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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the fiscal year
ended DECEMBER 31, 2003
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Commission File No. 0-15291
ARLINGTON HOSPITALITY, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-3312434
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2355 S. ARLINGTON HEIGHTS RD., SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005
- --------------------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 228-5400
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Each Class on which registered
- ------------------- ---------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.005 per share
----------------------------------------
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2) of the Act) Yes [ ] No [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing sale price of the Common Stock on June 30, 2003
as reported on the Nasdaq National Market, was approximately $9.0 million.
Common Stock held by officers, directors and each person who owns 10% or more of
the outstanding Common Stock have been excluded because such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of March 30, 2004, 5,038,149 shares of the Registrant's Common Stock were
outstanding.
The following documents are incorporated into this Form 10-K by reference: None
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PART I
ITEM 1. BUSINESS.
GENERAL
As used herein, the terms "we," "us," "our," or the "Company" refer to Arlington
Hospitality, Inc., a Delaware corporation organized in 1984, individually or
together with its subsidiaries, and our predecessors. We are engaged in the
development and construction of limited service hotels, without food and
beverage facilities, as well as the ownership, operation, management and sale of
these hotels. During the past several years, we have focused almost exclusively
on AmeriHost Inn hotels, as the largest franchisee of this brand, with limited
ownership and operation of other branded hotels. We are a full-service real
estate company, with in-house expertise and resources in development,
acquisitions, financing, construction management, property management,
marketing, and accounting. As of December 31, 2003, we had approximately 1,200
employees, with our senior officers averaging more than 15 years experience in
the hotel industry. Our hotels are located in 17 states, primarily in the
Midwestern United States. The table below sets forth information regarding our
hotels at December 31, 2003:
Open Under
Hotels Construction Total
-------------- ---------------- ---------------
Hotels Rooms Hotels Rooms Hotels Rooms
------ ----- ------ ------- ------ ------
Consolidated (1):
AmeriHost Inn hotels 49 3,161 - - 49 3,161
Other brands 5 692 - - 5 692
------ ----- ------ ------- ------ ------
54 3,853 - - 54 3,853
------ ----- ------ ------- ------ ------
Unconsolidated:
AmeriHost Inn hotels 8 574 1 96 9 670
Other brands 2 228 - - 2 228
------ ----- ------ ------- ------ ------
10 802 1 96 11 898
------ ----- ------ ------- ------ ------
Totals:
AmeriHost Inn hotels 57 3,735 1 96 58 3,831
Other brands 7 920 - - 7 920
------ ----- ------ ------- ------ ------
64 4,655 1 96 65 4,751
====== ===== ====== ======= ====== ======
(1) Consolidated hotels are those in which we have a 100% or
controlling ownership or leasehold interest and have therefore been
included in our consolidated financial statements
We created the AmeriHost Inn brand in 1989, with a focus on providing
consistent, cost-effective development and operation of mid-price,
limited-service hotels in various markets. After developing and operating the
AmeriHost Inn brands for approximately 10 years, we sold the AmeriHost Inn
brands and franchising rights to Cendant Corporation ("Cendant") (NYSE:CD) in
September 2000 (see also "Strategic Business Plan" below under the subheading
"Increase Cendant Fee Streams"). Cendant is one of the world's largest
franchising companies with several hotel brands, in addition to the AmeriHost
Inn brand, such as Super 8, Days Inn, Ramada, Howard Johnson and Wingate. To
date, nearly all of our AmeriHost Inn hotels have been developed and constructed
using a two- or three-story prototype, featuring 60 to 120 rooms, interior
corridors and an indoor pool area, and generally have been located in smaller
town markets, and to a lesser extent, secondary markets. We intend to focus our
new AmeriHost Inn development on larger, secondary markets, and have designed a
larger, three-story AmeriHost Inn & Suites prototype with more public space and
certain other enhancements for this purpose. Each of our other brand hotels are
franchised through Days Inn, Howard Johnson Express or Ramada Inn. As of
December 31, 2003, we were constructing one AmeriHost Inn hotel for a joint
venture in which we are a minority partner.
In addition to our 57 AmeriHost Inn hotels, unaffiliated third parties also
operated 46 AmeriHost Inn hotels under franchise agreements with Cendant as of
December 31, 2003, nearly all of which were previously developed, owned and
operated by us, until we sold them. As of December 31, 2003, according to a
franchise system report provided by Cendant, there were a total of 103 AmeriHost
Inn hotels open, including those owned, operated or managed by us, versus 92 as
of December 31, 2002.
Strategic Business Plan
2
In order to improve operating results, and liquidity, and to provide capital for
growth, we are focused on a strategic business plan that is intended to shift
our business model with the objective of generating increased recurring cash
flow and income streams with less investment in physical assets and less
indebtedness. Our strategies include:
- to concentrate on a few carefully selected geographic markets,
including the Midwestern U.S., California, and potentially the
Southeastern U.S., and to be a leading limited service hotel
operator and developer in those markets. Historically we have
targeted smaller towns for hotel development. Currently, we
are pursuing development opportunities in larger secondary
markets with a larger hotel prototype, which we believe will
provide a greater return on investment. We are also assessing
the market and investment return for the potential acquisition
of existing hotels for conversion to the AmeriHost Inn brand;
- to explore joint venture opportunities with partners who seek
to benefit from the depth of development and management
expertise we are able to provide, leveraging our strength as
owners and operators;
- to pursue the sale of 25 to 30 existing hotel properties at an
accelerated pace in order to realize the equity value within
the properties, so as to improve liquidity, reduce debt, and
to help fund future development projects;
- to sell newly developed hotels for our own account as well as
for joint ventures after a much shorter holding period than we
have historically;
- to seek third party development projects, that would provide
additional fee income;
- to maximize the fees generated from our contractual
relationship with Cendant,; through the sale of hotels and the
expansion of the brand;
- to improve operations at, and returns from, existing hotels
including through a possible restructuring of the long-term
lease for 21 hotels; and
- to improve our capital structure by reducing existing debt,
while exploring new, long-term sources of growth and operating
capital.
As a result, we expect that our revenue mix will change significantly, with
hotel operating revenues decreasing and sale of hotel revenues, hotel
development revenues and development incentive and royalty sharing fee revenues
increasing. We believe this shift will help us increase profit margins and
provide a greater return on capital.
In summary, we are pursuing four major initiatives as follows:
- Sell 35 - 40% of our existing owned hotel portfolio over a two
year period.
- Improve hotel operational results through revenue enhancement
initiatives, including Internet initiatives, and local,
regional, and national marketing programs, and through
aggressive cost control.
- Increase hotel development for joint ventures and third
parties.
- Increase and accelerate fees under the Cendant agreement.
In addition, as part of the strategic plan, we implemented a plan to reduce our
hotel management and other corporate staff in 2003 by approximately 20%, or 13
positions. This move is expected to result in annual savings of approximately
$580,000 in labor and related costs and has resulted in a reduction of office
space needs at our corporate headquarters. Since we own our office building, it
gives us the ability to lease out additional space to third parties. However, to
assist us in expanding our hotel development activity and increasing hotel
revenue, we subsequently added or enhanced five positions in the hotel
development, hotel marketing/revenue management, and finance areas, offsetting a
portion of the projected savings.
Hotel sales
The sale of existing hotels is an integral part of funding our growth plan.
During 2003, we conducted a comprehensive assessment of each of our hotel
properties and in July 2003, adopted a formal plan to sell 25 to 30 hotels over
a two-year period. The assessment of each hotel property included such factors
as operating cash flow, market penetration, age of property, Revenue Per
Available Room ("RevPAR") growth, demographics of the local market, individual
hotel capitalization, and new competition, among others. We determined that the
sale of a significant number of hotel properties would assist us in achieving
our financial and growth objectives. In particular, our hotel operating expenses
will decrease as we sell existing hotels and shift towards more hotel
development activity, which we believe will generate higher returns than hotel
operations activity. In addition, we determined that all of our owned
non-AmeriHost Inn hotels would be sold as part of this plan, subject to market
conditions. We anticipate using the proceeds from the sale of hotels to:
3
- provide liquidity for operational needs, both corporate and
hotel;
- reduce outstanding debt;
- provide capital for future hotel development; and
- provide capital to repurchase common stock.
When the plan for hotel disposition was adopted, we expected that the sale of
the identified hotels would 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 2003, after the adoption of this plan in July, we sold
six hotels, generating net cash proceeds of approximately $5.4 million, after
the payoff of the related mortgage debt of approximately $9.9 million. In an
effort to enhance the hotel disposition plan and maximize the activity from
potential buyers, we conducted a recent assessment of the timing, expected sales
prices, and brokerage groups to be used. As a result, we have slightly changed
the mix of hotels being offered for sale, identified and/or engaged three
additional brokers, in addition to the national broker used thus far, to market
and sell the hotels, and reevaluated the listing prices of certain hotels for
sale, or to be marketed for sale, based on current market conditions, resulting
in offering price reductions on certain hotels. As a result of this
reevaluation, we anticipate that the plan for hotel disposition, will now
generate total net proceeds toward the lower end of the range as originally
estimated, or approximately $11.9 million to $12.3 million.
Annual hotel sales activity is summarized as follows, including the number of
properties sold, the net cash proceeds to us upon sale, after the repayment of
the related mortgage debt, and exclusive of the Cendant incentive fees:
2003 2002 2001
---- ---- ----
Hotels Sold:
Consolidated hotels:
AmeriHost Inn hotels 8 5 9
Other brand hotels 2 - -
------- ------ ------
10 5 9
------- ------- ------
Unconsolidated hotels:
AmeriHost Inn hotels 1 2 -
Other brand hotels - 1 -
------- ------ ------
1 3 -
------- ------ ------
11 8 9
======= ====== ======
Net Proceeds from the sale of consolidated hotels (in thousands):
AmeriHost Inn hotels $ 8,631 $2,531 $6,172
Other brand hotels 137 - -
-------- ------ ------
$ 8,768 $2,531 $6,172
======= ====== ======
Debt paid off from the sale of consolidated hotels (in thousands):
AmeriHost Inn hotels $14,200 $7,187 $7,198
Other brand hotels 2,267 - -
------- ------ ------
$16,467 $7,187 $7,198
======= ====== ======
Upon successful completion of the sale of the properties in the plan and the
properties then 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 re-deploy the net cash into activities that will
earn higher returns than we were earning on these hotels, such as hotel
development for third parties and joint ventures.
Improve Hotel Operating Results
The lodging industry has been negatively impacted since 2001, due to the
economic downturn and its impact on both leisure and corporate travel patterns,
as well as other geopolitical events. The lodging industry experienced declining
revenues for
4
all of 2001, 2002 and the first three quarters of 2003. According to industry
analysts, such a prolonged downturn in revenues has not happened in the industry
in the past thirty years. During the latter part of 2003, and the beginning of
2004, the industry analysts have reported increased revenues for the lodging
industry, including the limited-service segment of the industry. These same
industry analysts forecast that revenues will continue to increase in 2004.
During the last several months of 2003 and the first part of 2004, our hotels
have been lagging behind industry results. We believe this is due primarily to
our hotel locations' concentration in the Midwest, where we believe the regional
economy has lagged the national averages. We believe our hotel operating results
have historically trended with this region's economic activity, and should
benefit from an upturn in the Midwestern U.S. economy.
We have initiated a multifaceted program designed to increase revenues at the
hotel properties we operate through a series of initiatives. This program, which
is aimed at maximizing market penetration and revenue on an individual and
aggregate basis, includes aggressive Internet initiatives, the fastest growing
distribution channel for the lodging industry. Our Internet marketing programs
are designed to link to more search engines and travel related web sites such as
Expedia and Hotels.com. We believe that further penetration of the Internet
market is critical to maximizing future hotel revenues. We added a revenue
manager in 2003 to assist in these initiatives, and to work with global
distribution and reservation systems to increase bookings from travel agent
groups. We are also providing significant training to our hotel management staff
to generate more local marketing activity and business from other traditional
distribution channels and market segments. In addition, in 2004 Cendant began
implementation of a frequent guest stay rewards program, called "TripRewards,"
which includes the AmeriHost Inn brand as well as Cendant's other hotel brands.
These reward programs have become very prevalent in the lodging industry,
including the limited service segment, and have usually proven, over time, to
significantly increase brand awareness and guest loyalty. We believe that, over
time, this program will help all AmeriHost Inn hotels, including ours, increase
revenue.
We have implemented a number of initiatives to control costs at our hotels,
especially in the areas of labor, insurance, utilities, and maintenance. For
example, we have reduced our housekeeping labor hours, and were successful in
significantly reducing property and other commercial insurance. We have also
started to implement energy control systems at a few hotels and are exploring
the expansion of this program.
In addition, we have entered into discussions with PMC Commercial Trust ("PMC")
(AMEX: PCC), regarding 21 AmeriHost Inn hotels owned by PMC which are leased and
operated by one of our wholly owned subsidiaries. Due to numerous economic and
market-driven factors relating to these 21 hotels, we have entered into
discussions with the objective of improving operating results with respect to
these hotels through a reduction in the lease payments, and agreeing on a plan
for the sale of the hotels to third parties. See "Leased Hotel Properties"
below. There can be no assurance that the leases will be restructured on terms
and conditions acceptable to us, if at all, or that a restructuring will improve
operating results and cash flow.
Increase hotel development
Over the last two years, we have developed three AmeriHost Inn hotels for joint
ventures in which we have an ownership interest and we currently are approaching
finalization of two new joint ventures. We believe we can achieve a higher
return on our investment by developing hotels for third parties and joint
venture projects, compared to developing and operating hotels for our own
account. In addition, we intend to selectively acquire hotels where the
opportunity exists to convert them to the AmeriHost Inn brand, again primarily
on a joint venture basis. Our goal is to increase the development activity for
third parties and joint ventures to reach a pace of developing or acquiring and
converting 10 to 15 hotels annually by the end of 2005. We anticipate that these
new developments will be larger hotels, with 80 to 90 rooms, compared to the
average of 60 to 65 rooms in our current portfolio, and will be located in
larger markets with multiple demand generators. Our focus will continue to be on
the Midwest United States, and California. We are also exploring the
Southeastern part of the United States where we feel there is significant
opportunity for limited-service hotels.
Developing hotels through joint ventures requires less capital from the Company,
compared to a wholly owned project, allowing us the capital to build more hotels
through joint ventures in a given period. In addition, the Company intends to
develop larger hotels, which is expected to create development and operational
efficiencies, and increase the cash flow from the Cendant agreements as
described below.
5
In 2003, we added to our business and hotel development team to assist in
expanding new hotel development, primarily through joint ventures, and to
identify other business opportunities. We enhanced and replaced the roles of two
executive hotel development and construction positions vacated earlier in 2003,
we added one individual in the market analysis area, and we added one position
in the corporate finance area. We believe these new and enhanced positions have
brought additional depth and knowledge in hotel development, acquisitions,
finance and capital markets.
Increase Cendant fee streams
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:
- for the 25-year term of a royalty-sharing agreement, favorable
reduced 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;
- 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
- 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, subject to certain limitations.
We also received $5.2 million from Cendant in 2000 upon the sale of the
AmeriHost Inn brand and franchising rights, net of closing costs, and three
installment payments of $400,000 each in 2001 through 2003. In conjunction with
this transaction, we changed our name to Arlington Hospitality, Inc. from
Amerihost Properties, Inc. in May 2001.
As such, the sale of existing AmeriHost Inn hotels, as well as the development
and ultimate sale of additional AmeriHost Inn hotels to third parties allows us
to generate fees under the Cendant agreement, a significant component of the
strategic plan. In addition, the development of larger hotels is also expected
to result in larger fees from Cendant, since these hotels are expected to
generate greater revenues (which is the basis for the fees) than our existing
hotels. As the AmeriHost Inn brand grows, we will also benefit from increased
royalty sharing fees when they add hotels not owned by us to the AmeriHost Inn
franchise system.
Per the terms of our Development Agreement with Cendant, we are restricted from
developing or acquiring non-Cendant brands for our own account, or developing
for unaffiliated third parties over certain annual limits. There are certain
other limitations pertaining to our acquisition of hotel management companies or
hotel management contracts. Many of the restrictions related to the development,
acquisition or management of non-Cendant brands, but not all, terminate in
September 2005. While there are many reasons outlined herein for us to focus on
growing the AmeriHost brand, such restrictions could result in our inability to
participate in other potentially profitable opportunities or diversification
strategies, especially until September 2005.
LEASED HOTEL PROPERTIES
In 1998 and 1999, we, through various subsidiaries, completed the sale of 30
AmeriHost Inn hotels to PMC Commercial Trust ("PMC"), a real estate investment
trust ("REIT") for approximately $73.0 million. Upon the respective sales to
PMC, our wholly owned subsidiary entered into agreements to lease back the
hotels for an initial term of 10 years, with two five-year renewal options. The
lease payments were fixed at 10% of the sale price for the first three years.
Thereafter, the lease payments were subject to a CPI increase with a 2% annual
maximum. We have guaranteed the lease payments of our subsidiary under the terms
of the master lease.
In January 2001, the master lease with PMC was amended to provide for the sale
of eight unidentified hotels under specified terms, and to extend the initial
lease term by five years. The amendment provides for four increases in rent
payments of 0.25% each, if these hotels are not sold to a third party or
purchased by us by the dates specified. As of December 31, 2003, the first three
scheduled rent increases were avoided due to the sale of hotels by PMC to us.
The third scheduled increase was avoided in September 2003, when we purchased a
hotel from PMC, using cash of approximately $556,000 and mortgage financing
provided by PMC of approximately $1.7 million. The fourth 0.25% increase of
approximately
6
$127,000 on an annual basis becomes effective if we do not either facilitate the
sale to a third party, or purchase from PMC, one specified hotel at a price of
approximately $2.6 million by June 5, 2004. If we decide to purchase this hotel
by June 5, 2004, we intend to fund the $2.6 million purchase price with a
combination of mortgage debt, the source of which has not yet been identified,
and cash from operations or working capital. However, there can be no assurance
that we will have the liquidity and/or acceptable financing available to
purchase this hotel at that time, and the rent increase may therefore become
effective under the existing agreements. In addition to the hotels sold pursuant
to this amendment, PMC has also sold three other hotels to third parties. We
facilitated all of the sales of hotels by PMC to third parties, and have
received a commission from PMC for this service.
Due to numerous economic and market-driven factors relating to these 21
remaining hotels, we have had to fund, on behalf of our subsidiary, a
significant portion of the approximate $5.3 million annual lease obligation, as
the aggregate operating cash flow from these hotels in 2003 was insufficient to
meet the lease obligation. We have entered into discussions with PMC, on behalf
of our subsidiary, with the objective to restructure these long-term lease
agreements. On March 12, 2004, we entered into a temporary letter agreement with
PMC that expires on April 30, 2004. The temporary letter agreement provides that
base rent will continue to accrue at the rate of approximately $445,000 per
month, as set forth in the lease agreements; however the base rent payments
required to be paid on March 1, 2004 and April 1, 2004 were reduced to
approximately $360,000 per month, with the March 1, 2004 payment being due and
payable upon the execution of the temporary letter agreement. In addition, we
were allowed to utilize $200,000 of our security deposit held with PMC to
partially fund these payments. Upon the expiration of the temporary letter
agreement on April 30, 2004, the deferred portion of the base rent
(approximately $170,000) will be payable and the security deposit is to be
restored to its March 12, 2004 balance.
Our objective of the contemplated restructuring is to improve our operating
results and cash flow with respect to these hotels, and to agree on a plan that
would transfer these hotels to third party operators through the sale of the
properties. The sale of these hotels is consistent with our strategic
objectives, as discussed above. While our objective is to reach a restructured
agreement prior to the expiration of the temporary letter agreement, there can
be no assurance that the leases will be restructured on terms and conditions
acceptable to us, if at all, or that a restructuring will improve operating
results and cash flow, or provide for the sale of the hotels to third party
operators.
HOTEL PROPERTIES
At December 31, 2003, the Company owned or managed 64 hotels in 17 states,
primarily concentrated in the Midwestern United States. The Company had one
additional hotel under construction in West Virginia.
