ventures for working capital and
renovation projects. The advances bear interest at rates ranging from prime to
10% per annum and are due upon demand. The advances were $3.0 million at June
30, 2003, 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 through cash flow generated from hotel
operations, mortgage financing, and/or the sale of the hotel.
28
In January 2003, Interpretation No. 46, "Consolidation of Variable Interest
Entities", was issued. We are required to adopt the requirements of this
Interpretation for interim periods beginning after June 15, 2003. This
Interpretation clarifies the application of Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", and requires that we present any variable
interest entities in which we have 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 on 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, on a consolidated basis in our financial statements
beginning with the consolidated financial statements issued for the quarterly
period ended September 30, 2003. The consolidation of these joint ventures is
expected to add approximately $6.8 million in assets and $6.1 million in
liabilities to our consolidated balance sheet. As of June 30, 2003, we had
investments in, and advances to, these joint ventures of approximately $819,000,
which was presented as such under the equity method of accounting in the
accompanying consolidated financial statements.
We have determined that our combined effective economic ownership is at least
90% in each of these joint ventures at June 30, 2003. We expect that we will
continue to present all of our other unconsolidated investments under the equity
method.
The following table summarizes our contractual obligations, including
off-balance sheet mortgage loan guarantees provided for certain joint ventures:
Payments due by period
----------------------
Less than 1 -- 3 3 -- 5 More than
Total 1 year years years 5 years
------------- ------------- ------------- ------------- ---------------
Long-term debt -- consolidated $ 37,010,922 $ 7,840,814 $ 2,220,539 $ 4,547,838 $ 22,401,731
Liabilities of assets held for sale --
non-AmeriHost Inn hotels 11,161,147 11,161,147
Long-term debt of assets held for
sale -- AmeriHost Inn hotels 25,741,339 25,741,339
Long-term debt -- unconsolidated
joint ventures 22,923,726 2,494,621 2,463,323 2,111,167 15,854,615
Line of credit 4,400,000 4,400,000 - - -
Operating leases -- consolidated 66,404,412 5,823,891 11,938,435 12,394,517 36,247,569
Operating leases -- unconsolidated - - - - -
Purchase obligations:
Joint venture buyout 829,800 829,800 - - -
Lease buyout 2,225,000 2,225,000 - - -
Construction contracts 725,771 725,771 - - -
Other long-term liabilities - - - - -
------------- ------------- ------------- ------------- -------------
Total $ 171,422,117 $ 61,242,383 $ 16,622,297 $ 19,053,522 $ 74,503,915
============= ============= ============= ============= =============
We expect these obligations to be funded through operations, including the sale
of hotels, or refinanced/extended prior to maturity. The sale of the hotels
under contract and those to be sold as part of our hotel disposition plan is
expected to generate net cash of approximately $11.5 million to $14.7 million,
after the repayment of the related mortgage debt which is included in the
amounts above.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
On September 18, 2000, in connection with the approval of all joint venture
partners regarding the sale of the AmeriHost Inn brand and franchising rights to
Cendant Corporation, we entered into an agreement to purchase the remaining
ownership interests in three existing joint ventures at specified prices and to
issue options to purchase a total of 125,000 shares of our common stock to the
partners of these ventures, canceling existing options to purchase 60,000 shares
of the our common stock held by these partners. One of our directors, and
parties related to him, were partners in each of these three joint ventures.
The first joint venture acquisition was completed in 2001. The second was
completed during the second quarter of 2002 using approximately $800,000. The
final acquisition, with a specified purchase price of approximately $830,000, is
scheduled to be completed before August 31, 2003. Similar to other joint
ventures that the Company had been forming at the time, the Company was the
general partner in these three joint ventures and had guaranteed
29
minimum annual distributions to the limited partners, including our director,
and parties related to him, in the amount of 10% of their original capital
contributions. Upon the consummation of the final joint venture acquisition, we
will no longer have any joint ventures in which we have guaranteed a minimum
return to our partners.
We currently lease 22 hotels from a REIT. Pursuant to an amendment to the master
lease agreement with this REIT, we can facilitate the sale of up to eight leased
hotels by the REIT. When the REIT sells a leased hotel to a buyer who becomes an
AmeriHost Inn franchisee of Cendant, we receive:
o a commission from the REIT for facilitating the transaction which is
based upon the sale price;
o an incremental fee from Cendant;, and
o long-term royalty sharing fees from Cendant from the future royalties
paid to Cendant.