The following is a list of hotel properties under the Company's management at
December 31, 2003, by state:
Date
State Hotel (1) Rooms Operations Began
----- --------- ------ ----------------
California AmeriHost Inn & Suites Redding 84 06/27/03
------
Florida Howard Johnson Express Inn Ft. Myers 124 09/30/92
------
Georgia AmeriHost Inn Lagrange 59 03/01/95
AmeriHost Inn Eagles Landing, Stockbridge 60 08/08/95
AmeriHost Inn Smyrna 60 12/21/95
Days Inn Northwest, Atlanta (3) 104 11/01/91
------
283
------
7
Illinois AmeriHost Inn Macomb 60 05/19/95
AmeriHost Inn Players Riverboat Hotel, Metropolis 120 02/25/94
AmeriHost Inn Rochelle 61 03/07/97
AmeriHost Inn Sycamore 58 05/31/96
Days Inn Niles 150 01/01/90
------
449
------
Indiana AmeriHost Inn & Suites Columbia City 60 03/05/99
AmeriHost Inn & Suites Decatur 60 08/30/98
AmeriHost Inn Hammond 86 03/29/96
AmeriHost Inn & Suites Huntington 62 08/21/98
AmeriHost Inn Plainfield 60 09/01/92
Days Inn Plainfield 64 05/01/90
------
392
------
Iowa AmeriHost Inn & Suites Boone 60 08/21/98
AmeriHost Inn & Suites Le Mars 63 01/07/98
AmeriHost Inn & Suites Mt. Pleasant 63 07/02/97
AmeriHost Inn & Suites Pella 60 11/02/01
AmeriHost Inn Storm Lake 61 08/13/97
------
307
------
Kentucky AmeriHost Inn Murray 60 11/01/96
------
Michigan AmeriHost Inn Coopersville 60 12/31/95
AmeriHost Inn & Suites Dewitt 75 01/24/03
AmeriHost Inn & Suites Dowagiac 64 09/28/01
AmeriHost Inn Grand Rapids North, Walker 60 07/05/95
AmeriHost Inn Grand Rapids South 61 06/11/97
AmeriHost Inn & Suites Howell 75 01/18/02
AmeriHost Inn Hudsonville 61 11/24/97
AmeriHost Inn & Suites Monroe 63 09/19/97
AmeriHost Inn Port Huron 61 07/01/97
------
580
------
Date
State Hotel (1) Rooms Operations Began
----- --------- ------ ----------------
Mississippi AmeriHost Inn Batesville 60 04/26/96
AmeriHost Inn Tupelo 61 07/25/97
Howard Johnson Express Inn Tupelo 124 12/31/01
------
245
------
Missouri AmeriHost Inn Fulton 62 01/21/99
AmeriHost Inn Mexico 61 12/06/97
AmeriHost Inn Warrenton 63 11/07/97
------
186
------
8
Ohio AmeriHost Inn Ashland 62 08/09/96
AmeriHost Inn & Suites Athens (2) 100 11/04/89
AmeriHost Inn & Suites Cambridge 71 02/06/98
AmeriHost Inn & Suites Columbus Southeast (2) 60 04/17/98
AmeriHost Inn & Suites East Liverpool (3) 66 10/20/00
AmeriHost Inn Jeffersonville North 61 07/20/96
AmeriHost Inn Jeffersonville South 60 10/14/94
AmeriHost Inn Lancaster 60 09/04/92
AmeriHost Inn Logan 60 04/16/93
AmeriHost Inn Marysville 78 06/01/90
AmeriHost Inn & Suites Oxford (3) 61 12/04/00
AmeriHost Inn & Suites Rickenbacker (3) 96 04/18/03
AmeriHost Inn St. Marys 61 11/25/97
AmeriHost Inn & Suites Toledo/Maumee (3) 85 07/24/02
AmeriHost Inn Upper Sandusky (4) 60 04/12/95
AmeriHost Inn & Suites Wilmington 61 02/21/97
AmeriHost Inn Wooster East 57 01/18/94
AmeriHost Inn Wooster North 60 10/20/95
Ramada Inn Dayton Mall 215 01/20/92
------
1434
------
Oklahoma AmeriHost Inn & Suites Enid 60 06/11/98
------
Pennsylvania Days Inn Altoona 139 08/31/92
------
Tennessee AmeriHost Inn Jackson 60 04/01/98
------
Texas AmeriHost Inn McKinney 61 01/07/97
------
West Virginia AmeriHost Inn Parkersburg North 78 06/26/95
------
Wisconsin AmeriHost Inn & Suites Lomira 60 06/08/01
AmeriHost Inn Mosinee 53 04/30/93
------
113
------
TOTAL ROOMS 4655
TOTAL PROPERTIES 64
(1) Unless otherwise noted, the Company owns a direct or indirect equity or
leasehold interest in the hotel.
(2) Indicates properties that are currently co-managed with an unaffiliated
third party.
(3) Indicates properties that are currently managed by an unaffiliated
third party.
(4) Indicates properties that were sold subsequent to December 31, 2003.
AmeriHost Inn Hotels
All of our AmeriHost Inn hotels are operated pursuant to 20-year franchise
agreements with Cendant. Pursuant to these agreements, we have access to the
franchise system's reservation system, Internet and global distribution systems,
marketing plans and trademarks, and we are a participant in the brand's frequent
guest loyalty program, "TripRewards." The franchise agreements require us to
maintain both the quality and condition of the hotel, as well as specific
operating procedures, in accordance with brand standards and inspections.
Our AmeriHost Inn hotels have typically been designed and constructed using a
two- or three-story prototype, featuring 60 to 120 rooms, interior corridors and
an indoor pool area. The AmeriHost Inn hotel's amenities and services include a
whirlpool in
9
the indoor pool area, exercise room, meeting room and extensive exterior
lighting for added security. The standard AmeriHost Inn guest room features an
electronic card-key lock, in-room safe, in-room coffee maker, telephone with
data port for personal computer, a work area and a 25" color television with
premium cable service or movies on demand. In addition, each AmeriHost Inn hotel
typically contains two to 12 whirlpool suites which provide extra amenities,
such as in-room whirlpools, microwave ovens, compact refrigerators and an
expanded sitting area. These whirlpool suites generate higher rates than those
of a standard room. AmeriHost Inn hotels do not contain food and beverage
facilities normally associated with full-service hotels. Food service for hotel
guests is generally available from adjacent or nearby free-standing restaurants
which are independently owned and operated. However, our hotels do provide a
continental breakfast.
Our AmeriHost Inn hotels are operated or managed in accordance with guidelines
we established over the past 15 years, as well as by Cendant, which are designed
to provide guests with a consistent lodging experience. We believe the quality
and consistency of the amenities and services provided by the AmeriHost Inn
hotels increase guest satisfaction and repeat business. In addition, the
AmeriHost Inn brand maintains a Commitment Plus 100% guest satisfaction
guarantee program. This program guarantees that every guest will leave
satisfied. All AmeriHost Inn employees have the authority to correct any
oversight to the guest's satisfaction, or the guest's money will be refunded, up
to 100%. This 100% satisfaction guarantee assists the brand in maintaining its
quality and consistency.
We have historically targeted smaller town markets for new development.
Currently, we are focused on larger, secondary markets, with established,
multiple demand generators such as major traffic arteries, office complexes,
industrial parks, shopping malls, colleges and universities or tourist
attractions, as the principal location for the development and construction of
AmeriHost Inn hotels. An AmeriHost Inn hotel typically is positioned to attract
both business and leisure travelers seeking consistent amenities and quality
rooms at reasonable rates, generally ranging from $50 to $80 per night,
depending on general economic and local market conditions and seasonality.
We believe our in-house design staff, centralized purchasing program, strict
cost controls and experience gained with the construction of more than 100
hotels all contribute to a favorable cost structure for developing and
constructing new AmeriHost Inn hotels. Furthermore, due to the centralization of
all accounting, purchasing, payroll and other administrative functions, we
believe each hotel is operated with reduced on-site staff.
Of our 57 existing AmeriHost Inn hotels, 36 are either wholly owned by us or we
participate in as joint venture partner while a wholly owned subsidiary leases
the other 21 hotels from PMC pursuant to a long-term lease agreements. The
Company has guaranteed such lease payments. The terms of such lease, which were
entered into in 1998 and 1999 for 30 hotels initially, are currently being
discussed with PMC for possibly restructuring, as the Operational cash flow from
the 21 hotels is significantly less than the approximate $5.3 million annual
lease obligations.[See "Leased Hotel Properties" above].
Other Owned Hotels
We primarily acquired our non-AmeriHost Inn hotels through joint ventures prior
to 1993. These hotels are owned, operated and managed principally as part of
national franchise systems under such brands as Days Inn, Howard Johnson Express
or Ramada Inn. Cendant also owns these brands. We believe that maintaining a
national franchise is important for these hotels in order to maintain their
occupancy levels, which are supported by the franchisor's national reservation
systems, marketing efforts and brand name recognition.
Our non-AmeriHost Inn hotels generally are located in smaller town markets, with
nearby demand generators. The non-AmeriHost Inn hotels contain 64 to 215 rooms,
generate average daily rates ranging from $40 to $65 per night and offer a
variety of amenities and services. The non-AmeriHost Inn hotels include limited-
and full-service hotels. The full-service hotels primarily contain food and
beverage facilities, many of which are operated through lease arrangements with
non-affiliated restaurant operators. These hotels have generally underperformed
our AmeriHost Inn hotels.
10
As part of our strategy to focus on development and ownership of AmeriHost Inn
hotels, we intend to sell all our owned, non-AmeriHost Inn hotels as market
conditions warrant. The net proceeds from the sales of these hotels, will be
used for working capital purposes or the development of additional AmeriHost Inn
hotels.
Hotel Revenue Results
Same room revenues for all AmeriHost Inn hotels we owned and operated, including
unconsolidated minority-owned hotels, are presented below. These results relate
to all the AmeriHost Inn hotels that have been operating for at least 13 full
months during the periods presented.
Three Months Ended Twelve Months Ended
December 31 December 31
------------------ -------------------
Occupancy - 2003 51.5% 56.7%
Occupancy - 2002 51.1% 56.7%
Increase (decrease) 0.8% (0.0%)
Average Daily Rate - 2003 $56.49 $57.15
Average Daily Rate - 2002 $56.15 $57.25
Increase (decrease) 0.6% (0.2%)
Revenue per Available Room - 2003 $29.08 $32.40
Revenue per Available Room - 2002 $28.71 $32.48
Increase (decrease) 1.2% (0.3%)
The table below shows our same room average occupancy, ADR and RevPAR in 2003
for our AmeriHost Inn hotels and for our other branded hotels. These statistics
include the AmeriHost Inn hotels and other branded hotels open and operating for
a period of more than 13 months as of December 31, 2003.
Average Average Revenue Per
Occupancy Daily Rate Available Room
--------- ---------- --------------
AmeriHost Inn (54 hotels) 56.4% $56.89 $32.10
Other Brand (7 hotels) 44.2% $49.26 $21.79
All hotels (61) 53.9% $55.57 $29.93
The table below shows our AmeriHost Inn hotel averages for occupancy percentage,
average daily rate ("ADR") and RevPAR in 2003, broken down by various locations.
These statistics include all of our AmeriHost Inn hotels open and operating for
a period of more than 13 months as of December 31, 2003.
Average Average Revenue Per
Occupancy Daily Rate Available Room
--------- ---------- --------------
Ohio (17 hotels) 54.3% $62.76 $34.10
Illinois, Iowa and Wisconsin (11 hotels) 61.3 52.93 32.45
Michigan and Pennsylvania (8 hotels) 49.8 57.37 28.56
Georgia, Mississippi and West Virginia (6 hotels) 60.2 54.21 32.61
Indiana and Kentucky (6 hotels) 55.1 56.05 30.86
Texas (1 hotel) 56.2 50.41 28.34
Other hotels (5 hotels located in Tennessee,
Florida, Missouri and Oklahoma) 60.3 52.61 31.71
All hotels (54 hotels) 56.4% $56.89 $32.10
LODGING INDUSTRY
The United States lodging industry's performance is strongly correlated to the
general economic trends and activity, with changes in gross national product
affecting both room supply and demand. These fluctuations result in cyclical
changes in average occupancy rates, average daily rates, and revenue per
available room. After the recession of the early 1990's, the United States
lodging industry showed significant improvement throughout the mid and late
1990s in terms of aggregate
11
RevPAR and profitability results. In 2000, the industry had its most profitable
year ever, and the growth in hotel room demand peaked. In 2001, the United
States lodging industry was severely impacted by the economic downturn, the
September 11th terrorist attacks and excess supply. Although, the rate of
industry-wide decline slowed in 2002 versus 2001, the industry remained in a
stagnant-to-downward trend during most of 2003 with minor increases for the
year, as indicated by the following statistics reported by
PricewaterhouseCoopers, a leading industry analyst:
2003 2002 2001
---- ---- ----
Change in industry-wide occupancy +0.2% -1.0% -5.8%
from prior year
Change in industry-wide RevPAR +0.2% -2.6% -6.9%
from prior year
Our hotel operating results have been affected by the downward economic and
industry trends in 2001 and 2002 and for most of 2003, although in 2002 our
hotels were impacted to a lesser degree than its competitors with respect to
RevPAR results. For 2002, same room RevPar for our AmeriHost Inn hotels
increased 3.7%, significantly outpacing the overall lodging industry and the
0.6% decrease in the limited-service sector according to Smith Travel Research,
another industry analyst. In 2003, RevPAR increased 0.5% for the mid-scale
without food and beverage segment for the lodging industry, according to Smith
Travel Research. Same room RevPAR for our AmeriHost Inn hotels decreased 0.3% in
2003, underperforming the mid-scale without food and beverage segment of the
lodging industry. This industry segment increase was primarily achieved in the
last quarter of 2003. While the RevPAR results for our AmeriHost Inn hotels
improved during the fourth quarter of 2003 compared to the prior year and
compared to the results of the prior quarters in 2003, they did not increase at
the same rate as the industry segment.
We believe our hotels were negatively impacted in 2003 by the following trends:
a continuing stagnation in business travel primarily due to a weak economy, and
new hotel room supply in several of our markets, even though overall industry
construction of new units continued to decrease versus 2002.
The industry outlook for 2004 is more optimistic. Historically, as mentioned
above, lodging demand in the United States correlates to changes in U.S. Gross
Domestic Product (GDP) growth, with typically a two to three quarter lag period.
Therefore, given the relatively strong U.S. GDP growth in the past six months
and the projections for the balance of 2004, an improvement in 2004 in lodging
demand is predicted by industry analysts. Such improvement, and its continuation
beyond 2004 will be dependent upon several factors including: the strength of
the economy; the correlation of hotel demand to new hotel supply, which is
expected to improve in 2005; and the impact of global or domestic events on
travel and the hotel industry.
As shown in the chart below, PricewaterhouseCoopers predicts that the industry's
results will improve in 2004 and 2005, after three difficult years. As discussed
above, we expect our hotels to participate in such industry upturn, however
there can be no assurance that any improvement will be realized.
2001 2002 2003 2004 2005
----- ----- ----- ----- -----
Occupancy % 59.7% 59.1% 59.3% 61.2% 61.7%
Percentage change in -5.7% -1.1% 0.4% 3.2% 0.8%
occupancy from prior year
Percentage change in average -1.0% -1.4% -0.1% 1.9% 3.0%
daily rate from prior
year
Percentage change in RevPAR -6.6% -2.5% 0.3% 5.2% 3.9%
from prior year
12
Source: PricewaterhouseCoopers forecasts for 2004 and 2005; Smith Travel
Research statistics for 2001-2003
Most analysts predict, consistent with historical industry results, that the
mid-scale without food and beverage segment, should outperform the industry
trends outlined above. There can be no assurance that such mid-scale without
food and beverage segment will outperform the industry, or that our hotels will
achieve industry or sector wide increases in line with such forecasts.
DEVELOPMENT AND CONSTRUCTION
We pursue new business utilizing an interdisciplinary staff composed of
architects, interior designer, purchasing, an escrow agent, and construction
professionals to perform many tasks in-house, thereby reducing costly outsourced
services and the length of time needed to construct our hotels. By administering
the building process with our own staff, we believe we are often able to offer a
competitive advantage in terms of pricing, and length of time for construction,
compared to other developers.
We build for ourselves and for joint venture entities in which we retain an
equity position in the hotel. We also offer turnkey services to unaffiliated
third parties under a general contractor agreement, which includes development,
construction, architectural/engineering, interior design and FF&E (furniture,
fixtures and equipment) purchasing.
To control costs and reduce risk, we require bids on substantially all
construction related contracts, and obtain pricing from other vendors, prior to
purchasing the land, to verify the accuracy of the development budget. Then we
either hire a general contractor to construct the hotel for a fixed price, or
act as the general contractor and enter into all subcontracts directly. In
either case, we purchase directly many of the materials and FF&E installed in
the hotel to control costs.
Our project superintendents and project managers oversee each phase of
construction in order to assure the quality and timing of the construction. Each
AmeriHost Inn hotel is built using one of our prototypical designs, which means
that, except for the interior color scheme, our AmeriHost Inn hotels are
consistent in nearly every detail, including the overall layout, room sizes and
indoor pool area. The replication of our prototype designs, with as few changes
as possible, allows for accurate budgeting of construction and overhead costs.
We recently concluded an in-depth analysis and assessment of the furniture,
fixtures & equipment, and other amenities used in our AmeriHost Inn hotels, and
have incorporated several changes and upgrades into our pending new
developments. We are also designing a slightly upgraded facility, at minor
incremental cost, meant for larger markets. This hotel will include amenities
such as a sundry shop, guest laundry, a business center, a larger exercise room,
and a game room. We expect to utilize the upgraded version in one or more of our
new developments in 2004, subject to Cendant's approval as franchisor.
Development and Construction Growth Strategy
Having developed more than 100 hotels throughout the continental United States,
we believe we have a strong reputation in construction and development that
enables us to effectively market these services to unaffiliated entities. The
association with Cendant in franchise development and brand growth affords us an
opportunity to offer and provide these services for a fee to potential Cendant
franchisees. We anticipate increasing our efforts to grow such third-party
income streams.
Hotel development activity is summarized as follows:
2003 2002 2001
---------------------------- ---------------------------- ----------------------------
Unaffiliated & Unaffiliated & Unaffiliated &
Unconsolidated Consolidated Unconsolidated Consolidated Unconsolidated Consolidated
Hotels (1) Hotels (2) Hotels (1) Hotels (2) Hotels (1) Hotels (2)
-------------- ------------ -------------- ------------ -------------- ------------
Under construction at
beginning of year 1 3 2 3 - 2
Starts 1 - 1 2 2 4
13
Completions 1 3 2 2 - 3
--- ---- ---- ---- --- ---
Under construction at
end of year 1 0 1 3 2 3
=== ==== ==== ==== === ===
(1) hotels developed/constructed for unaffiliated third parties and
entities in which the Company holds a non-controlling, minority
ownership interest
(2) hotels developed/constructed for the Company's own account and for
entities in which the Company has a controlling ownership interest
During 2003, we completed construction on four AmeriHost Inn hotels, which were
started in 2002 and began construction on one additional AmeriHost Inn hotel.
For several internal and industry factors described herein, the pace of new
developments slowed in 2003. The one AmeriHost Inn hotel currently under
construction is scheduled to open in the second quarter of 2004. In addition, we
currently have two land sites under contract to purchase for potential hotel
developments located in Michigan and Ohio. Several additional potential
AmeriHost Inn sites have been identified in California, and the Midwest and
Southeastern United States. We believe that additional hotel developments in
California and the Midwest will build on our historical development success and
brand awareness in those regions. The Southeast has been identified as a third
region for possible expansion due to its positive population and employment
growth trends, availability of reasonably priced land sites, and supply of
existing older hotel product which are deemed to be competitively at risk to the
introduction of more modern and physically attractive hotel facilities. An
increase in the pace of our hotel development activity is essential to our
strategic business plan. We are also assessing a strategy involving the
acquisition of existing hotels with the conversion to the AmeriHost Inn brand.
In 2004, we will place renewed emphasis on working with existing and new joint
venture partners, and with non-affiliated parties in developing and providing
"turnkey" completed AmeriHost Inn hotels. Under our franchise agreements with
Cendant, we can claim exclusive rights to certain geographic markets for a
period of time, allowing us to build a strong presence in that market to achieve
economies of scale and competitive advantages.
Historically, we have financed our hotel development and construction through a
combination of equity and debt or lease financing, with the equity typically
provided by us and/or our joint venture partners, debt financing typically
provided by local or regional banks, and leasing arrangements provided by PMC, a
real estate investment trust. The AmeriHost Inn hotel under construction at
December 31, 2003, is being financed by a joint venture ownership entity through
a combination of debt and equity.
We believe that we can develop and operate additional AmeriHost Inn hotels in
larger, secondary markets that will achieve occupancies and average daily rates
similar to those achieved by its local mid-market, limited-service hotel
competition. Moreover, we believe that the development of additional AmeriHost
Inn hotels, through the Company as well as through additional AmeriHost Inn
franchise sales by Cendant, and the resulting expanded geographic diversity will
continue to enhance the awareness of the AmeriHost Inn brand, improving revenues
and market penetration at existing, as well as future, AmeriHost Inn hotels. We
believe that leveraging our expertise in hotel development and management by
providing these services to unaffiliated parties, including other and Cendant
franchisees, will also assist us in reaching our financial objectives.
Joint Venture Hotel Development
As of December 31, 2003, we had 15 projects (including one vacant parcel holding
and one hotel under construction) with joint venture partners, including
multiple projects with certain joint venture partners, and two additional joint
venture projects that are in the final stages of the development process. Our
joint ventures have taken various forms, including general partnerships, limited
partnerships, and limited liability companies. Each joint venture has been
formed with respect to a particular hotel project and reflects the
characteristics of that project, including the relative contributions, in cash,
property or services, of its partners. In most instances, the joint venture has
taken the form of a limited partnership or a limited liability company, with a
wholly-owned subsidiary of the Company as a general partner or managing member
with sole or joint management authority. Our subsidiary, as general partner or
managing member, has typically received an ownership interest ranging from 1% to
30% for contributing our expertise. In certain cases, the subsidiary also has
contributed a minimal amount of cash. The limited partners or members (which may
include the Company or its affiliates in some instances) have typically
contributed the cash equity required to fund the project and have received
interests proportionate to their contributions. A typical joint venture
agreement provides that the profits and losses of the entity will be allocated
among the partners in proportion to their respective interests. However, the
distribution of operating cash flow and asset sale proceeds to us in proportion
to our ownership interest
14
is often subordinate to the prior return of capital and other distributions
payable to the other joint venture partners. As the general partner or managing
member, our subsidiary generally has significant management authority with
respect to the day-to-day operations of the joint venture. In certain instances,
the joint venture agreement or applicable law provides to the other joint
venture partners the right to amend the joint venture agreement, approve or
prevent a transfer of the general partner's partnership interest, remove the
general partner for cause, approve significant transactions or dissolve the
joint venture. Furthermore, in certain cases, we are obligated and/or have
funded operating shortfalls on behalf of the joint ventures, usually in the form
of interest-bearing loans. The joint venture agreements do not typically
restrict our right to engage in related or competitive business activities. As
part of our strategic plan, we intend to pursue additional joint venture
arrangements for the development of new AmeriHost Inn hotels.
15
HOTEL OPERATIONS
Our operating goal is to provide its customers with a consistent lodging
experience by offering a set of amenities and services that meet or exceed the
customer's expectations. We developed a set of standards and procedures for all
aspects of operating an AmeriHost Inn hotel, including management, accounting,
marketing, quality control, housekeeping, human resource administration,
training, auditing, and purchasing.
The Senior Vice President of Operations is responsible for establishing
strategic objectives for all hotel operations with a goal of maximizing RevPAR
and profitability. In pursuit of such goals, the Senior Vice President of
Operations supervises the Regional Directors of Operations, who in turn oversee
the General Managers of the hotels. The General Managers, in turn, train,
develop and oversee their hotel's operational teams. Each Regional Director of
Operations is responsible for ten to 15 hotels, depending on size and the
geographic dispersion of the properties. Regional Support Managers report to the
Regional Directors of Operations and provide training and sales support to the
region. We also have corporate sales, marketing and revenue management personnel
who provide support for national, regional and local marketing efforts, as
directed by the Vice President of Sales and Marketing. Our internal auditors
perform operational audits of each hotel, at least once a year. Their
responsibilities include a review of financial reports, cash, receivables,
operational standards, cleanliness, security and federal and state compliance
matters. This department also provides on-site training for General Managers and
other on-site personnel.
During the last quarter of 2003, and the early part of 2004, we implemented our
"Heads in Beds" room revenue enhancement initiative. This program is focused on
increasing revenues with the reorganization of the sales and marketing
department. We have also pursued additional third party Internet booking sites
that offer incremental revenue opportunities, and have built web pages for many
of the hotels in an effort to improve placement on Internet search engines. We
created a Revenue Manager position in 2003, which is responsible for the
optimization of room rate opportunities and the growth of the reservation
distribution channels.
We use a marketing strategy, which seeks active involvement in the local
community in which the hotels are located. The local business and residential
community is often the hotels' best referral source. Visitors to these
communities often seek hotel referrals from family, friends and business
associates. The General Managers are expected to devote time to participate in
activities with local businesses and the community. The General Managers are
expected to be involved in local civic groups and sponsor special events in an
effort to promote community awareness and build relationships with business
leaders and local residents. The hotels sponsor local social and community
events and open their facilities to local clubs and civic organizations. The
community involvement and local and regional marketing programs showcase the
hotel to both the corporate and leisure markets.
Our corporate and regional sales/marketing personnel, and our general managers,
also will continue to utilize Cendant's reservation system, the Internet and
other distribution channels in their efforts to increase hotel revenues. The
franchisor, Cendant, maintains a toll-free reservation number for the AmeriHost
Inn system, which allows guests to make reservations at any one of the AmeriHost
Inn hotels nationwide. In addition, the AmeriHost Inn web site is capable of
accepting reservations on-line, further improving guests' ability to easily
reserve rooms. We also participate in the Global Distribution System (GDS) and
Cendant's Internet distribution channels. GDS is the airline reservation system
utilized by travel agents to make hotel bookings. The franchise system also
periodically implements local and regional marketing campaigns using radio,
newspaper, direct mail and other marketing/sales initiatives. As part of its
franchise agreements with Cendant, all franchisees, including the Company,
contribute to the marketing fund used to promote the brand on a national level.
In addition, Cendant has recently implemented a frequent guest stay rewards
program, called "TripRewards," which includes the AmeriHost Inn brand as well as
Cendant's other hotel brands. These reward programs have become very prevalent
in the lodging industry, and have proven to substantially increase brand
awareness and guest loyalty. We believe that this program, over time, will help
all AmeriHost Inn hotels, including ours, increase revenue.
We have developed a centralized financial management system, which includes cash
management, accounts payable, the generation of daily financial and operational
information and monthly financial statements. This reporting system allows
property, regional and senior management to closely monitor operating results.
We provide standard operating procedures to maximize uniform and efficient
financial reporting. These efficiencies allow the property management to focus
on the
16
operation and marketing of the hotel. The centralized financial management
reporting system also enhances the quality and reporting of internal financial
reports. In addition, since our employee leasing subsidiary employs all of the
approximately 1,200 hotel personnel, the costs of certain payroll and related
expense are lower than if each hotel maintained its own employees. Similarly,
this system allows us to offer more attractive health insurance programs to our
employees.
Hotel Management and Employee Leasing Expertise
We offer complete operational and financial management services, including
sales, marketing, quality control, training, purchasing and accounting. This
expertise is used for our own account, as well as for joint ventures pursuant to
written management contracts. However, under certain management contracts, our
joint venture partners or co-managers are responsible for the day-to-day
operational management, while we provide full financial management and
operational consulting and assistance. As of December 31, 2003 we managed,
co-managed, or provided accounting services for all of the hotels in which we
had an ownership interest.
Company-managed hotels in which we have a minority ownership interest are
managed under contracts ranging from one to 10 years, with optional renewal
periods of equal length, and which contain provisions under which we are paid
fees equal to a percentage of total gross revenues for our services. We have
developed centralized systems and procedures, which we intend to continue to
improve as needed, allowing us to manage the hotels effectively and efficiently.
We may pursue management contracts with additional third parties, including
Cendant franchisees, while continuing to manage hotels for current, as well as
future, joint ventures.
We provide employee leasing services to hotels in which we have a minority
ownership interest. Under its employee leasing program, we employ all of the
personnel working at the participating hotels and lease them to the hotel owners
pursuant to written agreements. Employee leasing allows individual hotel owners
with minimal employees to benefit from economies of scale on personnel-related
costs that result from our employee population of approximately 1,200 hotel
employees. Our employee leasing agreements typically provide for one-year terms,
with automatic one-year renewals. We generally receive fees from each
participating hotel in an amount equal to the gross payroll costs for the leased
employees, including all related taxes and benefits, plus a percentage of the
gross payroll.
COMPETITION
There is significant competition in the mid-price, limited- and full-service
segments of the lodging industry. There are numerous hotel chains that operate
on a national or regional basis, as well as other hotels, motor inns and other
independent lodging establishments throughout the United States. Several of
these chains or franchisors have a much larger inventory of hotels within their
franchise system than the AmeriHost Inn brand. Competition is primarily in the
areas of price, location, age and quality of product, services, amenities, and
the ability of the franchisor's marketing efforts, reservation system, and other
distribution channels, to bring guests to the hotel. Many of our competitors
have recognized trade names, greater resources and longer operating histories
than our hotels and their franchise systems.
There are a number of companies that develop, construct and renovate hotels.
Some of these companies perform these services only for their own account, while
others actively pursue contracts for these services with third-party owners.
There are also many hotel management companies that provide management services
to hotels similar to the services we provided.
We believe that the relationship between the development and construction costs
and the average daily rates achieved by the AmeriHost Inn hotels is favorable
compared to many of the Company's competitors. In addition, a significant
portion of the purchasing and accounting functions related to the hotels is
handled centrally, thus enabling the local general managers and their staff to
focus their efforts on marketing and sales. The centralization of many functions
also assists in controlling costs through economies of scale.
FRANCHISE AGREEMENTS
At December 31, 2003, we had franchise agreements (collectively, the "Franchise
Agreements") with AmeriHost Inn Franchise Systems, Inc. for our AmeriHost Inn
hotels, and with Days Inn of America, Inc., Howard Johnsons Franchise Systems,
Inc. and
17
Ramada Franchise Systems, Inc. for our other branded hotels. Although the terms
of the various Franchise Agreements differ, each requires us to pay a monthly
fee for the right to operate the hotel under the "flag" of that Franchisor and
to have access to the other benefits provided by such Franchisor, including
access to reservation systems, marketing plans and use of trademarks. Pursuant
to the sale of the AmeriHost Inn brand and franchising rights to Cendant, we
operate our AmeriHost Inn hotels under favorable terms with respect to the
monthly franchise fees. The fees, including the marketing and reservation system
assessments, typically range between 4% and 10% of gross room rental revenue. In
addition, we and/or the joint venture which owns a hotel operated pursuant to a
Franchise Agreement, will have ongoing obligations to maintain the quality and
condition of the hotel to the standards required by the Franchisor. The term of
a Franchise Agreement typically is between 10 and 20 years, with a substantial
penalty for early termination by the joint venture entity or us. We believe that
we are in compliance with our Franchise Agreements, and the loss of any one of
the Franchise Agreements would not have a material impact on us. Our AmeriHost
Inn franchise agreements expire in 2020 through 2023. Our other brand franchise
agreements expire 2009 through 2017.
EMPLOYEES
As of December 31, 2003, the Company and its subsidiaries had 1,239 full and
part-time employees:
Hotel Management:
Operations 21
Accounting and finance 11
Property general managers 64
Hotel Development: 10
Hotel Operations: 933
Corporate:
General and administrative 6
Executive officers 4
Employee Leasing:
General and administrative 2
Operations 188
-----
1,239
=====
To date, we have not experienced any work stoppages or significant
employee-related problems.
CORPORATE CONTACT INFORMATION, WEB SITE, AND SEC REPORTS
Our corporate headquarters is located at 2355 South Arlington Heights Road,
Suite 400, Arlington Heights, Illinois 60005, and its phone number is (847)
228-5400. Our Web site is located at http://www.arlingtonhospitality.com. On our
Web site, you can obtain a copy of our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to those
reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities
and Exchange Act of 1934, as amended, as soon as reasonably practicable after we
electronically file such material with, or furnish such material to, the
Securities and Exchange Commission (the "SEC"). Our Internet web site and the
information contained therein or incorporated therein are not intended to be
incorporated into this Annual Report on Form 10-K.
CORPORATE GOVERNANCE
In 2002, we began implementing various corporate governance initiatives in
response to the Sarbanes-Oxley Act of 2002, as well as the recently adopted
corporate governance listing standards:
- We added four independent directors in 2002 (Messrs. Fell,
Shapiro, LaFlamme, and Belmonte), and eliminated related party
relationships with two existing directors. In addition, we
have mandated that a super majority of two-thirds of the Board
and 100% of its key committees be composed of independent
directors.
18
- The Chairman of the Board position was made independent and
separate from the Chief Executive Officer.
- An independent Vice Chairman position was created to improve
Board succession and functioning.
- Our Board of Directors determined that Gerald T. LaFlamme, the
Chairman of the Audit Committee, as well as Thomas J. Romano,
each qualify as "audit committee financial experts" as such
term is defined under Item 401 of Regulation S-K. Both Mr.
LaFlamme and Mr. Romano are "independent" as that term is used
in Item 7(d)(3)(iv) of Schedule 14A under the Exchange Act.
- Our Audit Committee adopted our Audit and Non-Audit Services
Pre-Approval Policy, which sets forth the procedures and the
conditions pursuant to which permissible services to be
performed by our independent public accountants must be
pre-approved.
- Our Audit Committee established "Audit Committee Complaint
Procedures" for the receipt, retention and treatment of
complaints regarding accounting, internal accounting controls
or auditing matters, including the anonymous submission by
employees of concerns regarding questionable accounting or
auditing matters.
- Our Board of Directors adopted a Code of Business Conduct and
Ethics, which governs business decisions made and actions
taken by our directors, officers, and employees.
- Our Board of Directors established and adopted new charters
for each of its Audit, Compensation and Corporate
Governance/Nominating Committees. Each committee is required
to be comprised solely of independent directors.
A copy of the Code of Business Conduct and Ethics is available on our website at
http://www.arlingtonhospitality.com under the heading of "About Us" and
subheading "Corporate Governance" and we intend to disclose on this website any
amendment to, or waiver of, any provision of this Code applicable to our
directors and executive officers that would otherwise be required to be
disclosed under the rules of the SEC or NASDAQ Committee. A copy of each of the
committee charters is also available on our website under the heading "About Us"
and subheading "Corporate Governance" and further subheading "Board Committees
and Charters".
A copy of the Code of Business Conduct and Ethics and the committee charters are
also available in print to any stockholder upon written request addressed to
Investor Relations, Arlington Hospitality, Inc., 2355 S. Arlington Heights Road,
Suite 400, Arlington Heights, Illinois 60005.For purposes of shareholder
communication directly with our board or suggestions of qualified director
candidates for consideration by the Corporate Governance/Nominating Committee,
the website also contains an email link to independent director Mr. Andrew E.
Shapiro, Chairman of the Corporate Governance/Nominating Committee.
ENVIRONMENTAL LAWS
We review and monitor compliance with federal, state and local provisions, which
have been enacted or adopted regulating the discharge of material into the
environment, or otherwise relating to the protection of the environment. For the
year ended December 31, 2003, we did not incur any material capital expenditures
for environmental control facilities nor do we anticipate incurring material
amounts during the year ending December 31, 2004. [See also, Item 6 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations, under the heading, "Government Regulation."]
ITEM 2. PROPERTIES.
The Company owns the office building in which its corporate offices and the
offices of its wholly-owned subsidiaries are located at 2355 South Arlington
Heights Road, Suite 400, Arlington Heights, Illinois 60005. The five-story
building contains approximately 53,000 rentable square feet, of which the
Company occupies approximately 14,000 square feet. Approximately 77% of the
space is occupied, including the space leased to various tenants under long-term
agreements, and we have engaged a broker to assist us in leasing the remainder
of the available space. This office building is pledged to secure related
long-term mortgage debt. We intend to monitor alternatives with respect to
ownership and operation of this office building, including a sale of the
building.
At December 31, 2003, we had a 100% or controlling ownership or leasehold
interest in 51 operating hotels located in 17 states. The land, building,
furniture, fixtures and equipment and construction in progress for these hotels
are reflected in our Consolidated Balance Sheet at December 31, 2003. These
assets were substantially pledged to secure related long-term mortgage debt. See
Item 1 and Notes 6 and 7 to the Consolidated Financial Statements under Item 15.
In addition to the foregoing, we have an equity interest in partnerships that
own and/or lease property. See Note 4 to the Consolidated Financial Statements
under Item 15.
19
ITEM 3. LEGAL PROCEEDINGS.
We are subject to claims and suits in the ordinary course of business. In
management's opinion, currently pending legal proceedings and claims against the
Company will not, individually or in the aggregate, have a material adverse
effect on our financial condition, results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The annual shareholders' meeting was held on October 29, 2003. Five matters were
voted with the following results:
Matter 1: Election of Directors
Director For Authority Withheld
- ------------------ --------- ------------------
Kenneth M. Fell 3,786,563 332,269
Andrew E. Shapiro 3,804,908 313,924
Jerry H. Herman 3,785,333 333,499
Salomon J. Dayan 3,805,343 313,589
Thomas J. Romano 3,786,543 332,289
Gerald T. LaFlamme 3,786,718 332,114
Steven J. Belmonte 3,786,743 332,089
Matter 2: Ratify Appointment of KPMG LLP as Independent Auditors
For Against Abstain
--- ------- -------
Total Shares Voted 4,095,345 21,242 2,245
Matter 3: Approve the 2003 Non-Employee Director Restricted Stock Plan
For Against Abstain
--- ------- -------
Total Shares Voted 2,763,033 275,106 79,188
Matter 4: Approve the 2003 Long-Term Incentive Plan
For Against Abstain
--- ------- -------
Total Shares Voted 2,277,894 753,891 80,542
Matter 5: Approve 1-for-100 Reverse Split, Followed By 100-for-1
Forward Split
For Against Abstain
--- ------- -------
Total Shares Voted 2,683,240 430,053 4,034
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is included for quotation on the Nasdaq National
Market under the symbol HOST. As of March 26, 2004, there were 527 holders of
record of the Company's common stock. The following table shows the range of
reported high and low closing prices per share.
20
High($) Low($)
------- ------
FISCAL 2002
First quarter 3.00 1.92
Second quarter 4.80 2.74
Third quarter 4.30 3.30
Fourth quarter 4.00 2.90
FISCAL 2003
First quarter 3.53 3.00
Second quarter 3.35 2.56
Third quarter 3.66 3.09
Fourth quarter 4.14 3.48
FISCAL 2004
First quarter (through March 26, 2004) 3.98 3.47
We have not declared or paid any cash dividends on our common stock. We
currently intend to retain any earnings for use in our business and, therefore,
do not anticipate paying any cash dividends in 2004. However, from time to time,
we may utilize cash to purchase our common stock. Currently, the Board of
Directors has authorized the Company to buy back, at any time and without
notice, up to 1,000,000 shares of its common stock under certain conditions.
Under this authorization we have repurchased 36,800 shares. In addition, in 2003
we executed a reverse-forward stock split whereby approximately 33,000 shares
held by shareholders owning less than 100 shares each were redeemed and
converted into a right to receive cash. Any future determination to pay cash
dividends or to purchase common stock will be made in light of our earnings,
financial position, capital requirements and such other factors as the board of
directors deems relevant.
We have not granted or issued any unregistered securities during the last three
years, except as follows:
Date Shares
Security Issued Issued Exemption
-------- ------ ------ ---------
Common stock (2) 2001 4,812 4(2)
Common stock (2) 2002 4,736 4(2)
Common stock (1) 2003 40,000 4(2)
(1) On January 17, 2003, our President and CEO exercised a purchase option
pursuant to his employment agreement whereby we issued 40,000 shares of
restricted common stock at an exercise price of $3.16 per share.
(2) Represents shares of restricted common stock issued in lieu of monthly
director cash retainer fees.
The following table sets forth information, as of December 31, 2003, with
respect to compensation plans under which equity securities of the Company are
authorized for issuance, aggregated by (i) all compensation plans previously
approved by the shareholders, and (ii) all compensation plans not previously
approved by the shareholders:
21
Number of shares
remaining available
(a) for future issuance
Number of shares Weighted average under equity
to be issued upon exercise price of compensation plans
exercise of outstanding (excluding shares
outstanding options, options, warrants reflected in
warrants and rights and rights column (a))
------------------- ---------- -----------
Equity compensation plans
approved by shareholders 327,500 $4.39 706,782
Equity compensation plans not
approved by shareholders 1,107,458 $4.19 -
--------- ----- -------
Total 1,434,958 $4.23 706,782
========= ===== =======
On August 13, 2003, the 1996 Non-Employee Director Stock Option Plan was
terminated. On October 29, 2003, the shareholders approved the Non-Employee
Director Restricted Stock Plan. This plan provides for the issuance of
restricted common stock to non-employee directors as part of their overall
compensation. A total of 200,000 restricted shares of common stock can be issued
under the plan. On November 10, 2003, the Company granted 40,500 shares of
restricted common stock to the directors pursuant to the plan, of which 75%
vested immediately, as these shares related to services performed during the
first three quarters of 2003, and 25% vested on December 31, 2003. The Company
expensed approximately $156,000 in the fourth quarter of 2003 in connection with
these restricted stock grants.
On October 29, 2003, the Company's 1996 Omnibus Incentive Stock Plan was
terminated and the shareholders approved a Long-Term Incentive Plan ("LTIP") for
key employees. The LTIP provides for the issuance of stock based awards to key
employees as part of their overall compensation, including restricted shares of
common stock, stock options, and other stock based awards. The Plan features the
following:
- The plan has a stated term of 10 years.
- The maximum number of shares that may be issued under the Plan
is 550,000, with certain annual limitations on an individual
basis.
- The Plan prohibits the re-pricing of options.
- Actions cannot be taken that would otherwise require
stockholder approval.