Both we and the REIT choose which properties are sold. For each hotel chosen by
us, one hotel is also chosen by the REIT. Our choice is final when the sale
transaction closes. The REIT makes their corresponding choice at this time. If
we, or the REIT, are not successful in selling the REIT's choice to a third
party, then we are obligated under the agreement to purchase the hotel from the
REIT at predetermined prices. If we do not complete the purchase of the hotel
within the specified time period, then our rent payment on all of the REIT
hotels shall be increased by 0.25% each time. We cannot close on the sale of our
third and fourth choice until the first and second REIT choices have been sold
(or purchased by us), respectively. During 2001, we facilitated the sale of two
hotels by the REIT (our first and second choices), and purchased one hotel from
the REIT (the REIT's first choice). During 2002, we purchased the REIT's second
choice, using approximately $680,000 in cash, plus mortgage financing already
committed from an affiliate of the REIT, and facilitated the sale of one hotel
by the REIT. We must facilitate the sale or purchase of the REIT's third choice
by September 15, 2003, as extended. We believe a sale of this hotel will not be
achieved by September 15, 2003, and thus we intend to purchase this hotel by
this date using cash of approximately $556,000 and mortgage financing already
committed by an affiliate of the REIT of approximately $1.7 million. In June
2003, we paid a non-refundable deposit of $250,000 toward the purchase of this
hotel.
LIQUIDITY AND CAPITAL RESOURCES
We have seven main sources of cash from operating activities:
o revenues from hotel operations;
o fees from development, construction and renovation projects,
o revenues from the sale of hotel assets;
o fees from management contracts,
o fees from employee leasing services,
o hotel development incentive fees and royalty sharing pursuant to the
Cendant transaction, and
o rental income from the ownership of an office building.
Approximately 10% of our hotel operations revenues is not received at checkout
and is generated through other businesses and contracts, such as direct billings
to local companies using the hotel and third party hotel room brokers, which is
usually paid within 30 to 45 days from billing. Fees from development,
construction and renovation projects are typically received within 15 to 45 days
from billing. Due to the procedures in place for processing our construction
draws, we typically do not pay our contractors until we receive our draw from
the equity or lending source. 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. Management
fee revenues typically are received by us within five working days of the end of
each month. Cash from our employee leasing segment typically is received as of
or prior to the pay date. The development incentive fee from Cendant is
typically received within 20 days of the simultaneous closing of the sale of an
AmeriHost Inn hotel and the execution by the buyer of a franchise agreement with
Cendant, including all proper documentation. Royalty sharing payments from
Cendant are received quarterly, based on the actual royalty payments received by
Cendant from all AmeriHost Inn hotel franchisees, except for those operated by
us. Office space rents are typically received monthly in advance, around the
first of each month.
During the first six months of 2003, we received cash from operations of $8.3
million, compared to cash received from operations of $6.3 million during the
first six months of 2002, or an increase in cash provided by operations of $2.0
million. The increase in cash flow from operations during the first six months
of 2003, when compared to 2002, can be primarily attributed to the sale of three
wholly-owned hotels in 2003, versus the sale of two wholly-
30
owned hotels and one leased hotel in 2002, offset by a decrease in hotel
development for a minority-owned hotels during 2003, and the decrease in
operating income from hotel operations.
We invest cash in three principal areas:
o the purchase of property and equipment through the construction and
renovation of consolidated hotels;
o the purchase of equity interests in hotels; and
o the making of loans to affiliated and non-affiliated hotels for the
purpose of construction, renovation and working capital.
From time to time, we may also utilize cash to purchase our own common stock.
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. Under this
authorization, to date in 2003 we have repurchased 27,300 shares. The buy back
of these shares has partially offset any dilution created by the Chief Executive
Officer's purchase of 40,000 newly issued restricted shares in connection with
his employment agreement.
During the first six months of 2003, we used $3.1 million in investing
activities compared to using $13.9 million during the first six months of 2002.
During the first six months of 2003, we used $3.8 million to purchase property
and equipment for consolidated AmeriHost Inn hotels and used approximately
$185,000 for investments in and advances to affiliates, net of distributions and
collections on advances from affiliates, offset by approximately $963,000 in net
proceeds from the sale of a non-AmeriHost Inn hotel. During the first six months
of 2002, we used $12.1 million to purchase property and equipment for
consolidated AmeriHost Inn hotels, used $1.0 million for investments in and
advances to affiliates, net of distributions and collections on advances from
affiliates, and used approximately $797,000 for the acquisition of partnership
interests.
Cash used in financing activities was $4.9 million during the first six months
of 2003, compared to cash provided by financing activities of $6.3 million
during the first six months of 2002. In 2003, the contributing factors were
principal repayments of $7.7 million, including the repayment of mortgages in
connection with the sale of a hotel, and net repayments on the line of credit of
$2.0 million, offset by $4.7 million in proceeds from the mortgage financing of
consolidated hotels. In 2002, the primary factors were principal repayments of
$3.7 million, including the repayment of mortgages in connection with the sale
of hotels, offset by $9.7 million in proceeds from the mortgage financing of
consolidated hotels and approximately $363,000 in net proceeds on the line of
credit.
We have secured a $20 million construction line of credit facility, which
provides for both construction financing as well as long-term mortgage
financing. We utilize this facility primarily for the construction of
wholly-owned AmeriHost Inn properties, as approved by the lender on a
project-by-project basis. As of June 30, 2003, approximately $11.4 million has
been utilized for four hotel projects, which has already been, or will be,
automatically converted to long-term financing. We have until October 31, 2003,
as extended, to utilize this facility for new construction projects. Any new
hotel projects with the financing committed under this facility prior to October
31, 2003 will automatically convert to the long-term financing when construction
is completed. We are currently negotiating with this lender for a new or
enhanced construction line of credit facility.