To date, 2,718 restricted shares of common stock have been granted pursuant to
this plan.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data presented below has been derived from
the Company's consolidated financial statements. The consolidated financial
statements for all years presented have been audited by the Company's
independent certified public accountants, whose report on such consolidated
financial statements for each year of the three-year period ended December 31,
2003, is included herein under Item 15. The information set forth below should
be read in conjunction with the consolidated financial statements and notes
thereto under Item 15 and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
22
(in thousands, except per share data)
(this presentation not covered by independent auditors' report)
Fiscal Year Ended December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue $ 72,517 $ 68,172 $ 68,124 $ 76,151 $ 76,058
Operating costs and expenses 58,842 53,060 51,187 58,736 57,868
Depreciation and amortization expense 3,602 4,339 3,899 4,542 4,567
Leasehold rents - hotels 5,033 5,112 5,833 6,525 7,307
Corporate general and administrative 2,420 2,199 1,908 1,695 1,537
Impairment provision 5,070 542 - - -
Operating income (loss) (2,449) 2,921 5,297 4,653 4,780
Interest expense, net 3,620 4,273 3,790 4,819 5,155
Gain on sale of fixed assets 400 727 1,286 6,663 553
Net income (loss) before discontinued operations $ (4,163) $ (656) $ 971 $ 4,010 $ 201
Discontinued operations (1,456) (1,054) (215) - -
--------- --------- --------- --------- ---------
Net income (loss) $ (5,619) $ (1,710) $ 755 $ 4,010 $ 201
========= ========= ========= ========= =========
Net income (loss) per share - basic:
From continuing operations $ (0.83) $ (0.13) $ 0.19 $ 0.74 $ 0.02
From discontinued operations (0.29) (0.21) (0.04) - -
--------- --------- --------- --------- ---------
$ (1.12) $ (0.34) $ 0.15 $ 0.81 $ 0.04
========= ========= ========= ========= =========
Net income (loss) per share-diluted:
From continuing operations $ (0.83) $ (0.13) $ 0.17 $ 0.81 $ 0.04
From discontinued operations (0.29) (0.21) (0.04) - -
--------- --------- --------- --------- ---------
$ (1.12) $ (0.34) $ 0.13 $ 0.74 $ 0.02
========= ========= ========= ========= =========
Weighted average shares outstanding:
Basic 5,011 4,963 4,975 4,976 5,567
========= ========= ========= ========= =========
Diluted 5,011 4,963 5,182 5,272 5,857
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Total assets $ 99,713 $ 119,934 $ 114,888 $ 98,143 $ 103,108
Long-term debt, including current portion 27,708 76,242 72,199 58,604 60,349
Liabilities of assets held for sale 38,126 - - - -
Working capital (deficiency) (2,500) (8,995) (4,575) (4,172) (6,817)
Shareholders' equity 11,787 17,370 19,067 18,266 14,181
Deferred income 11,362 10,867 10,715 12,196 14,001
OTHER DATA:
Cash provided by (used in) operating activities 20,366 14,330 15,507 1,218 (885)
Cash (used in) provided by investing activities (6,013) (17,073) (27,105) 2,728 12,344
Cash provided by (used in) financing activities (14,699) 1,964 14,617 (5,983) (12,187)
Capital expenditures (7,088) (18,583) (25,400) (10,434) (2,103)
AMERIHOST INN HOTEL OPERATING STATISTICS:
Hotels operated/managed at December 31 57 62 66 72 74
Hotel rooms operated/managed at December 31 3,735 3,995 4,229 4,590 4,705
Average occupancy 55.7% 57.4% 56.1% 59.1% 57.3%
Average daily rate $ 57.36 $ 57.48 $ 58.53 $ 56.75 $ 56.95
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Information both included and incorporated by reference in this Annual Report on
Form 10-K may contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934, and as such may involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be materially different from future results, performance or achievements
expressed or implied by such forward-looking statements. Forward-looking
statements, which are based on various assumptions and describe our future
plans, strategies and expectations, are generally identified by our use of words
such as "intent," "plan," "may," "should," "will," "project," "estimate,"
"anticipate," "believe," "expect," "continue," "potential," "opportunity," and
similar expressions, whether in the negative or affirmative. We cannot guarantee
that we actually will achieve these plans, intentions or expectations. All
statements regarding our expected financial position, business and financing
plans are forward-looking statements.
Factors that could have a material adverse effect on our operations and future
prospects include, but are not limited to:
- a downturn or sluggishness in the national economy in general,
and the real estate market specifically;
- the effect of threats or acts of terrorism and increased
security precautions on travel patterns and demand for hotels;
- governmental actions and other legislative/regulatory changes,
including changes to tax laws;
- level of proceeds from asset sales;
- ability of our hotel buyers to obtain adequate financing;
- cash available for operating expenses and ongoing capital
expenditures;
- availability of capital for new development/acquisition
growth;
- ability to refinance debt;
- rising interest rates;
- rising insurance premiums;
- competition;
- supply and demand for hotel rooms in our current and proposed
market areas, including the existing and continuing weakness
in business travel and lower-than-expected daily room rates;
and
- other factors that may influence the travel industry,
including health, safety and economic factors.
These risks and uncertainties, along with the risk factors discussed under "Risk
factors" in this Annual Report on Form 10-K, should be considered in evaluating
any forward-looking statements contained in this report or incorporated by
reference herein. All forward-looking statements speak only as of the date of
this report or, in the case of any document incorporated by reference, the date
of that document. All subsequent written and oral forward-looking statements
attributable to us or any person acting on our behalf are qualified by the
cautionary statements in this section. We undertake no obligation to update or
publicly release any revisions to forward-looking statements to reflect events,
circumstances or changes in expectations after the date of this report.
EXECUTIVE OVERVIEW
We are engaged primarily in developing, selling, owning, operating and managing
limited service hotels, without food and beverage facilities, primarily
AmeriHost Inn hotels. Our hotels are concentrated primarily in the Midwestern
and South Central United States, however we have developed a number of hotel
properties in California and the South Central U.S. over the past several years.
Our portfolio, as well as the changes in 2003 are summarized as follows:
24
Hotels at Hotels Hotels Hotels at
12/31/02 Sold/Disposed (2) Opened/Acquired 12/31/03
------------- ----------------- --------------- -------------
Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
------ ----- ------ ----- ------ ----- ------ -----
Consolidated (1):
AmeriHost Inn hotel 53 3,385 (8) (514) 4 290 49 3,161
Other brands 8 1,045 (3) (353) - - 5 692
-- ----- --- ---- --- --- -- -----
61 4,430 (11) (867) 4 290 54 3,853
-- ----- --- ---- --- --- -- -----
Unconsolidated:
AmeriHost Inn hotels 9 610 (2) (132) 1 96 8 574
Other brands 2 228 - - - - 2 228
-- ----- --- ---- --- --- -- -----
11 838 (2) (132) 1 96 10 802
-- ----- --- ---- --- --- -- -----
Totals:
AmeriHost Inn hotels 62 3,995 (10) (646) 5 386 57 3,735
Other brands 10 1,273 (3) (353) - - 7 920
-- ----- --- ---- --- --- -- -----
72 5,268 (13) (999) 5 386 64 4,655
== ===== === ==== === === == =====
(1) Consolidated hotels are those in which we have a 100% or controlling
ownership interest or a leasehold interest.
(2) Includes one leased consolidated other branded hotel, which lease had
expired in 2003 without renewal. Also includes one unconsolidated
AmeriHost Inn hotel that we acquired, and consolidated in 2003.
Our AmeriHost Inn hotels operate under franchise agreements with Cendant. Our
other brand hotels are those hotels operated under other national franchise
affiliations, such as Days Inn, Ramada Inn, and Howard Johnson Express. These
brands are also owned by Cendant.
Sources of Revenue
We generate revenue from the following primary sources:
- Hotel operations consisting of the revenues from all hotels in
which we have a 100% or controlling ownership or leasehold
interest (consolidated hotels). Unconsolidated hotels are
those hotels in which we have a minority or non-controlling
ownership or leasehold interest, and which are accounted for
by the equity method.
- Development and construction revenues consisting of fees for
new development, construction and renovation activities.
- Commissions and revenue from selling of our consolidated
AmeriHost Inn hotels.
- Incentive and royalty sharing fees consisting of the
amortization of one-time development incentive fees received
from Cendant, and our portion of the AmeriHost Inn franchise
royalty fees Cendant receives from all other AmeriHost Inn
franchisees and pays to us.
We generate revenue from additional secondary sources;
- Management and employee leasing revenues consisting of fees
for hotel management and employee leasing services.
- Rental revenue from the third-party tenants in our office
building.
Operating Expenses
Operating expenses consist of the following:
25
- Operating expenses from hotel operations consisting of all
costs associated with operating our consolidated hotels
including front desk, housekeeping, utilities, marketing,
maintenance, insurance, real estate taxes, and other general
and administrative expenses.
- Operating expenses from hotel development including all direct
costs of development and construction activities, such as site
work, zoning costs, the cost of all materials, construction
contracts, and furniture, fixtures and equipment, as well as
indirect internal costs such as architectural, design,
purchasing and legal expenses.
- Operating expenses from hotel sales equal to the net book
value of consolidated AmeriHost Inn hotels we sell.
- Operating expenses from hotel management including the direct
and indirect costs of management services, including sales,
marketing, quality control, training, purchasing and
accounting.
- Operating expenses from employee leasing including the actual
payroll cost for hotel employees.
- Operating expenses for the office building including all costs
associated with managing and owning the office building, such
as maintenance, repairs, security, real estates taxes, and
other direct and indirect administrative expenses.
Hotel and corporate level financing
Our company-owned and operated hotels have been financed historically through
either a combination of debt and equity, or lease financing. Our lenders are
typically local or regional banks, or other financial institutions, that provide
mortgage debt based on a percentage of cost or value, as determined by each
individual lender. The loan to value ratios have typically ranged from 60%-75%.
The equity requirement has been funded through our operating cash flow or other
corporate financing resources, such as our operating line-of-credit with LaSalle
Bank NA.
Our joint ventures have also historically been financed through a combination of
debt and equity, similar to the terms discussed above, and in one case, through
a long-term lease. We have also typically made an equity contribution of up to
30% of the total equity as a minority partner. In addition, we have guaranteed
the mortgage debt of the joint venture in most instances.
We paid off approximately $16.5 million in mortgage debt in 2003, in connection
with the sale of hotels. We expect to decrease our mortgage debt further as we
sell additional hotels. Total debt service for 2004, excluding mortgages which
mature in 2004, is approximately $6.0 million for all of our consolidated
hotels. Total debt service for our unconsolidated joint ventures in 2004,
excluding mortgages which mature in 2004, is approximately $1.9 million.
However, if certain anticipated hotel sales occur, these obligations would
decrease as the related mortgage debt would be paid off with the proceeds
therefrom.
In 1998 and 1999, our subsidiary completed a sale and lease back transaction
with PMC (a REIT) for 30 AmeriHost Inn hotels. Since then, PMC has sold, or we
have repurchased, nine hotels, leaving 21 hotels currently leased from PMC. The
leases expire in 2008, subject to an automatic five-year extension by either our
subsidiary or PMC, plus additional renewals through 2020. Our subsidiary's
current lease obligation for these 21 hotels is approximately $5.3 million on an
annual basis. We have guaranteed our subsidiary's obligation under the leases.
At the corporate level, our sole financing source is our operating
line-of-credit with LaSalle Bank NA. This line-of-credit is a revolving
facility, allowing us to take advances when needed, up to the allowed maximum,
and to repay any advances without penalty. This facility also requires us to
satisfy financial covenants such as minimum net worth, maximum debt to net
worth, minimum net income, and minimum debt service ratio. Our current maximum
availability under the line-of-credit is $5.5 million, subject to adjustments
discussed below.
Overall industry and economic factors
The lodging industry's performance, and the related travel patterns of both
business and leisure travelers, generally follows the trends of the overall U.S.
economy. Both the U.S. economy and the lodging industry began to decline in
2001. The
26
performances of our hotels have followed this same trend. As the U.S. economy
began to show signs of improvement in 2003, the lodging industry has followed in
the latter part of 2003. However, historically we have seen that lodging demand
trends will typically lag six to nine months behind these economic trends. Based
on the economic forecasts such as the GDP growth forecast, our industry outlook
for 2004 is optimistic.
The downturn in the lodging industry has also negatively impacted the values of
hotel assets. In an environment with declining revenues and margins, the prices
at which hotels are sold have generally been relatively lower than prior to the
economic downturn. Fluctuations in values could have a material impact on our
plan to sell a significant number of hotels on an accelerated basis in 2004 and
2005, and the net cash proceeds that we receive.
Key business trends and developments
We have several key indicators that we use to evaluate the performance of our
business. These indicators include room revenue per available room, or RevPAR,
and RevPAR penetration index. RevPAR is a commonly used measure within the hotel
industry to evaluate hotel operations. RevPAR is defined as the product of the
average daily room rate charged and the average daily occupancy achieved. RevPAR
does not include revenues from telephone and other guest services generated by
the property. RevPAR is generally considered the leading indicator of core
revenues for many hotels, and we use RevPAR to compare the results of our hotels
between periods and to compare results of our comparable hotels.
The table below shows our same room AmeriHost Inn hotel RevPAR results versus
the mid-scale without food and beverage segment of the limited service hotel
industry over the past eight years. Consistent with overall lodging industry
performance, our AmeriHost Inn RevPAR results have ranged from a 14.5% increase
in 1996, to a 2.1% decrease in 2001. Although our AmeriHost Inn hotels did not
outperform their segment in 2001 and 2003, they have outperformed their industry
segment's performance in six of the last eight years.
RevPAR Growth
1996 1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ---- ----
AmeriHost Inn Hotels (1) 14.5% 3.9% 9.4% 7.2% 5.9% (2.1%) 3.7% (0.3%)
Limited service segment,
without food and
beverage (2) 3.5% 3.2% 3.1% 2.2% 4.4% (1.6%) (0.6%) 0.5%
(1) Includes all AmeriHost Inn hotels we owned and operated, including
unconsolidated minority-owned hotels, operating for at least 13 full
months during the periods presented.
(2) According to Smith Travel Research, a leading industry analyst.
27
A related revenue measure for our hotels is the RevPAR penetration index. The
RevPAR penetration index reflects each property's RevPAR in relation to the
RevPAR for that property's competitive set. We use the measure as an indicator
of a property's market share. For example, a RevPAR penetration index of 100
would indicate that a hotel's RevPAR is, on average, the same as its
competitors. A RevPAR penetration index exceeding 100 would indicate that a
hotel maintains a RevPAR premium in relation to its competitive set, while a
RevPAR penetration index below 100 would be an indicator that a hotel is
underperforming its competitive set. One critical component in this calculation
is the determination of a hotel's competitive set. Factors that we consider
include geographic proximity, as well as the level of service provided at the
property. Our methodology for determining a hotel's competitive set, however,
may differ for those used by other owners and/or managers. From a market
penetration standpoint, in the aggregate, our AmeriHost Inn hotels were at an
index of 97.3 for 2003. We believe that many factors contribute to our AmeriHost
Inn hotels which underperform their competitive set with regard to RevPAR
penetration, including:
- the relatively smaller size of the AmeriHost Inn brand
compared to many other hotel brands with significant critical
mass and market penetration,
- a lower contribution rate from the AmeriHost Inn reservation
system compared to many other hotel brands, and
- the level of new competition in the local markets which
compete directly with our hotels.
Despite some positive trends with regard to same room revenue, the cash flow
from the operations of many of our hotels in 2003, was not sufficient to pay
their related mortgage debt service, lease obligations, and ongoing capital
expenditures. Our operating margins declined significantly in 2003 as many
expenses increased substantially, including employee wages and benefits,
insurance, maintenance, utilities, and property taxes. We have a significant
amount of debt and obligations under long-term leases, such as the leases with
PMC, requiring us to dedicate a substantial portion of our cash flow from our
overall operations, including our business activities other than hotel
operations, to make these required payments.
While we believe the combination of improved demand for hotel rooms and our cost
control initiatives create the possibility of improvements in our hotel
operations in 2004, there can be no assurance that any increases in hotel
revenues, or improvement in earnings will be achieved. The trends discussed
above may not occur for any number of reasons, including slower than anticipated
growth in the economy, changes in travel patterns of both business and leisure
travelers and the continued threat of terrorist attacks, all of which may result
in lower revenues or higher operating costs and declining operating margins.
LaSalle Bank NA, the lender for our corporate line-of-credit has decreased the
availability under this facility over the past two years, from $8.5 million to
the current maximum of $5.5 million. We have recently executed a commitment from
LaSalle Bank to renew this facility through April 30, 2005. The revised terms
require that the maximum availability under the facility be reduced to $5.0
million on June 30, 2004, further reduced to $4.0 million on August 31, 2004,
and further reduced to $3.5 million on February 28, 2005. Furthermore, the
majority of the proceeds from the sale of any hotel properties must be used to
reduce the outstanding balance of the line-of-credit until it is at or below
$4.0 million, at which time the maximum availability on the line will be reduced
to $4.0 million, even if prior to the August, 31, 2004 scheduled reduction date.
The renewed facility will bear interest at the rate of 10% per annum.
Our $20 million new construction loan facility expired October 31, 2003 without
renewal. We are seeking a renewal of this facility, however we do not know when,
or if, the lender will approve this or any similar facility. We used this
facility to finance the combined construction and long-term mortgage debt
required for many of our wholly owned new construction AmeriHost Inn hotel
projects during the past few years. Mortgage financing is a critical component
of the hotel development process and we intend to seek additional financing
sources. If we, or the hotel joint ventures in which we are a partner, are
unable to obtain adequate mortgage financing on acceptable terms, our ability to
develop new hotels will be significantly limited.
Management's priorities
Based on our primary business objectives and anticipated operating conditions,
our key priorities, and focus in 2004 and the next several years include the
following:
- Divest up to 40% of our existing hotel portfolio, which hotels
in many instances have operated with cash flow that is
insufficient to pay their debt service and ongoing capital
expenditures during the past year;
28
- Expand our hotel development activities to be developing
and/or acquiring and converting hotels at a pace of 10 - 15
hotels per year by the end of 2005. We intend for this
development to primarily be the new construction of larger
AmeriHost Inn hotels, or selective acquisition of existing
hotels and their conversion to AmeriHost Inn, in larger
markets, primarily through joint ventures where we can earn
significant development fees, with the intention of selling
these hotels after a shorter holding period than we have
historically;
- Grow our relationships with existing and new joint venture
partners in connection with the development of new AmeriHost
Inn hotels;
- Improve hotel operation results through a combination of
selling hotels, revenue generation initiatives, and cost
control measures;
- Increase the fees we receive from Cendant, including the
one-time development incentive fee and the recurring royalty
sharing fees, from selling of our hotels to third parties, and
as a result of Cendant's efforts from growing the number of
AmeriHost Inn franchises through their own sales;
- Restructure our lease agreements with PMC;
- Obtain longer term corporate level financing than our
historical one-year operating line-of-credit, to better match
our financing sources with our business plan of developing,
building and selling AmeriHost Inn hotels; and
- Obtain growth capital to finance both the equity and debt
required for the anticipated development projects.
SUMMARY OF YEAR-END RESULTS. Total revenues increased 6.4% in 2003, due
primarily to increases in hotel sales and commissions and incentive and royalty
sharing fees. Total revenues from Consolidated AmeriHost Inn hotels decreased
from $43.2 million to $39.8 million during 2003, due primarily to the sale of
hotels and a 1.0% decrease in same room revenue for these hotels. Revenues from
the development segment decreased during 2003, as we were developing two
AmeriHost Inn hotels for joint ventures in 2003, versus three hotels for joint
ventures in 2002. Revenues from hotel sales and commissions increased during
2003, as a result of the sale of eight AmeriHost Inn hotels during 2003, versus
the sale of five wholly owned AmeriHost Inn hotels in 2002. Revenues from hotel
management and employee leasing segments decreased during 2003, due primarily to
termination of management contracts for five hotels effective January 1, 2003.
We received the final $400,000 installment in 2003 in connection with the sale
of the AmeriHost Inn brand names and franchising rights. We recorded a net loss
of $5.6 million for 2003, compared to a net loss of $1.7 in 2002. These results
include non-cash hotel impairment provisions in 2003 and 2002 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 2003, 2002 and
2001 are summarized as follows:
(In thousands)
2003 2002 2001
---- ---- ----
Net income (loss) from continuing
operations, before impairment $(1,123) $ (336) $ 971
Impairment provision, net of tax (3,040) (32) -
------- ------- -------
Net income (loss) from continuing
operations (4,163) (656) 971
Discontinued operations, net of tax (1,456) (1,054) (215)
------- ------- -------
Net income (loss) $(5,619) $(1,710) $ 755
======= ======= =======
Net income (loss) per share - Diluted:
From continuing operations $ (0.83) $ (0.13) $ 0.17
From discontinued operations (0.29) (0.21) $ (.04)
------- ------- -------
$ (1.12) $ (0.34) $ 0.13
======= ======= =======
CRITICAL ACCOUNTING POLICIES
29
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, or GAAP, requires management
to use judgment in the application of accounting policies, including making
estimates and assumptions. We base our estimates on historical experience and on
various other assumptions believed to be reasonable under the circumstances.
These judgments affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. If our judgment or interpretation of the facts and circumstance
relating to various transactions had been different, it is possible that
different accounting policies would have been applied resulting in a different
presentation of our financial statements. From time to time, we evaluate our
estimates and assumptions. In the event estimates or assumptions prove to be
different from actual results, adjustments are made in subsequent periods to
reflect more current information. Below is a discussion of accounting policies
that we consider critical in that they may require complex judgment in their
application or require estimates about matters that are inherently uncertain.
Consolidation Policy
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries and entities in which we have a majority or
controlling interest. All significant intercompany accounts and transactions
have been eliminated.
A joint venture project will be consolidated if we have a majority (i.e.,
greater than 50%) ownership interest, or when we have a minority ownership
interest (i.e., less than 50%) and can exercise control over the critical
decisions of the joint venture. We will evaluate several factors in determining
whether or not we have control over the joint venture to warrant consolidation.
These factors include the nature of our ownership (for example, the sole general
partner in a limited partnership, the sole managing member of a limited
liability company, etc.), oversight of the daily operations, and the ability to
make major decisions such as to refinance or sell the hotel asset without the
consent of the other partners, among others.
Minority-owned joint ventures in which we maintain a non-controlling ownership
interest are accounted for by the equity method. Under this method, we maintain
an investment account, which is increased by contributions made and our share of
the joint venture's income, and decreased by distributions received and our
share of the joint venture's losses, in accordance with the terms of the joint
venture agreement. Our share of each joint venture's income or loss, including
gains and losses from capital transactions, is reflected on our consolidated
statement of operations as "Equity in income and (losses) from unconsolidated
joint ventures."
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," which addresses how a business
enterprise should evaluate whether or not it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of
Variable Interest Entities", which was issued in January 2003. The Company is
required to adopt the requirements of FIN 46R for interim periods beginning
after March 31, 2004. This Interpretation requires that the Company present any
variable interest entities in which it has a majority variable interest on a
consolidated basis in its financial statements. The Company is continuing to
assess the provisions of this Interpretation and the impact to the Company of
adopting this Interpretation. The Company currently anticipates consolidating
four variable interest entities upon the application of FIN 46R, however the
Company is continuing to assess the provisions of this Interpretation and the
impact to the Company of adopting this Interpretation. Therefore, the impact may
change based upon this additional analysis. The consolidation of these four
joint ventures is expected to add approximately $9.7 million in assets and $7.8
million in liabilities to the Company's consolidated balance sheet. As of
December 31, 2003, the Company had investments in, and advances to, these joint
ventures of approximately $2.3 million, which was presented as such under the
equity method of accounting in the accompanying consolidated financial
statements. The Company expects that it will continue to present all of its
other unconsolidated investments under the equity method.
Revenue Recognition
We provide hotel development, management, and staffing services to unrelated
third parties and unconsolidated, minority-owned joint ventures. Revenues can be
generated in three ways: (i) we will record revenue from the development and
construction of the hotel, (ii) if we enter into a hotel management agreement
with the owner, we will recognize revenue in accordance with the terms of the
agreement, and (iii) if we enter into a hotel staffing agreement with the owner,
we will
30
recognize revenue in accordance with the terms of the agreement as services are
performed. An unrelated third party or an unconsolidated minority-owned joint
venture may contract with us for any or all three services. However, we will not
provide employee leasing services unless we also provide hotel management
services pursuant to a written agreement.
Hotel operations
The revenue from the operation of a Consolidated hotel is recognized as part of
the hotel operations segment when earned. Typically, cash is collected from the
guest at the time of check-in or checkout, however we also extend credit to
selected corporate customers. The reserve for doubtful accounts is reviewed
periodically for reasonableness and is considered appropriate as of December 31,
2003.
Hotel sales and commissions
Our intention is to operate the consolidated AmeriHost Inn hotels until a buyer
is found at an appropriate price. We may actively try to sell the hotel during
the construction period, upon opening, or anytime thereafter. Unless
specifically identified as held for sale, we will depreciate the hotel assets
and classify them as investment assets while we operate the hotel, since it is
not assured that a sale will ultimately be consummated. When a sale is
consummated, we record the hotel sale price as revenue and the net cost basis of
the hotel asset as expense, as part of our ongoing operational activity. From
time to time, PMC, a REIT which owns certain of our leased hotels, has sold its
hotels. We have earned a commission from PMC for our services in facilitating
these sales to third parties. This commission is recorded as revenue when the
sale is consummated.
Hotel development and construction
We recognize revenue from the development and construction of hotels for third
parties and unconsolidated minority-owned entities pursuant to development and
construction contracts with the hotel ownership entity. All contracts must be
fully executed prior to the start of construction. In addition, typically we
will not begin construction on a hotel for a joint venture or third party until
it is assured that both the equity and debt financing are in place. We record
the total contract price as development and construction revenue over the
relevant development and construction period, and all development and
construction costs as operating expenses in the hotel development segment.
Development fee revenue from construction/renovation projects with unaffiliated
third parties and unconsolidated joint ventures is recognized using the
percentage-of-completion method. However development fee revenue is not
recognized until certain development hurdles are met; such as the execution of a
land purchase contract and the debt and equity financing commitments.
Construction fee revenue from construction/renovation projects with unaffiliated
third parties and unconsolidated joint ventures is recognized on the
percentage-of-completion method, generally based on the ratio of costs incurred
to estimated total contract costs. Revenue from contract change orders is
recognized to the extent costs incurred are recoverable. Profit recognition
begins when construction reaches a progress level sufficient to estimate the
probable outcome. Provision is made for anticipated future losses in full at the
time they are identified.
When we build a hotel for an unconsolidated joint venture, a portion of the
profit is deferred and included on our consolidated balance sheet as deferred
income. The deferral is computed based on our ownership percentage in the joint
venture and the construction profit (as it is recognized on the percentage of
completion basis). We recognize the deferred income over the estimated useful
life of the related hotel asset. A portion of the deferral is amortized over the
same life the joint venture is depreciating the hotel asset (generally 39
years), and the remaining portion is amortized over the same life the joint
venture is depreciating the furniture, fixtures & equipment (generally 7 years).
Upon the sale of a hotel by the joint venture to an unaffiliated third party,
the remaining unamortized deferred income is recognized as equity in income and
(loss) of affiliates in our consolidated financial statements.
Hotel management services
We recognize management fee revenue when we perform hotel management services
for unrelated third parties and unconsolidated joint ventures. The management
fees are computed based upon a percentage of total hotel revenues, ranging
31
from 4% to 8%, plus incentive fees in certain instances, in accordance with the
terms of the individual written management agreements. We recognize the
management fee revenue in the hotel management segment as the related hotel
revenue is earned.
Employee leasing
We recognize employee leasing revenue when we staff hotels, and perform related
services, for unrelated third parties and unconsolidated joint ventures.
Employee leasing revenues are generally computed as the actual payroll costs
plus an administrative fee ranging from 2% to 3%, in accordance with the terms
of the individual written staffing agreements. We recognize the employee leasing
revenue in the employee leasing segment as the related payroll cost is incurred.
Although we maintain employee leasing agreements with the hotel ownership
entities, we are still ultimately responsible for its employees. In addition, we
are responsible for maintaining and determining staffing levels, scheduling,
hiring, firing, performance reviews, etc. through our managers who are our
direct employees. Moreover, we are at risk with regard to personnel issues and
lawsuits. As such, we have recorded employee leasing revenues primarily as the
gross payroll cost, plus the administrative fee.
Incentive and royalty sharing
We seek not only to generate profit from the sale of a hotel, but also to
generate an additional development incentive fee and long-term, ongoing royalty
sharing revenues from Cendant Corporation. Cendant has agreed to pay us a
development incentive fee every time we sell one of our 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 us for new hotels that we
develop which are then sold to a franchisee of Cendant. This fee applies to the
first 370 hotels we sell during the 15-year term of the agreement, expiring in
2015. The fee is computed based on the most recent twelve months revenue, or a
stipulated per room amount if the hotel has been open less than eighteen months.
Since the Cendant agreement provides for the potential reimbursement of this
fee, from future fees earned, in the event the buyer defaults on the franchise
agreement within the first 76 months, these fees are deferred when received, in
accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements." The deferred fees are amortized as incentive and royalty
sharing segment revenue in the accompanying consolidated financial statements on
a straight-line basis over the 76-month period, as the contingencies on the
revenues are removed.
Cendant has agreed to pay us a portion of all royalty fees Cendant receives from
all of its AmeriHost Inn franchisees through September 2025. Generally, Cendant
receives royalty fees from each of their franchisees based upon a percentage of
guest room revenue, ranging from 4% to 5%. In turn, Cendant will pay us a
portion of this fee as stipulated in the agreement. We include this royalty
sharing fee as incentive and royalty sharing fee revenue in the accompanying
consolidated financial statements.
Guarantees
We apply the provisions of FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others," with respect to mortgage loan guarantees for joint
ventures in which we are a partner. This interpretation elaborates on the
disclosures required by the guarantor and requires the guarantor to recognize,
at inception of a guarantee, a liability for the fair value of the obligation
undertaken. During the third quarter of 2003, we provided a guarantee related to
the mortgage debt of a joint venture in which it shares the responsibility of
the guarantee on a joint and several basis with its joint venture partners. The
guarantee is effective for the 20-year term of the mortgage loan. We have
recorded an additional investment in this joint venture, and a liability for its
share of this guarantee at the time of issuances, less accumulated amortization
of approximately $39,000, as of December 31, 2003, its estimated fair value.
Sale and Leaseback of Hotels
During 1998 and 1999, we sold 30 hotels to PMC Commercial Trust, a Real Estate
Investment Trust ("REIT") for approximately $73 million. Upon the sale of the
hotels, our subsidiary simultaneously entered into agreements to lease back each
of the hotels from the PMC. The leases are for an initial term of 15 years, as
amended, and provide for rent in the amount of 10% of the original sale price,
increased annually after year three by the lesser of 2% or the CPI adjustment.
The gains from the sale of the hotels in 1998 and 1999 were deferred for
financial statement reporting purposes, due to the continuing
32
involvement with the long-term lease agreement, and are being amortized on a
straight line basis into income as a reduction of leasehold rent expense over
the 15-year initial term. Upon the sale of a hotel, which is owned by PMC to an
unaffiliated third party, the remaining unamortized deferred income is
recognized as gain on sale of fixed assets in our consolidated financial
statements. We are currently in discussions with PMC to restructure the lease
agreements and provide for the sale of all the leased hotels (See Item 1. -
Business under the heading, "Leased hotel Properties").
Impairment of Long-Lived Assets
We periodically review the carrying value of certain long-lived assets in
relation to historical results, current business conditions and trends to
identify potential situations in which the carrying value of assets may not be
recoverable. If such reviews indicate that the carrying value of such assets may
not be recoverable, we would estimate the undiscounted sum of the expected cash
flows of such assets to determine if such sum is less than the carrying value of
such assets to ascertain if an impairment exists. If an impairment exists, we
would determine the fair value by using quoted market prices, if available for
such assets, or if quoted market prices are not available, we would discount the
expected future cash flows of such assets.
In July 2003, we implemented a plan to sell approximately 25 to 30 hotels over
the next two years. In connection with the implementation of the plan to sell
hotels, and in accordance with Statement of Financial Accounting Standard (SFAS)
No. 144, "Accounting for Long-Lived Assets," we have recorded $6.0 million in
pre-tax, non-cash impairment charges during 2003, related to 18 of the hotels
targeted for sale. Approximately $909,000 pre-tax of the non-cash impairment
charges relates to three consolidated non-AmeriHost Inn hotels anticipated to be
sold, and has been included in "discontinued operations". The non-cash
impairment charge represents an adjustment to reduce the carrying value of
certain hotel assets to the estimated sales prices, net of estimated costs to
sell.
Based on the implementation of this plan for hotel dispositions, the hotel
assets identified for sale, which are being actively marketed and expected to be
sold within a twelve month period, have been classified as "held for sale" on
the accompanying consolidated balance sheet as of December 31, 2003. Hotels
identified as part of the plan of disposition, which are not currently marketed,
and are not expected to be sold within the next twelve months, have not been
classified as "held for sale." The debt that is expected to be paid off as a
result of these hotel sales has been classified as current liabilities in the
accompanying consolidated financial statements. The results of the operations of
business components which have been disposed of or classified as "held for sale"
are to be reported as discontinued operations if such operations and cash flow
have been or will be eliminated from our ongoing operations. Accordingly, the
disposition of non-AmeriHost Inn hotels have been treated as discontinued
operations. However, the disposition of AmeriHost Inn hotels, although
classified as "held for sale" on the accompanying consolidated balance sheet,
have not been treated as discontinued operations due to the ongoing royalty fees
to be earned by us after their disposition. In addition, in accordance with this
literature, we have ceased depreciating the hotel assets that have been
classified as "held for sale."
If the Company determines that a property is no longer for sale, or if a
property does not sell, after a certain period of time, under certain
conditions, a depreciation expense adjustment may be recorded at that time, up
to the amount of depreciation that would have been recorded during the period
that the asset was classified as "held for sale." During the fourth quarter of
2003, two AmeriHost Inn hotels previously classified as "held for sale" were
reclassified back to operating assets since we no longer were actively marketing
these properties for sale. In accordance with SFAS 144, depreciation was
recorded through December 31, 2003, as if the hotels were never classified as
"held for sale". We anticipate reviewing the market status of the hotels "held
for sale" at some time later in 2004, which assessment may result in additional
depreciation adjustments if any hotels are removed from the "held for sale"
classification.
HOTEL DISPOSITION PLAN AND RESTRUCTURING
In 2001 and 2002, we sold, or have facilitated the sale for joint ventures for a
landlord, 17 hotel properties. However, during 2003, senior management, and the
board of directors, determined that the sale of a significant number of hotel
properties would assist us achieving our financial and growth objectives, as
well as support our liquidity. The sale of the hotels is expected to:
- provide liquidity for operational and ongoing capital
expenditure needs;
- reduce outstanding debt;
- increase operating cash flow of the hotel operations segment;
33
- accelerate the generation and realization of development
incentive and royalty-sharing fees from our agreements with
Cendant;
- provide capital for future new hotel development and/or
acquisition and conversion of existing hotels; and
- provide capital to repurchase common stock.
In July 2003, we adopted a strategic plan to sell approximately 25 to 30 hotel
properties over a two year period. The properties to be sold include 20 to 25
AmeriHost Inns and six non-AmeriHost hotels that are wholly or partially-owned.
The decision to recommend the sale of a hotel property is made by our senior
management team and approved by a majority of the board of directors or a
committee thereof. We sold 11 hotels (including six hotels as part of this
disposition plan) in 2003, more than any other year in our history.The financial
impact is summarized as follows:
(in thousands)
Net cash
Number proceeds Mortgage Cendant
of after mortgage debt Incentive
hotels Payoff reduction Fees
------ ------ --------- ----
Consolidated hotels:
AmeriHost Inn hotels 8 $ 8,631 $14,200 $ 1,730
Other brand hotels 2 137 2,267 -
Unconsolidated hotels:
AmeriHost Inn hotels 1 5 - 229
-- ------- ------- -------
Total 11 $ 8,773 $16,467 $ 1,959
== ======= ======= =======
An integral part of our growth plan, profitability, and liquidity is our ability
to sell hotels, including those under the plan for disposition, as well as our
other existing hotels, and hotels we develop in the future.
In addition, in connection with our asset disposition plan, we undertook certain
hotel regional management, hotel development, and other corporate-level
restructuring actions in 2003, including:
- we have not replaced several corporate positions which had
been vacated as a result of normal attrition during 2003;
- we did not fill several positions which had been budgeted for
in 2003; and
- we reduced our corporate office space needs, giving us the
ability to lease more space to third parties.
The restructuring including a reduction in our existing corporate and hotel
regional management staff by approximately 20%, or 13 positions. However, we
subsequently added or enhanced five positions in the hotel development, hotel
marketing/revenue management, and finance areas, to assist us in expanding our
hotel development activity and increasing hotel revenue, offsetting a portion of
the projected savings. We expect to incur total non-recurring restructuring
charges of approximately $140,000 through the second quarter of 2004. These
charges reflect costs of items such as severance benefits, insurance benefits,
outplacement services, legal services and office reconfiguration. Approximately
$73,000 in such restructuring costs were incurred during 2003 and recorded as
operating expenses in the accompanying consolidated financial statements.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2003, COMPARED TO THE YEAR
ENDED DECEMBER 31, 2002
The following tables set forth our selected operations data for the 2003 and
2002. This data should be read in conjunction with our financial statements in
Item 8 on this Form 10-K.
34
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------------- -------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- -------- ----------
Revenue:
Hotel operations:
AmeriHost Inn hotels 39,824 54.9% 43,217 63.4% (7.9%)
Other hotels 1,639 2.3% 2,274 3.3% (27.9%)
Development and construction 4,197 5.8% 7,180 10.5% (41.6%)
Hotel sales and commissions 22,831 31.5% 10,017 14.7% 127.9%
Management services 446 0.6% 958 1.4% (53.4%)
Employee leasing 1,858 2.6% 3,267 4.8% (43.1%)
Incentive and royalty sharing 972 1.3% 589 0.9% 65.1%
Office building rental 750 1.0% 670 1.0% 11.9%
------ ----- ------ ----- -----
72,517 100.0% 68,172 100.0% 6.4%
------ ----- ------ ----- -----
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 30,625 76.9% 31,570 73.1% (3.0%)
Other hotels 1,856 113.2% 2,145 94.3% (13.5%)
Development and construction 4,739 112.9% 7,205 100.3% (34.2%)
Hotel sales and commissions 19,328 84.7% 8,159 81.5% 136.9%
Management services 280 62.9% 715 74.6% (60.8%)
Employee leasing 1,799 96.8% 3,209 98.2% (43.9%)
Office building rental 214 28.6% 57 8.5% 277.5%
------ ----- ------ ----- -----
58,842 81.1% 53,060 77.8% 10.9%
------ ----- ------ ----- -----
13,675 18.9% 15,112 22.2% (9.5%)
====== ===== ====== ===== =====
Depreciation and amortization 3,602 5.0% 4,339 6.4% (17.0%)
Leasehold rents - hotels 5,033 6.9% 5,112 7.5% (1.5%)
Corporate general & administrative 2,419 3.3% 2,199 3.2% 10.0%
Impairment provision 5,070 7.0% 542 .8% 835.4%
------ ----- ------ ----- -----
Operating income (loss) (2,449) (3.4%) 2,921 4.3% (183.9%)
====== ===== ====== ===== ======
Segment Data:
Year Ended Year Ended
December 31, 2003 December 31, 2002
--------------------- -------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- -------- ----------
Operating Income (Loss) by Segment:
Hotel operations:
AmeriHost Inn hotels 1,353 1.9% 3,169 4.6% (57.3%)
Other hotels (731) (1.0%) (463) (0.7%) 57.8%
Non-cash impairment provision (5,070) (7.0%) (542) (0.8%) 835.4%
Development and construction (546) (0.7%) (31) 0.0% 1,673.0%
Hotel sales and commissions 3,503 4.8% 1,858 2.7% 88.6%
Management services 121 0.2% 191 0.3% (36.9%)
Employee leasing 57 0.1% 56 0.1% 1.5%
Incentive and royalty sharing 972 1.3% 589 0.9% 65.1%
Office building rental 374 0.5% 454 0.7% (17.7%)
Corporate general & administrative (2,482) (3.5%) (2,361) (3.5%) 5.1%
------- ---- ------- ---- -------
Operating income (loss) $(2,449) (3.4%) $ 2,921 4.3% (183.9%)
======= ==== ======= ==== =======
35
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Operating Income (Loss) as a percentage
of Segment Revenue:
Hotel operations:
AmeriHost Inn hotels 3.4% 7.3
Other hotels (44.6%) (20.4%)
Non-cash impairment provision N/A N/A
Development and construction (13.0%) (0.4%)
Hotel sales and commissions 15.3% 18.5%
Management services 27.0% 20.0%
Employee leasing 3.1% 1.7%
Incentive and royalty sharing 100.0% 100.0%
Office building rental 49.9% 67.8%
Corporate general & administrative N/A N/A
----- -----
Total operating income (loss) (3.4%) 4.3%
===== =====
36
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the
sale of eight Consolidated AmeriHost Inn hotels in 2003, whereby the operations
of these hotels were included in our hotel operations segment during all or part
of 2002; however such hotels were not included during all or part of the 2003
period. In addition, same room revenues for the Consolidated AmeriHost Inn
hotels, including those that we sold, through the date of sale, decreased 1.0%.
The decrease in revenues from Consolidated AmeriHost Inn hotels was partially
offset by the opening of three newly constructed AmeriHost Inn hotels. Our hotel
revenues have been impacted by general economic and industry conditions, and an
increase in competition in certain markets, primarily from newly constructed
hotels. As a result, we experienced increased downward pressure on occupancy
levels and average daily rates. We believe that as the total number of AmeriHost
Inn hotels in the brand increases, the greater the benefits will be at all
AmeriHost locations from marketplace recognition and repeat business. In
addition, we are now focused on building new hotels in larger, growing markets
where many of our competitors already exist or where we factor in 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 two
hotels for minority-owned entities during 2003, compared to two minority-owned
hotels and one unrelated third party hotel during 2002.
Hotel sales revenue increased as a result of the sales of eight wholly owned
AmeriHost Inn hotels during 2003, compared to the sale of four wholly owned
AmeriHost Inn hotels during 2002. In addition, we facilitated the sale of one
AmeriHost Inn hotel leased to us by PMC during 2002. The sale of the eight
wholly owned AmeriHost Inn hotels in 2003 generated net hotel revenues of
approximately $22.8 million compared to $10.0 million in 2002 from the sale of
the five hotels in 2002, plus a commission earned on the PMC sale. We intend to
continue to build and sell AmeriHost Inn hotels in order to generate increased
fees under the agreement with Cendant while enhancing our operating results and
cash flow.
Hotel management revenue decreased, due primarily to the termination of five
management contracts with joint ventures effective January 1, 2003.