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
are not aware of any covenant violations as of June 30, 2003.
The Company's plan to sell certain AmeriHost Inn hotel assets is expected to
result in the payoff of the related mortgage debt in the amount of approximately
$25.7 million, which has been classified in current liabilities in the
accompanying consolidated balance sheet as of June 30, 2003.
At June 30, 2003, we had $4.4 million outstanding under our operating
line-of-credit, which matures April 30, 2004. The line-of-credit is
collateralized by substantially all of our assets, subject to first mortgages
from other lenders on hotel assets, and has a maximum available of $6.5 million,
reducing to $6.0 million on September 29, 2003, and to $5.5 million on February
27, 2004. The line-of-credit provides for interest at the rate of prime, plus
2.5%, with a floor of 6.75%. The credit line also provides for the maintenance
of certain financial covenants, including minimum tangible net worth, a maximum
leverage ratio, a minimum debt service coverage ratio, and a minimum net income
covenant for 2003.
31
We intend to pursue longer term financing options with our current
line-of-credit lender or other lenders that would better match our business plan
of developing, building and selling AmeriHost Inn hotels. However, there can be
no assurance that we will obtain an alternative credit facility of longer
duration under terms and conditions that we deem satisfactory.
We expect cash from operations, including proceeds from the sale of hotels, to
be sufficient to pay all operating and interest expenses in 2003, as well as
commitments to purchase hotel assets, provided that current financing facilities
remain in place.
FINANCING RISKS
The availability of financing on reasonable terms is critical to our ability to
develop hotels, maintain our operations and sell hotels. Our results and
prospects may be materially affected by the availability and conditions of
development and mortgage financing and lines-of-credit for us and for potential
purchasers and franchisees of our hotels. The requirements of lenders may be
influenced by economic and geopolitical conditions, as well as our business.
Changes in the availability or terms of financing could have a material adverse
effect on us.
SEASONALITY AND OTHER RISKS
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2002, the FASB issued Statement No. 146 "Accounting for Costs Associated
with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires that the costs
associated with exit or disposal activity be recognized and measured at fair
value when the liability is incurred. The provisions of SFAS 146 are effective
for exit or disposal activities initiated after December 31, 2002. As discussed
in Note 17, the Company anticipates incurring restructuring charges of
approximately $140,000 over the next six months.
On May 15, 2003 the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
("SFAS 150"). The issuance of SFAS 150 was intended to improve the accounting
for certain financial instruments that, under previous guidance, issuers could
account for as equity. SFAS 150 requires that those instruments be classified as
liabilities in statements of financial position and also requires disclosures
about alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. SFAS 150 affects the
issuer's accounting for a number of freestanding financial instruments,
including mandatorily redeemable shares, which the issuing company is obligated
to buy back in exchange for cash or other assets. Most of the guidance in
Statement 150 is effective for all financial instruments entered into or
modified after May 31, 2003. The Company does not expect that the implementation
of SFAS 150 will require any additional disclosures or changes in presentations
be made.
32
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.
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, 2003. As the table incorporates only those exposures
that existed as of June 30, 2003, it does not consider those exposures or
positions which could arise after that date. Moreover, the information presented
therein is merely an estimate and has limited predictive value. As a result, the
ultimate realized gain or loss with respect to interest rate fluctuations will
depend on the exposures that arise during future periods, hedging strategies and
prevailing interest rates at the time.
Average Nominal
Carrying Value Interest Rate
-------------- -----------------
Operating line of credit -- variable rate $ 4,400,000 6.75%
Mortgage debt -- fixed rate $ 25,946,914 7.71%
Mortgage debt -- variable rate $ 47,303,974 6.01%
ITEM 4. CONTROLS AND PROCEDURES
Our chief executive officer and our chief financial officer have concluded,
based on their evaluation within 90 days before the filing date of this
quarterly report, that our disclosure controls and procedures, as defined in
Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of 1934 (the
"Exchange Act"), are effective to ensure that information required to be
disclosed in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms. There have been no
significant changes in our internal controls or in other factors that could
significantly affect our disclosure controls and procedures subsequent to the
date of this evaluation.
33
PART II: Other Information
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) The following exhibits are included in this Report on Form 10-Q filed
May 15, 2003:
Exhibit No. Description
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 15d-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.
(b) Reports on Form 8-K. The following reports on Form 8-K were filed
during this period covered by this report:
Date filed Description
May 16, 2003 First quarter 2003 earnings press release
July 15, 2003 Press release providing details of previously
announced hotel disposition plan
July 16, 2003 Press release announcing corporate restructuring
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARLINGTON HOSPITALITY, INC.
By: /s/ Jerry H. Herman
----------------------------
Jerry H. Herman
Chief Executive Officer
By: /s/ James B. Dale
----------------------------
James B. Dale
Chief Financial Officer
Chief Accounting Officer
Date: August 14, 2003
34
EXHIBIT INDEX
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 15d-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.