Employee leasing revenue decreased, due primarily to the reduction in rooms
managed for minority-owned entities and unrelated third parties as described
above, and a concerted effort to decrease hotel employee payroll costs which is
the basis for the employee leasing revenue. In addition, during 2002, we began
treating our workers compensation insurance cost as a pass-through cost, whereby
the hotels reimburse us for the insurance cost, however it is not shown as part
of our employee leasing operating cost and revenue (since the revenue is based
on employee leasing cost). The workers compensation insurance cost has never
been included for purposes of computing our administrative fee.
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 $1,960,000 and $1,754,000 during 2003 and 2002, respectively, in
development incentive fees from the sale of AmeriHost Inn hotels. Approximately
$673,000 and $367,000 was recognized during 2003 and 2002, respectively, from
the amortization of this deferred income. We also recorded approximately
$299,000 and $222,000 in royalty sharing revenue during 2003 and 2002,
respectively.
Office building rental consisting of leasing activities from our office
building, increased due to the annual increases as stipulated in the various
lease agreements with the tenants, and the leasing of additional office space
during 2003 versus 2002. We occupy approximately 27% of the rentable square
feet, as reduced as part of the restructuring activities discussed in Part 1
above. Approximately 50% of the space is leased to unrelated third parties
pursuant to long-term lease agreements, and we have hired a national real estate
broker to assist us in leasing the rest of the available space.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased,
primarily due to an increase in operating costs and expenses from the greater
number of hotel sales, and the higher aggregate net book value of these hotels
upon their sale, 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 -- 54 hotels at December 31, 2003, as compared to 61 hotels at
December 31, 2002. Operating costs and expenses as a percentage of revenues for
the consolidated AmeriHost Inn hotels increased due primarily to the costs of
insurance, real estate taxes, energy, general and administrative, and ongoing
maintenance and
37
secondarily due to several hotels operating during their initial stabilization
period when revenues are typically lower and significant start-up costs are
incurred.
Operating costs and expenses for the hotel development segment decreased,
consistent with the decrease in hotel development activity for 2003, compared to
2002. Operating costs and expenses in the hotel development segment as a
percentage of segment revenue increased during 2003 due to the greater level of
projects from third parties and joint ventures, in the construction phase of the
total development process in 2003, which construction phase activity has a
higher ratio of operating costs to revenues, compared to the ratio of operating
costs to revenues during the pre-construction, development phase.
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 2003, compared to 2002, consistent with the decrease
in segment revenue for 2003 as noted above.
Office building rental operating costs and expenses consisted primarily of
expenses related to the management of our office building. The increase in
operating expenses from 2002 to 2003 was due primarily to a change in the
allocation of certain of the office building costs among the other operating
segments. The new allocation method was adopted based on an internal review to
more accurately reflect the segment occupancy expense.
Depreciation and amortization expense decreased, primarily due to the
classification of certain assets as "held for sale," which properties were not
depreciated beginning in July 2003, the date of this determination, in
accordance with the relevant accounting literature, and the sale of consolidated
AmeriHost Inn hotels during the last twelve months, offset by the opening of
newly constructed hotels, and the acquisition or consolidation of existing
hotels. Consequently, the hotels classified as "held for sale" were depreciated
for all of 2002, if open, and only partially in 2003.
Leasehold rents - hotels decreased slightly during 2003 compared to the 2002,
due to the disposition of one leased hotel during the first quarter of 2002, the
purchase of one leased AmeriHost Inn hotel and the termination of another
non-AmeriHost Inn hotel lease upon its expiration during the third quarter of
2003, partially offset by annual rent increases pursuant to the lease
agreements.
Corporate general and administrative expense increased due primarily to
increases in professional fees, directors and officers liability insurance, and
director expenses. Director expenses include director fees, which were revised
in 2003 to be competitive with other public companies of a similar size,
including non-cash compensation in the form of equity, and increases in travel
costs associated with a greater number of directors residing outside the Chicago
metropolitan area. In addition, the increase in corporate general and
administrative expense for 2003 also includes the non-recurring 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 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 to the anticipated market
value, net of closing costs. The impairment adjustment includes $5.1 million,
pre-tax, related to AmeriHost Inn hotels to be sold which has been included in
operating income. An additional $909,000, 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 excludes any corporate general and administrative expense and the
non-cash hotel impairment charges. Operating income from consolidated AmeriHost
Inn hotels decreased due to:
- increases in certain expenses, including insurance, real
estate taxes, energy, general and administrative, and
maintenance,
- a decrease in same room revenues, and
38
- certain new hotels operating during their ramping up stage
when revenues are typically lower.
Operating income from the hotel development segment in 2002 decreased to an
operating loss in 2003 due to the decrease in hotels developed and constructed
for third parties and minority-owned entities during 2003, compared with 2002.
Operating income from hotel sales and commissions increased due to the sale of
more AmeriHost Inn hotels and at a greater total profit during 2003, versus the
sale of AmeriHost Inn hotels during 2002. The decrease in hotel management
segment operating income during 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
among our other business segments.
Operating income from hotel operations, and the related cash flow, has declined
significantly over the past two years. Operating income from hotel operations,
excluding impairment provision, declined approximately $262,000, from $3.0
million in 2001 to $2.7 million in 2002, or 8.8%, and declined further by $2.0
million to approximately $622,000 in 2003, or 77%. This two-year total decline
of $2.3 million can be attributed to many factors, including (i) the overall
downturn in the economy, (ii) significant increases in several operating costs
such as labor, utilities, insurance and maintenance, (iii) additional supply of
hotel rooms in the markets in which our hotels are located, (iv) geopolitical
events, including terrorism and the conflict in Iraq, (v) the elimination of
hotels with positive operating cash flow, upon their sale, and (vi) a
significant decline in the operating margins for the one non-AmeriHost Inn hotel
not classified under discontinued operations since we operate the hotel under a
long-term lease.
We believe that aggregate hotel revenue growth is critical to improving the
results of our hotel operations. As such, if our revenue enhancement programs
are not successful, or if the economy does not improve, or if the economy
improves without a corresponding improvement in the lodging industry, it could
have a significant, negative impact on our results of operation and financial
condition.
INTEREST EXPENSE. The decrease in interest expense during 2003 compared to 2002
was attributable to the reduction in our overall level of debt as a result
primarily of i.) the sale of consolidated hotels and the use of proceeds to
payoff the related mortgage debt and a portion of our operating line-of-credit,
and ii.) interest rate reductions on floating rate debt, partially offset by the
mortgage financing of newly constructed or acquired consolidated hotels, and a
higher interest rate on our operating line-of-credit. Interest expense does not
include interest incurred on hotels under development and construction. We
capitalize interest expense incurred during the pre-opening construction period
of a consolidated hotel project, as part of the total development cost. The
amount capitalized includes both interest charges from a direct construction
loan, plus interest computed at our incremental borrowing rate on the total
costs incurred to date in excess of the construction loan funding.
GAIN ON SALE OF ASSETS. Pursuant to the terms of the agreement for the sale of
the AmeriHost Inn brand name and franchising rights to Cendant Corporation in
2000, we were due three annual installments of $400,000 each, on September 30,
2001, 2002, and 2003. The Company received each of the $400,000 payments as
scheduled, including the final installment in 2003. These payments have been
classified as gain on sale of assets in the consolidated financial statements.
As part of our strategy to focus primarily on the development and sale of new
AmeriHost Inn hotels, we intend to sell all our owned, non-AmeriHost Inn hotels.
During 2003, two joint ventures in which we were a partner sold their
non-AmeriHost Inn hotels, including one subsequent to the adoption of the formal
plan to sell hotels, and the lease for one non-AmeriHost Inn hotel expired
without renewal. The net proceeds from these sales were minimal. Any gain or
loss on the sale of these hotels will be reported as "discontinued operations".
CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during 2003,
compared to 2002, was primarily attributable to 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 $24,232 during
the twelve months ended December 31, 2003, compared to $22,685 during the twelve
months ended December 31, 2002.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2002, COMPARED TO THE YEAR
ENDED DECEMBER 31, 2001
The following tables set forth our selected operations data for the twelve month
periods ended December 31, 2002 and 2001. This data should be read in
conjunction with our financial statements in Item 15 on this Form 10-K.
39
Year Ended Year Ended
December 31, 2002 December 31, 2001
------------------------- ------------------------ %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenue (Decrease)
----------- -------- ----------- ------- ----------
Revenue:
Hotel operations:
AmeriHost Inn hotels 43,217 63.4% 45,081 66.2% (4.1%)
Other hotels 2,274 3.3% 2,272 3.3% 0.1%
Development and construction 7,180 10.5% 1,724 2.5% 316.4%
Hotel sales and commissions 10,017 14.7% 12,922 19.0% (22.5%)
Management services 958 1.4% 1,067 1.6% (10.2%)
Employee leasing 3,267 4.8% 4,678 6.9% (30.2%)
Incentive and royalty sharing 589 0.9% 210 0.3% 180.9%
Office building rental 670 1.0% 170 0.2% 294.9%
------ ------- ------ ------ ------
68,172 100.0% 68,124 100.0% 0.1%
------ ------- ------ ------ ------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 31,570 73.1% 32,920 76.2% (4.1%)
Other hotels 2,145 94.3% 1,881 82.7% 14.0%
Development and construction 7,205 100.3% 1,480 20.6% 386.9%
Hotel sales and commissions 8,159 81.5% 9,622 96.1% (15.2%)
Management services 715 74.6% 717 74.8% (0.3%)
Employee leasing 3,209 98.2% 4,564 139.7% (29.7%)
Office building rental 57 8.5% 3 0.4% (1818.8%)
------ ------- ------ ------ ------
53,060 77.8% 51,187 75.1% 3.7%
------ ------- ------ ------ ------
15,112 22.2% 16,937 24.8% (10.8%)
Depreciation and amortization 4,339 6.4% 3,899 5.7% 11.3%
Leasehold rents - hotels 5,112 7.5% 5,833 8.6% (12.4%)
Corporate general & administrative 2,199 3.2% 1,908 2.8% 15.2%
Impairment provision 542 0.8% 0 - -
------ ------- ------ ------ ------
Operating income (loss) 2,920 4.3% 5,297 7.8% (44.9%)
====== ======= ====== ====== ======
40
Year Ended Year Ended
December 31, 2002 December 31, 2001
------------------------- ------------------------ %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- -------- ----------
Operating Income (Loss) by Segment:
Hotel operations:
AmeriHost Inn hotels 3,169 4.6% 3,100 4.6% 2.2%
Other hotels (463) (0.7%) (132) (0.2%) 249.9%
Non-cash impairment provision (542) (0.8%) 0 0.0% N/A
Development and construction (31) 0.0% 236 0.3% (113.0%)
Hotel sales and commissions 1,858 2.7% 3,301 4.8% (43.7%)
Management services 191 0.3% 295 0.4% (35.3%)
Employee leasing 56 0.1% 110 0.2% (49.0%)
Incentive and royalty sharing 589 0.9% 210 0.3% 180.9%
Office building rental 454 0.7% 131 0.2% 247.3%
Corporate general & administrative (2,361) (3.5%) (1,954) (2.9%) 20.8%
------ ------ ------ ------ ------
Operating income (loss) 2,920 4.3% 5,297 7.8% (44.9%)
====== ====== ====== ====== ======
Year Ended Year Ended
December 31, 2002 December 31, 2001
----------------- -----------------
Operating Income (Loss) as a percentage
of Segment Revenue:
Hotel operations:
AmeriHost Inn hotels 7.3% 6.9%
Other hotels (20.4%) (5.8%)
Non-cash impairment provision N/A N/A
Development and construction (0.4%) 13.7%
Hotel sales and commissions 18.5% 25.5%
Management services 20.0% 27.7%
Employee leasing 1.7% 2.4%
Incentive and royalty sharing 100.0% 100.0%
Office building rental 67.8% 77.1%
Corporate general & administrative N/A N/A
----- -----
Total operating income (loss) 4.3% 7.8%
===== =====
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the
sale of five Consolidated AmeriHost Inn hotels to Cendant franchisees, whereby
the operations of these hotels were included in our hotel operations segment
during all, or part of 2001; however, such hotels were not included during all
or part of 2002. In addition, same room revenues for all Consolidated AmeriHost
Inn hotels, including the sold hotels prior to their sale date, increased
approximately 2.9%. The decrease in revenues from Consolidated AmeriHost Inn
hotels was partially offset by this same room revenue increase and the opening
of two newly constructed AmeriHost Inn hotels. Our hotel revenues were impacted
by general economic and industry conditions, and an increase in competition in
certain markets, primarily from newly constructed hotels. As a result, we
experienced increased downward pressure on occupancy levels and average daily
rates.
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 constructed two hotels
for minority-owned entities during 2002 and one for an unrelated third party,
compared to two minority-owned hotels during 2001.
We closed on the sale of four wholly owned AmeriHost Inn hotels during 2002, and
four wholly owned AmeriHost Inn hotels during 2001. In addition, we facilitated
the sales of one AmeriHost Inn hotel leased to us by PMC during 2002 and five
hotels during 2001. These sales generated hotel sales revenues and commissions
of approximately $10.0 million in 2002 and approximately $12.9 million in 2001.
41
Hotel management revenue decreased, due primarily to the decrease in the number
of hotels managed for third parties and minority-owned entities.
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 hotel employee payroll costs which is the
basis for the employee leasing revenue. In addition, during 2002, we began
treating our workers compensation insurance cost as a pass-through cost, whereby
the hotels reimburse us for the insurance cost, however it is not shown as part
of our employee leasing operating cost and revenue (since the revenue is based
on employee leasing cost). The workers compensation insurance cost has never
been included for purposes of computing our administrative fee.
42
Development incentive and royalty sharing revenue increased as a result of our
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 $1.8 million and $1.6 million during 2002 and 2001, respectively,
in development incentive fees from the sale of AmeriHost Inn hotels.
Approximately $367,000 and $148,000 were recognized during 2002 and 2001,
respectively, from the amortization of this deferred income. We also recorded
approximately $222,000 and $62,000 in royalty sharing revenue during 2002 and
2001, respectively.
Office building rental consisting of leasing activities from our office
building, increased due to a full year of ownership in 2002 compared to three
months in 2001. We occupied approximately 34% of the rentable square feet in the
building in 2002.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses increased,
primarily due to an increase in operating costs from hotel development,
partially offset by decreases in operating costs from hotel operations, sale of
hotels and commissions, and employee leasing 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 -- 61 hotels at December 31, 2002, as
compared to 63 hotels at December 31, 2001. Operating costs and expenses as a
percentage of revenues for the consolidated AmeriHost Inn hotels decreased due
to the increase in some room revenues and the minimization of certain operating
expenses by hotel personnel.
Operating costs and expenses for the hotel development segment increased,
consistent with the increase in hotel development revenues for 2002. Operating
costs and expenses in the hotel development segment as a percentage of segment
revenue increased during 2002 due to the higher level of projects for third
parties and joint ventures, in the hotel construction phase of the overall
process, which has a higher ratio of operating costs to revenues, compared to
the ratio of operating costs to revenues for pre-construction, hotel development
activity. The results for 2001 consisted of a greater amount of
pre-construction, hotel development activity, which resulted in lower operating
costs in relation to the revenue recognized.
Hotel management segment operating costs and expenses decreased 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 2002, compared to 2001, consistent with the decrease
in segment revenue for 2002 and 2001.
Office building rental operating costs and expenses consisted primarily of
expenses related to the management of our office building. On October 1, 2001,
the company purchased the office building in which its headquarters is located
and assumed the landlord duties for the other tenants. Certain of the office
building costs were allocated to the other operating segments.
Depreciation and amortization expense increased, primarily due to the sale of
consolidated AmeriHost Inn hotels during the last twelve months, offset by the
opening of newly constructed hotels, the acquisition or consolidation of
existing hotels, and the depreciation of the office building in the fourth
quarter of 2001.
Leasehold rents - hotels decreased slightly during 2002 compared to 2001, due to
the disposition of six leased hotels during 2001 and 2002, partially offset by
annual rent increases.
Corporate general and administrative expense increased approximately $683,000 in
expenses related to the resignation and replacement of the Company's
President/CEO in 2002. The results for 2001 reflect the recognition of $167,000
in one-time expenses related to the issuance of stock options in 2000 to joint
venture partners, including a director of the Company, pursuant to the variable
accounting rules of Financial Accounting Standard Board Statement No. 123, in
connection with the sale of the AmeriHost Inn brand and franchising rights.
The hotel impairment provision was recorded primarily in connection with the
anticipated disposition of certain hotel assets, and as a result of our internal
hotel asset impairment analysis. The amount represents an adjustment for certain
hotel assets to decrease the carrying value of the assets to the anticipated
fair market value, net of closing costs.
43
OPERATING INCOME BY SEGMENT. The following discussion of operating income by
segment excludes any corporate general and administrative expense and the
non-cash hotel impairment charges. Operating income from consolidated AmeriHost
Inn hotels increased slightly due to an increase in same room revenues, and
decreases in certain expenses. Operating income from the hotel development
segment in 2001 decreased to an operating loss in 2002 due to the decrease in
hotels developed and constructed for third parties and minority-owned entities
during 2002, compared with 2001. Operating income from hotel sales and
commissions decreased due to the sale of five AmeriHost Inn hotels during 2002
versus the sale of nine AmeriHost Inn hotels during 2001. The decrease in hotel
management segment operating income during the year of 2002 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 increased, attributable to a full year
of ownership in 2002 compared to three months in 2001.
INTEREST EXPENSE. The decrease in interest expense during 2002 compared to 2001
was attributable to the reduction in our overall level of debt in connection
with the sale of AmeriHost Inn hotels and the use of proceeds to payoff the
related mortgage debt, and the interest rate reductions on floating rate debt,
was offset by the mortgage financing of newly constructed or acquired
consolidated hotels.
GAIN ON SALE OF ASSETS. Pursuant to the terms of the agreement for the sale of
the AmeriHost Inn brand name and franchising rights to Cendant Corporation in
2000, the Company was due three annual installments of $400,000 each. The
Company received the first and second installments of $400,000 each as scheduled
in 2001 and 2002. These payments have been classified as gain on sale of assets
in the consolidated financial statements.
CHANGE IN EQUITY OF AFFILIATES. The change in equity of affiliates during 2002,
compared to 2001, was primarily attributable to the sale of two unconsolidated
minority-owned properties in 2002 at a significant gain, offset by an impairment
provision on a non-AmeriHost Inn hotel of $100,000 during the second quarter of
2002 and the recognition of 100% of the net operating losses from two additional
unconsolidated joint ventures during 2002. The Company exchanged a note
receivable from the principals of Diversified Innkeepers, Inc. in the amount of
approximately $1.2 million on September 30, 2002, for a 50% ownership interest
in a hotel joint venture. This exchange was accounted for at fair value and
resulted in no gain or loss. The Company had previously managed this hotel for
Diversified Innkeepers, Inc. pursuant to a management contract. Since the
Company does not control the major decisions of this joint venture, this
investment has been accounted for by the equity method. Distributions from
affiliates were $172,685 during 2002, including a $150,000 note receivable
pursuant to the sale of a hotel, compared to $19,220 during 2001.
OFF-BALANCE SHEET ARRANGEMENTS
Through wholly-owned subsidiaries, we are a general partner or managing member
in 15 joint ventures as of December 31, 2003. As a general partner, we are
secondarily liable for the obligations and liabilities of these joint venture
partnerships. As of December 31, 2003, these joint ventures had $26.7 million
outstanding under mortgage loan agreements, compared to $24.0 million as of
December 31, 2002. Approximately $4.9 million of this amount has been included
in our consolidated financial statements as of December 31, 2003, reflecting the
debt owed by joint ventures in which we have a majority or controlling ownership
interest, leaving approximately $21.8 million in off-balance sheet mortgage debt
owed by unconsolidated joint ventures. If we subsequently obtain a majority or
controlling ownership interest in a joint venture, the joint venture's debt will
be included in our consolidated financial statements. Of this $21.8 million of
financing, we also have provided approximately $16.9 million in guarantees to
the lenders. Other partners have also guaranteed $10.7 million of these
financings, which may ultimately impact the exposure on our guarantees. One
unconsolidated joint venture mortgage loan in the amount of approximately $1.7
million at December 31, 2003 matured on November 1, 2003, however the lender has
extended the maturity of the loan to November 1, 2004, and waived the minimum
debt service coverage ratio covenant violation for 2003. Unless the properties
collateralizing the debt are sold, the remaining joint venture mortgage loans
mature after 2004. [See also "Liquidity and Capital Resources" below.] In
connection with our plan to increase hotel development through joint ventures,
we anticipate that the total off-balance sheet mortgage debt on joint ventures
in which we have an ownership interest, will increase. The level of guarantees
we provide on this debt may also increase accordingly, however this will be
determined on a project by project basis, and provided only if deemed
appropriate.
From time to time, we advance funds to these joint ventures for working capital
and renovation projects. The advances bear interest at rates ranging from prime
to 10% per annum and are due upon demand. Interest is accrued in all loans, and
paid to us periodically. The advances totaled $2.4 million at December 31, 2003,
and are included in investments in and
44
advances to unconsolidated hotel joint ventures in our consolidated financial
statements. We expect the joint ventures to repay these advances primarily from
the sale of the related hotels, and cash flow generated from hotel operations,
however there is no guarantee that we will recover the entire amounts advanced
or any interest accrued. These advances will be repaid to us prior to
distributions being paid to the partners.
We apply the provisions of FASB Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others," with respect to mortgage loan guarantees for joint
ventures in which the Company is a partner. This interpretation elaborates on
the disclosures required by the guarantor and requires the guarantor to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken and to amortize the guarantee over the term of the
guarantee. During 2003, the Company provided a guarantee related to the mortgage
debt of a joint venture in which it shares the responsibility of the guarantee
on a joint and several basis with its joint venture partners. The guarantee is
effective for the 20-year term of the mortgage loan. We have recorded as an
additional investment in this joint venture, and a liability for our share of
this guarantee of approximately $39,000 as of December 31, 2003, its estimated
fair value at the time of issuance, less accumulated amortization.
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," which addresses how a business
enterprise should evaluate whether or not it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of
Variable Interest Entities", which was issued in January 2003. We are required
to adopt the requirements of FIN 46R for interim periods beginning after March
31, 2004. This Interpretation requires that we present any variable interest
entities in which it has a majority variable interest on a consolidated basis in
our financial statements. We are continuing to assess the provisions of this
Interpretation and the impact to us of adopting this Interpretation. Therefore
the following amounts may change based upon additional analysis. Due to the
adoption of this Interpretation, we expect that we will begin to present our
investments in four joint ventures in which we have a majority variable
interest, as determined in accordance with the provisions of this
Interpretation, on a consolidated basis in our financial statements beginning
with the consolidated financial statements issued for the quarterly period ended
June 30, 2004. The consolidation of these joint ventures is expected to add
approximately $9.7 million in assets and $7.8 million in liabilities to our
consolidated balance sheet. As of December 31, 2003, we had investments in, and
advances to, these joint ventures of approximately $2.0 million, which was
presented as such under the equity method of accounting in our consolidated
financial statements. We expect that we will continue to present all of our
other unconsolidated investments under the equity method.
CONTRACTUAL OBLIGATIONS AND CONTINGENT LIABILITIES AND COMMITMENTS
We currently lease 21 hotels from PMC Commercial Trust pursuant to an Amended
and Restated Master Agreement dated January 24, 2001. In January 2001, we
amended the master lease with PMC to provide for the purchase of eight
unidentified hotels from the lessor under specified terms, and to extend the
initial lease term by five years. The amendment provides for four increases in
rent payments if these hotels are not sold to a third party or purchased by us
by the dates specified. As of December 31, 2003, the first three scheduled rent
increases were not effective due to the sale of hotels by PMC to us. The third
scheduled increase was avoided in September 2003, when we purchased a hotel from
PMC, using cash of approximately $556,000 and mortgage financing provided by PMC
of approximately $1.7 million. If we do not either facilitate the sale to a
third party, or purchase from PMC, one hotel at a price of approximately $2.6
million by June 5, 2004, the fourth rent increase becomes effective computed as
0.25% of the original sales values, or approximately $127,000 on an annual
basis. If we decide to purchase this hotel by June 5, 2004, we intend to fund
the $2.6 million purchase price with a combination of mortgage debt, the source
of which has not yet been identified, and cash from operations or working
capital. However, there can be no assurance that we will have the liquidity
and/or acceptable financing available to purchase this hotel at that time, and
the rent increase would become effective.
We have entered into discussions with PMC to restructure the lease agreements,
including our potential obligation for the purchase of the hotel by June 5, 2004
[see also Part 1 - Business, under the heading "Leased Hotel Properties", and
below, under the heading "Subsequent Events."]. However, there can be no
assurance that we will be successful in restructuring the lease agreements, or
that such restructuring will eliminate this purchase obligation or
alternatively, the scheduled rent increase without the required purchase.
The following table summarizes our contractual obligations, including
off-balance sheet mortgage loan guarantees provided for certain joint ventures:
45
Payments due by period
----------------------
Less than 1 - 3 3 - 5 More than
Total 1 year years years 5 years
------------ ------------ ------------ ------------ ------------
Long-term debt - consolidated $ 27,708,448 $ 1,195,051 $ 8,935,677 $ 1,968,604 $ 15,609,116
Long-term debt of assets held for
sale - non-AmeriHost Inn hotels 8,928,906 361,850 3,164,841 4,279,005 1,123,210
Long-term debt of assets held for
sale - AmeriHost Inn hotels 28,540,561 2,567,358 5,017,854 3,364,031 17,591,317
Corporate line of credit 3,850,000 3,850,000 - - -
Operating leases - consolidated 58,672,162 5,629,370 11,581,479 12,026,262 29,435,052
Construction contracts 837,472 837,472 - - -
------------ ------------ ------------ ------------ ------------
Total $128,537,549 $ 14,436,101 $ 28,699,851 $ 21,637,902 $ 63,758,695
============ ============ ============ ============ ============
Long-term debt - unconsolidated
joint ventures (at 100%) 21,809,941 2,507,102 1,727,094 3,658,979 13,916,766
Operating leases - unconsolidated - - - - -
------------ ------------ ------------ ------------ ------------
Total $ 21,809,941 $ 2,507,102 $ 1,727,094 $ 3,658,979 $ 13,916,766
============ ============ ============ ============ ============
We expect these obligations to be funded through operations, including the sale
of hotels, or refinanced/extended prior to maturity. Currently, the sale of the
remaining hotels as part of our hotel disposition plan, is expected to generate
net cash of approximately $3.8 million to $4.4 million, after the repayment of
the related mortgage debt which is included in the amounts above. See "Risk
Factors" discussed below. Actual sales prices may be materially less than what
we expect. There is no assurance, for example, that we will generate the
expected proceeds associated with the strategic plan for hotel disposition.
LIQUIDITY AND CAPITAL RESOURCES
General
Our principal liquidity needs for the next twelve months are to:
- fund normal recurring expenses;
- meet debt service requirements including the repayment or
refinancing of approximately $4.1 million of hotel mortgage
indebtedness that matures within the twelve month period;
- meet the obligations under our operating line-of-credit,
including the $2.0 million reduction on its maximum
availability over the next 12 months;
- meet lease payment obligations of approximately $5.6 million,
primarily to PMC Commercial Trust, subject to ongoing
discussions as described herein;
- fund capital expenditures, primarily hotel and office building
improvements of approximately $1.5 million to $2.1 million;
To the extent available, we also need funds for the following growth activities:
- fund equity contributions on joint venture development
projects; and
- for wholly-owned hotel development projects, if any, fund
development costs not covered under construction loans.
In addition, we are obligated to purchase a hotel from PMC for a total purchase
price of $2.6 million by June 5, 2004. We are currently in discussions with PMC,
regarding several of the specific terms within the lease agreements, however
there can be no assurance that this obligation will be terminated. If we choose
not to purchase this hotel from PMC, our rent on the entire 21 hotel portfolio
will increase by approximately $127,000 per year.
46
We expect to fund these liquidity needs and obligations using cash flows
generated by operations, particularly from hotel sales, and by financing
activities. Hotel revenue, hotel development fees, proceeds from the sale of
hotels, including fees received from Cendant, and other income from operations
are our principal sources of cash flow used to pay the hotel and corporate
operating expenses and obligations mentioned above. We also have a corporate
line-of-credit, however the availability under this facility is decreasing
significantly, from its current maximum of $5.5 million to $3.5 million by the
end of February 2005. We intend to pursue alternative sources of debt and equity
financing, including longer-term alternatives to our corporate line-of-credit,
as discussed below.
During 2003, the cash flow from hotel operations continued to decline, due to
many factors such as downturn in the hotel industry for most of 2003 and its
effect on hotel room demand, increased competition in our markets, and
increasing operating costs such as labor, maintenance, utilities and insurance.
The net cash flow from the operations of many of our hotels has been
insufficient to support their related mortgage debt payments, or lease payments,
primarily to PMC, as well as necessary and ongoing capital expenditures. There
can be no assurance that these costs will not increase further at rates greater
than our revenues. In addition, our hotel development activity for joint
ventures has also decreased over the past two years, with only one joint venture
project completed in 2003. As a result, the cash flow from all of our business
segments, with the largest amount funded by the sale of hotel properties, has
been utilized to maintain liquidity and meet the line-of-credit availability
reductions. A smaller amount has been used for investment in new hotel
development. The factors impacting us in 2003, as well as the reduction in the
availability of our corporate line of credit, have at times created liquidity
issues. We have been able to maintain our liquidity primarily through the sale
of hotels.
We believe that during the next twelve months, in order to maintain our
liquidity, it is critical for us to continue to sell hotel properties. In
addition, we seek to increase income from our existing hotel properties by
focusing on new revenue enhancement opportunities, and aggressive cost controls.
We believe that an upturn in the economy will result in increased demand for
hotel rooms, including ours, and such upturn could result in significantly
improved hotel operating results. However, historically we have seen that
lodging demand trends will typically lag six to nine months behind any such
economic trends. We have also been in discussions with PMC requesting a
reduction in our subsidiary's monthly lease payment and other modifications.
Our principal liquidity needs for periods beyond twelve months are for the cost
of new developments, property acquisitions, scheduled debt maturities, major
renovations, expansions and other non-recurring capital improvements. We expect
to satisfy these needs using one or more of the following:
- construction loans;
- long-term secured and unsecured indebtedness;
- income from operations, including the development and sales of
real estate;
- joint ventures;
- issuances of additional common stock and/or other equity
securities; and
- our unsecured revolving line of credit.
In addition to our normal operational and growth oriented liquidity needs, other
contingencies may also have a significant impact on us, including the impact of
seasonality on our hotel operations and hotels sales, and the inability to pay
off mortgage loans when maturing. See "Risk Factors" below.
Our hotels are seasonal in nature, with the second and third calendar quarters
being the strongest from a cash flow standpoint, and the fourth and first
calendar quarters being the weakest. In addition, the buyers of our hotels tend
to purchase hotels on a seasonal basis, wanting to acquire the property just in
time for the stronger summer season. As the sale of hotel properties is a
critical part of our liquidity, our inability to sell during the winter months
could have a negative impact on our liquidity, if we do not generate strong cash
flow from our other segments, or if we do not have adequate financing sources.
We believe our revenues, together with proceeds from financing activities will
continue to provide the necessary funds for our short-term liquidity needs.
However, material changes in these factors, including factors that could inhibit
our ability to sell hotels under acceptable terms and within certain time
frames, may adversely affect net cash flows. Such changes, in turn, would
adversely affect our ability to fund debt service, lease obligations, capital
expenditures, and other liquidity
47
needs. In addition, a material adverse change in our cash provided by operations
may affect the financial performance covenants under our unsecured line of
credit and certain mortgage notes.
Cash Flow Summary
The following summary discussion of our cash flows is based on the consolidated
statements of cash flows in "Item 8. Financial Statements and Supplementary
Data".
Cash and cash equivalents were $3.6 million and $4.0 million at December 31,
2003 and December 31, 2002, respectively, or a decrease of approximately
$346,000. The decrease was a result of the following increases and decreases in
cash flows:
48
Years ended December 31,
(in thousands)
-------------------------------------------
Increase
2003 2002 (Decrease)
-------- -------- ----------
Net cash provided by operating activities $ 20,366 $ 14,331 $ 6,035
Net cash provided by (used in) investing activities (6,013) (17,073) 11,060
Net cash provided by (used in) financing activities (14,699) 1,964 (16,663)
-------- -------- --------
Increase (decrease) in cash $ (346) $ (778) $ 432
======== ======== ========
Cash provided by operating activities
We have four main sources of cash from operating activities:
- revenues from hotel operations;
- revenues from the sale of hotel assets;
- fees from development, construction and renovation projects,
and
- hotel development incentive fees and royalty sharing pursuant
to the Cendant transaction.
To a lesser extent, we have these additional sources of cash from operating
activities:
- fees from management contracts,
- fees from employee leasing services,
- rental income from the ownership of an office building.
Hotel operations
Approximately 10% of our hotel operations revenue not received at checkout is
generated through other businesses and contracts, such as direct billings to
local companies using the hotel and third party hotel room brokers, which is
usually paid within 30 to 45 days from billing.
We have implemented a number of initiatives to control costs at our hotels,
especially in the areas of labor, insurance, utilities, and maintenance. For
example, we have reduced our housekeeping labor hours significantly, and were
successful in reducing property and workers compensation insurance costs. We
have also started to implement energy control systems at a few hotels and are
exploring the expansion of this program.
We have entered into discussions with PMC with the objective to restructure the
long-term lease agreements with our subsidiary. One of the objectives of such
restructuring is to improve the operating results and cash flow generated by
these hotels through a permanent reduction in the monthly lease payment.
Currently, our subsidiary's lease obligation for these 21 hotels is
approximately $5.3 million per year, significantly greater than the operating
cash flow generated from these hotels before the rent payment. However, there
can be no assurance that we will be successful in any such restructuring, or
that a restructuring will result in improved operational results for these
hotels.
Sale of hotels
We typically receive an earnest money deposit from the buyer of a hotel when a
sales contract is executed. The remaining proceeds from the sale of hotel assets
are received at the time of closing. However, in certain instances, we have
provided seller financing in the form of a note to the buyer with specified
interest and repayment terms.
49
The decrease in cash flow from operations from 2001 to 2003, due primarily to
the decrease in cash flow from hotel operations, has been offset by the net cash
proceeds generated from the sale of hotels. The fluctuations in cash flow from
the sale of hotels are directly related to number, size and value of the
AmeriHost Inn hotels sold. On a cash basis, the net proceeds from the sale of
wholly owned AmeriHost Inn hotels, after the payoff of the related mortgage
debt, and including commissions, was $6.2 million in 2001, $2.5 million in 2002,
and $8.7 million in 2003. In addition, net cash proceeds after the payoff of the
related mortgage debt from the sale of non-AmeriHost Inn hotels, an activity
which is included in discontinued operations rather than operating income, was
$125,000 in 2003. We also received $400,000 per year in 2001, 2002, and 2003
from Cendant, in connection with the sale of the AmeriHost Inn brand name in
2000. The amount received in 2003 was the last installment of the initial fees.
We intend to continue to sell hotels, as discussed above under "Hotel
Disposition Plan and Restructuring." However, there can be no assurance that we
will be able to sell hotel assets under terms acceptable to us, and the timing
and estimated proceeds from any such sales could differ materially from that
anticipated.
Historically, we have experienced greater activity in hotels for sale from
prospective buyers during the second and third calendar quarters, versus the
first and fourth quarters, consistent with the seasonality of the hotel
operations. We have had a few hotels under contract for sale scheduled to close
during the fourth quarter of 2003 or first quarter of 2004 that have been
delayed or fallen out of contract. The timing of hotel sales can be affected by
numerous factors, many of which are beyond our control. For example, many of our
historical buyers obtain debt financing under various U.S. Small Business
Administration ("SBA") loan guarantee programs. Due to the recent federal budget
issues, certain SBA programs, and all loans currently being underwritten and
documented under this program, were significantly delayed. In fact, one hotel
which was under contract for sale and scheduled to close in December 2003, was
delayed by SBA financing issues and the sale was not consummated until the end
of March 2004. The seasonality of the hotel sales, as well as the delays from
numerous factors, including buyer financing, can create significant liquidity
issues for us, especially at times when our hotel operations cash flow may be
minimal or negative, after debt service and lease obligations, as during the
winter months.
Currently, we expect to realize net cash proceeds of approximately $3.8 to $4.4
million from the sale of the remaining hotels in the plan for hotel disposition,
after the payoff of the related mortgage debt, and exclusive of any Cendant
fees. Five hotels are currently under contract for sale, which are expected to
be consummated within the next six (6) months. Under the terms of the contracts,
these anticipated sales are expected to generate approximately $11.1 million in
gross proceeds and the reduction of mortgage debt of approximately $8.0 million.
However, there can be no assurance that these hotel sales will be consummated as
anticipated. Any forecasted amounts from these sales could differ from the final
amounts included in the company's quarterly and annual financial statements when
issued.
Hotel development
Fees from development, construction and renovation projects are typically
received within 15 to 45 days from billing. Due to the procedures in place for
processing our construction draws, we typically do not pay our contractors until
we receive our draw from the equity or lending source.
Developing hotels for joint ventures in which we have an ownership interest, and
third parties, has historically provided stronger returns and cash flow,
compared to the longer term returns from developing and operating hotels for our
own account. In addition, our equity contribution is much less for a joint
venture development project, as most of the cash equity is contributed by our
partners. However, many of the same factors affecting hotel operations, as
discussed above, have also had an impact on our ability to develop hotels for
third parties and for joint ventures, and as a result, this development activity
has declined from 2001 to 2003. We currently have several projects under
development for joint ventures, or which will be marketed to joint venture
partners, and our goal is to significantly increase this activity in the future,
provided that we can find acceptable sites to locate the hotels, find acceptable
joint venture partners with sufficient equity, maintain sufficient liquidity to
make our share of capital contributions, as needed, and that the joint venture
can obtain the necessary mortgage debt financing on acceptable terms.
Fees from Cendant
The development incentive fee from Cendant is a one-time fee typically received
within 20 days of the simultaneous closing of the sale of an AmeriHost Inn hotel
and the execution by the buyer of a franchise agreement with Cendant, including
all proper documentation, and subject to certain conditions. Royalty sharing
payments from Cendant are received monthly,
50
based on the actual royalty payments received by Cendant from all AmeriHost Inn
hotel franchisees, except those operated by us.
We received $2.0 million, $1.8 million, and $1.6 million during 2003, 2002, and
2001, respectively, in development incentive fees. These fees may be refundable
to Cendant if the buyer of our AmeriHost Inn hotel defaults under their
franchise agreement with Cendant during the first 76 months. However, any such
amounts due would be reduced by a portion of any damages recovered by Cendant
and would only be paid by us an offset against future fees earned. To date,
there have been no defaults, and we have not had to repay any incentive fees.
We received royalty sharing fees from Cendant in the amount of $299,000 in 2003,
which is based on the royalty fees Cendant receives for all non-Arlington
Hospitality AmeriHost Inn hotels in their franchise system. We will receive
royalty sharing payments through 2025 under the terms of the agreement with
Cendant, including fees from AmeriHost Inn hotels that are not developed or
operated by us. While we expect this cash flow to increase as the AmeriHost Inn
brand is expanded, there can be no assurance that Cendant will be able to sell
additional AmeriHost Inn franchises, or that we will be able to sell existing or
newly developed AmeriHost Inn hotels to third party operators.
Cendant must approve the franchise applications of the buyers of our AmeriHost
Inn hotels, which approval is based solely on Cendant's evaluation of the
buyers' experience and ability to effectively operate the hotels, the physical
condition of the hotels, and other factors. If we choose to sell an AmeriHost
Inn hotel, where the buyer does not execute an AmeriHost Inn franchise
agreement, we may be subject to liquidated damages to Cendant under our
franchise agreements, which is computed as a percentage of room revenue or a
fixed amount per room, and their would be no incentive fee nor ongoing revenue
sharing fees paid to us by Cendant.
Other sources
We receive management fees and employee leasing fees which result in a
relatively smaller amount of cash flow, after the payment of related expenses in
comparison to the activities discussed above. These fees and cash flow could
increase as we develop and manage more hotels for joint ventures, as
anticipated. In addition, we receive rental income from the other tenants in our
office building. Owning our office building assists us in minimizing our own
corporate headquarter occupancy costs.
Cash used in investing activities
Cash is used in investing activities to fund acquisitions, invest in joint
ventures, to make loans to affiliated hotels for the purpose of construction,
renovation and working capital, for new hotel development, for recurring and
nonrecurring capital expenditures, and from time to time, for the purchase of
our own common stock. We selectively invest in new projects that meet our
investment criteria and enable us to take advantage of our development and
property management skills.
Cash used in investing activities for the twelve months ended December 31, 2003
and 2002, consisted of the following:
(in thousands)
2003 2002
---- ----
Investments in unconsolidated joint ventures,
net of distributions and collections on advances from affiliates $ (821) $ 878
Purchase of property and equipment (7,088) (18,583)
Acquisitions of partnership interests (777) (797)
Issuance of notes receivable, net of collections (131) (151)
The cash used in investing was partially offset by:
Proceeds from the sales of real estate 2,804 1,444
-------- --------
Total $ (6,013) $(17,073)
======== ========
The purchase of property and equipment includes all construction, furniture and
fixtures costs for three new hotel projects, which opened in 2003, and two new
hotels opened in 2002. However, two of the three hotels opened in 2003, opened
51
during the first quarter, and most of the project cost was incurred in 2002. We
spent $3.9 million on new construction in 2003, versus $8.6 million in 2002. We
expect these costs to be lower than historically, as we focus on new development
for joint ventures and others. In addition, the amounts for 2002 and 2003
include the acquisition of AmeriHost Inn hotels from joint ventures.
From time to time, we advance funds to these joint ventures for working capital
and renovation projects. In 2003, we advanced $408,000 to joint ventures in
which we are a partner, net of repayments, primarily for working capital
purposes. We expect the joint ventures to repay these advances primarily through
the sale of the hotel, and cash flow generated from hotel operations, however in
certain cases, we may not realize the entire amounts advanced. In all cases,
these advances will be repaid to us prior to any distributions to our partners.
In 2004, we expect to continue advancing funds to certain joint ventures for
working capital purposes. If we do not continue to support these joint ventures
for working capital needs and debt service, it may create defaults under their
mortgage agreements, which in most cases have been guaranteed by us.
In addition, in 2003 we invested approximately $442,000 in new and existing
joint ventures, net of approximately $24,000 in distributions received from
joint ventures. This amount included approximately $365,000 for a new
development project expected to open in 2004, and approximately $101,000 that
was used for working capital purposes.
Cash used in financing activities
Cash used in financing activities was $14.7 million during 2003, compared to
cash provided by financing activities of $2.0 million during 2002, summarized as
follows:
(in thousands)
2003 2002
-------- --------
Principal Payments on long-term debt (19,095) (10,440)
Net repayments on operating line of credit (2,534) (409)
Common stock repurchases (144) -
Distributions to minority interests (90) (203)
The cash used in financing activities was partially offset by:
Proceeds from issuance of long-term debt 6,888 13,017
Issuance of common stock 277 -
-------- --------
$(14,699) $ 1,964
======== ========
Principal payments on long-term debt include the payoffs of mortgages upon the
sale of hotel properties of approximately $16.5 million in 2003, and $7.2
million in 2002. We paid off 10 hotel mortgages in 2003, compared to five hotel
mortgages in 2002. Proceeds from the issuance of long-term debt includes
approximately $6.9 million in 2003 and $13.0 million in 2002, as a result of
opening five newly constructed consolidated AmeriHost Inn hotels during 2002 and
2003.
Future hotel development is dependent upon our ability to attain mortgage debt
financing. Lenders typically advance mortgage debt at the rate of 60% - 75% of
total project value. Assuming the total value of a new hotel development is $5.0
million, the typical mortgage loan amount would range from $3.0 million to $3.75
million. There can be no assurance that we will be able to obtain such mortgage
financing on terms acceptable to us, to support our growth objectives.
Our board of directors has authorized a common stock buy back, at any time and
without notice, of up to 1,000,000 shares under certain conditions and
consistent with securities laws governing these buybacks. Under this
authorization, in 2003 we repurchased 36,800 shares for a total of approximately
$122,000. In addition, in 2003 we executed a reverse-forward stock split whereby
the shares held by shareholders owning less than 100 shares on the effective
date were redeemed and converted into the right to receive cash from the
Company. The shareholders owning at least 100 shares were not impacted. As a
result of the reverse-forward split, approximately 33,000 shares were converted
to the right to receive $3.83 per share, or a total of approximately $128,000,
of which approximately $22,000 was funded through December 31, 2003. We consider
the reverse-forward split a one-time transaction, and we do not anticipate a
similar transaction in the foreseeable
52
future. All shares that we have repurchased or redeemed have been retired. In
addition, 37,000 options to purchase stock were exercised during 2003 resulting
in proceeds to us of approximately $130,000.
Construction line-of-credit
We had a $20 million loan facility, which provided for new construction
financing that automatically converted to permanent financing upon opening. We
utilized this facility primarily for the construction of wholly-owned AmeriHost
Inn properties, as approved by the lender on a project-by-project basis. We
still have three outstanding hotel mortgages which were originated through this
facility, with a total outstanding balance of $8.1 million at December 31, 2003.
However, the lender's commitment to review and underwrite new construction
projects under this facility expired on October 31, 2003. Under this facility,
we had availability, up to $20 million, less any loans outstanding, for new
hotel development projects, subject to lender approval. To the extent a hotel
was sold which had been financed with the facility, and the related mortgage is
paid off, it would create availability for the lender to review new hotel
development financing. We are currently seeking to renew this construction line
of credit facility, however we do not know when, or if, the lender will approve,
and there can be no assurance that this facility, or a version of this facility,
will be available for future development projects. In the meantime, this lender
continues to review and underwrite the debt financing for some of our current
development projects on a per project basis, and has approved a pre-commitment
for the construction and long term mortgage loan for one joint venture project
where we have an active land purchase contract. As an alternative to, or in
addition to this facility, we intend to explore alternative financing sources
for new construction and long term permanent mortgage financing to assist us in
the development of AmeriHost Inn hotels.
Mortgage Debt
The table below summarizes our mortgage notes payable as of December 31, 2003
and 2002:
(in thousands)
2003 2002
---------- ----------
Outstanding Balance:
Fixed rate $ 22,678 $ 29,001
Variable rate 42,500 47,242
---------- ----------
Total $ 65,178 $ 76,243
========== ==========
Percent of total debt:
Fixed rate 34.79% 38.04%
Variable rate 65.21% 61.96%
---------- ----------
Total 100.00% 100.00%
========== ==========
Weighted average interest rate at end of period:
Fixed rate 7.60% 7.52%
Variable rate 5.64% 6.17%
---------- ----------
Total 6.24% 6.66%
========== ==========
The variable rate debt shown above bears interest based on various spreads over
the Prime Rate or the London Interbank Offered Rate. The Company's plan to sell
certain hotel assets is expected to result in the payoff of the related mortgage
debt in the amount of approximately $37.5 million, which has been classified in
current liabilities in the accompanying consolidated balance sheet as of
December 31, 2003. This amount includes (i) one hotel mortgage in the amount of
approximately $1.6 million which was extended subsequent to December 31, 2003
for a two year period, (ii) one hotel loan in the amount of $1.5 million which
matures in August 2004, and (iii) approximately $1.4 million in principal
payments which are contractually due within the next twelve months regardless of
the plan for hotel disposition. We have received notice from the lender on the
loan which matures in August 2004 indicating that they will not be extending or
renewing the loan. We expect this hotel to be sold prior to its maturity, as it
is currently being actively marketed for sale as part of our plan for hotel
disposition, with the proceeds to be used to payoff the mortgage loan. However,
based on our current estimates, we anticipate that the net proceeds from the
sale of this hotel will be less than the outstanding mortgage balance by
approximately $200,000 - $300,000. This shortfall will need to be funded by us
upon the sale of the property, or it
53
could be an event of default, absent any other agreement with this lender.
Although not contractually due in 2004, another hotel mortgage loan matures on
January 1, 2005 in the amount of approximately $1.0 million. We also expect this
loan to be repaid prior to maturity with proceeds from the sale of the hotel, as
it is also being actively marketed. If these hotels are not sold by their
maturity dates, we are currently obligated to payoff the mortgage notes using
funds from other sources, if available, including mortgage refinancings with
other lenders, or if not paid off, we would be in default of the mortgage
agreements, absent any other agreement with these lenders. However, there can be
no assurance that these hotels will be sold by their loan maturity dates, or
that alternative financing will be available if needed. If these hotels are not
sold prior to their loan maturity dates, and absent an extension by the current
lenders, or a refinancing with another lender, it could have a significant
impact on our liquidity.
With respect to mortgages on hotels which are not held for sale, approximately
$1.2 million is classified in current liabilities, which is the principal
amortization due within the next twelve months. The Company also has a mortgage
loan on the office building in which its headquarters is located, and on October
1, 2003, the lender extended the maturity date to January 1, 2006. The office
building loan bears interest at the floating rate of either prime minus 0.25% or
LIBOR plus 2.25%, as determined by us.
Certain of our hotel mortgage notes and our office building mortgage note
contain financial covenants, principally minimum net worth requirements, debt to
equity ratios, and minimum debt service coverage ratios. These financial
covenants are typically measured annually, based upon our fiscal year end. At
December 31, 2003, we were not in compliance with the minimum debt service
coverage ratio contained in two hotel mortgage loans aggregating approximately
$4.5 million. The lender for one of these mortgage loans which matures in August
2004 has indicated they will not be extending or renewing the loan, as discussed
above. With respect to the other mortgage loan, we have obtained a waiver from
the lender.
Other Mortgage debt guaranteed by the Company
We are a general partner or managing member in 15 joint ventures as of December
31, 2003, 13 of which had mortgage debt.
The following is a summary of the mortgage debt held by the various types of
joint ventures:
No. of hotels Balance Outstanding Guarantee Balance
------------- ------------------- -----------------
Consolidated joint ventures
in which we have a majority
or controlling interest 2 $ 4,864 $ 976
Unconsolidated joint ventures
in which we are a general partner 2 3,674 3,674
Unconsolidated joint ventures
in which we are a managing
member of a limited liability company 9 18,136 13,194
-- ------------- ------------
13 $ 26,674 $ 17,844
== ============= ============
The mortgage balances for the two consolidated joint ventures have been included
in our financial statements at December 31, 2003.
The aggregate maturities on this long-term mortgage debt, excluding consolidated
joint ventures, regardless of the plan for hotel disposition, are approximately
as follows, including that portion related to our guarantees:
54
(in thousands)
Year Ending December 31, Amount Guaranteed
- ------------------------ ------ ----------
2004 $ 2,507 $ 1,926
2005 845 669
2006 882 694
2007 1,601 1,398
2008 2,058 988
Thereafter 13,917 11,193
--------- ---------
$ 21,810 $ 16,868
========= =========
The mortgage balances for the unconsolidated joint ventures has not been
included in our consolidated balance sheet. Other partners have also guaranteed
a portion of these financings, which may ultimately reduce the exposure on our
guarantees. Approximately $8.9 million of the mortgage debt with unconsolidated
joint ventures relates to five properties that have been identified to be sold
as part of our strategic hotel disposition plan. One mortgage in the amount of
approximately $1.7 million matures in November 2004. This mortgage had matured
on November 1, 2003, however the lender extended the maturity for one year, and
waived a covenant violation for the minimum debt service coverage ratio for
2003. This hotel is included in the hotel disposition plan, and we expect this
hotel to be sold prior to the loan maturity, with the net proceeds being used to
pay off the mortgage. However, if the joint venture is unable to sell the hotel
prior to the loan maturity, on acceptable terms, and the lender is unwilling to
extend the maturity date of the loan, or if acceptable alternative financing is
not available, it could create a default on behalf of the joint venture whereby
the lender would look to us for repayment of the loan under our guarantee,
possibly creating significant liquidity issues for us. [see also, "Off Balance
Sheet Arrangements"]
Operating line-of-credit
At December 31, 2003, we had $3.9 million outstanding under its operating
line-of-credit with LaSalle Bank NA. The operating line-of-credit has a limit of
$5.5 million, as reduced from $6.0 million on February 27, 2004, 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, and was
scheduled to mature on April 30, 2004. The credit line provides for the
maintenance of certain financial covenants, including minimum tangible net
worth, a maximum leverage ratio, minimum debt service coverage ratio, and
minimum net income. We were not in compliance with the minimum tangible net
worth requirement, and the minimum net income requirement as of December 31,
2003. However, the lender has waived these violations in connection with the
renewal of the line-of-credit set forth below.
In March 2004, we accepted a commitment from this lender, to renew the
line-of-credit through April 30, 2005, with a maximum available of $5.5 million,
reducing to $5.0 million on June 30, 2004, reducing further to $4.0 million on
August 31, 2004, and to $3.5 million on February 28, 2005. Notwithstanding the
scheduled reductions, the lender has required that the majority of the proceeds
from the sale of hotel properties must be used to reduce the line-of-credit
balance until the balance is at or below $4.0 million, at which time the maximum
available will be reduced to $4.0 million, even if prior to the August 31, 2004
scheduled reduction date, above. The commitment is subject to the closing of the
renewed loan by April 30, 2004. In addition, the terms of the agreement were
revised to provide for interest at the fixed rate of 10.0% per annum. The
renewed credit line provides for the maintenance of certain types of financial
covenants, similar to those in the previous credit line.
We intend to pursue longer term financing options with other lenders that is
consistent with our business plan of developing, building and selling AmeriHost
Inn hotels and expect to engage an investment/financial advisor in the near
future to assist us in this undertaking. 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.
Lease Purchase Obligation
Under the terms of our existing arrangement with PMC, if we do not either
facilitate the sale to a third party, or purchase from PMC, one of our leased
hotels at a price of approximately $2.6 million by to June 5, 2004, a rent
increase of approximately $127,000 on an annual basis, becomes effective. If we
decide to purchase this hotel by to June 5, 2004, we intend to fund the $2.6
million purchase price with a combination of mortgage debt, the source of which
has not yet been
55
identified, and cash from operations or working capital. However, there can be
no assurance that we will have the liquidity and/or acceptable financing
available to purchase this hotel at that time, and the rent increase could
become effective. As discussed above, we intend to address this purchase
obligation as part of our ongoing discussions with PMC, however there can be no
assurance that an alternative agreement will be in place prior to June 5, 2004.
SEASONALITY
The lodging industry, in general, is seasonal by nature. Our hotel revenues are
generally greater in the second and third calendar quarters than in the first
and fourth quarters due to weather conditions in the primarily midwest markets
in which many of our hotels are located, as well as general business and leisure
travel trends. This seasonality can be expected to continue to cause quarterly
fluctuations in our revenues. Quarterly earnings also may be adversely affected
by events beyond our control, such as extreme weather conditions, economic
factors, securities and geopolitical concerns and other general factors
affecting travel. In addition, hotel construction is seasonal, depending upon
the geographic location of the construction projects. Construction activity in
the Midwest may be slower in the first and fourth calendar quarters due to
weather conditions. Also, since our management fees are based upon a percentage
of the hotel's total gross revenues, we are further susceptible to seasonal
variations. We have also experienced greater interest in hotel sales from
prospective buyers during the second and third calendar quarters, consistent
with the seasonality of hotel operations.
GOVERNMENTAL REGULATION
Americans with Disabilities Act
Under the Americans with Disabilities Act, or ADA, all public accommodations
must meet federal requirements related to access and use by disabled persons.
These requirements became effective in 1992. Although significant amounts have
been invested in ADA-required upgrades to our hotels, a determination that our
hotels are not in compliance with the ADA could result in a judicial order
requiring compliance, imposition of fines or an award of damages to private
litigants. We are likely to incur additional costs in complying with the ADA;
however, such costs are not expected to have a material adverse effect on our
results of operations or financial condition.
Environmental Laws
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in property. Laws often impose liability whether or not the owner
or operator knew of, or was responsible for, the presence of hazardous or toxic
substances. In addition, the presence of contamination from hazardous or toxic
substances, or the failure to properly remediate a contaminated property, may
adversely affect the owner's ability to sell or rent real property or to borrow
funds using real property as collateral. Persons who arrange for the disposal or
treatment of hazardous or toxic substances may also be liable for the costs of
removal or remediation of these substances at the disposal or treatment
facility, whether or not the facility is or ever was owned or operated by those
persons.
Federal and state laws also regulate the operation and removal of underground
storage tanks. In connection with the ownership and operation of hotels, we
could be held liable for the costs of remedial action with respect to the
regulated substances and storage tanks and claims related thereto. We do not use
underground storage tanks at our hotels. In the few instances where we have had
an underground storage tank, activities were undertaken to remove the
underground storage tanks and fully remediate the site. We are not aware of any
underground storage tanks at any of the properties in our current portfolio,
however there can be no assurance that such underground storage tanks do not
exist, particularly at our older properties that we acquired as existing
structures.
Most of our hotels have undergone Phase I environmental site assessments, which
generally provide a non-intrusive physical inspection and database search, but
not soil or groundwater analyses, by a qualified independent environmental
engineer. The purpose of a Phase I assessment is to identify potential sources
of contamination for which the hotels may be responsible and to assess the
status of environmental regulatory compliance. The Phase I assessments have not
revealed any environmental liability or compliance concerns that we believe
would have a material adverse effect on our results of operations or financial
condition, nor are we aware of any material environmental liability or concerns.
Nevertheless, it is
56
possible that these environmental site assessments did not reveal all
environmental liabilities or compliance concerns or that material environmental
liabilities or compliance concerns exist of which we are currently unaware.
Federal, state and local environmental laws, ordinances and regulations require
abatement or removal of asbestos-containing materials and govern emissions of
and exposure to asbestos fibers in the air. Asbestos-containing materials may be
present in various building materials such as sprayed-on ceiling treatments,
roofing materials, pipe insulation or floor tiles at some of our older hotels.
In instances where we became aware of such asbestos-containing materials, such
materials were contained or removed and abated. To the best of our knowledge, we
have not used any asbestos-containing materials, which are not in compliance
with the applicable laws and regulations, in our new hotel development projects.
Any liability resulting from non-compliance or other claims relating to
environmental matters could have a material adverse effect on our results of
operations or financial condition.
In recent years there has been a widely publicized proliferation of mold-related
claims by tenants, employees and other occupants of buildings against the owners
of those buildings. To date, we have experienced a few instances where mold was
detected, however no such claims have been filed against us. Mold-related claims
are not covered by our insurance programs. In every hotel where we have
identified a measurable presence of mold, we have undertaken remediation we
believe to be appropriate for the circumstances encountered. Unfortunately,
there is little in the way of government standards, insurance industry
specifications or otherwise generally accepted guidelines dealing with mold
propagation. Although considerable research into mold toxicity and exposure
levels is underway, it may be several years before definitive standards are
available to property owners against which to evaluate risk and design
appropriate remediation practices. We cannot predict the outcome of any future
regulatory requirements to deal with mold-related matters. We also do not
believe that, currently, any potential mold-related liabilities, either
individually or in the aggregate, will have a material adverse effect on our
results of operations or financial condition.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). This Statement amends
FASB Statement No. 123, "Accounting for Stock-based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
148 and the disclosure requirements of Statement No. 123 require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after December 15,
2002, and are included in the notes to these consolidated financial statements.
During 2003, the Company has adopted the provisions of FASB No.123, including
the reporting of the fair value of any options as a charge against earnings.
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," which addresses how a business
enterprise should evaluate whether or not it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of
Variable Interest Entities", which was issued in January 2003. The Company is
required to adopt the requirements of FIN 46R for interim periods beginning
after March 31, 2004. This Interpretation requires that the Company present any
variable interest entities in which it has a majority variable interest on a
consolidated basis in its financial statements. The Company is continuing to
assess the provisions of this Interpretation and the impact to the Company of
adopting this Interpretation. Therefore the following amounts may change based
upon additional analysis. Due to the adoption of this Interpretation, the
Company expects that it will begin to present its investments in four joint
ventures in which it has a majority variable interest, as determined in
accordance with the provisions of this Interpretation, on a consolidated basis
in its financial statements beginning with the consolidated financial statements
issued for the quarterly period ended June 30, 2004. The consolidation of these
joint ventures is expected to add approximately $9.7 million in assets and $7.8
million in liabilities to the Company's consolidated balance sheet. As of
December 31, 2003, the Company had investments in, and advances to, these joint
ventures of approximately $2.0 million, which was presented as such under the
equity method of accounting in the accompanying consolidated financial
statements. The Company expects that it will continue to present all of its
other unconsolidated investments under the equity method.
57
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. This Statement is effective
for financial instruments entered into or modified after May 31, 2003 and is
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. The effective date of a portion of the statement has been
indefinitely postponed by the FASB. The Company does not expect that the
implementation of SFAS No. 150 will result in a material financial statement
impact.
SUBSEQUENT EVENTS
In 2004, we entered into discussions with PMC Commercial Trust, regarding 21
AmeriHost Inn hotels PMC owns which are leased and operated by our subsidiary.
Due to numerous economic and market-driven factors relating to these 21 hotels,
including the factors mentioned above, we have entered into discussions with PMC
with the objective to restructure these long-term lease agreements. The
objective of such restructuring is to improve our operating results and cash
flow with respect to these hotels, and to agree on a plan that would transfer
these hotels to third party operators through the sale of the properties. On
March 12, 2004, we entered into a temporary letter agreement with PMC that
expires on April 30, 2004. The temporary letter agreement provides that base
rent will continue to accrue at the rate of approximately $445,000 per month, as
set forth in the lease agreements; however the base rent payments required to be
paid on March 1, 2004 and April 1, 2004 were reduced to approximately $360,000
per month, with the March 1, 2004 payment being due and payable upon the
execution of the temporary letter agreement. In addition, our subsidiary was
allowed to utilize $200,000 of its security deposit held with PMC to partially
fund these payments. Upon the expiration of the temporary letter agreement on
April 30, 2004, the deferred portion of the base rent (approximately $170,000)
will be payable and the security deposit is to be restored to its March 12, 2004
balance. While the objective is to reach a restructured agreement prior to the
expiration of the temporary letter agreement, there can be no assurance that the
leases will be restructured on terms and conditions acceptable to us, if at all,
or that a restructuring will improve operating results and cash flow, or provide
for the sale of the hotels to third party operators.
In March 2004, we accepted a commitment to renew our operating line-of-credit
from the existing lender, LaSalle Bank N.A., through April 30, 2005, which we
accepted and executed. The revised terms require that the maximum availability
under the facility from its current $5.5 million level be reduced to $5.0
million on June 30, 2004, further reduced to $4.0 million on August 31, 2004,
and further reduced to $3.5 million on February 28, 2005. Notwithstanding these
scheduled reductions, the lender has required that the majority of the proceeds
from the sale of hotel properties must be used to reduce the outstanding balance
of the line-of-credit until the balance it at or below $4.0 million, at which
time the maximum availability on the line will be reduced to $4.0 million, even
if prior to the August 31, 2004 scheduled reduction date, above. The terms of
the agreement were further revised to provide for interest at the fixed rate of
10.0% per annum. The renewed credit line provides for the maintenance of certain
types of financial covenants, as in the previous credit line.
In March 2004, we sold two wholly owned AmeriHost Inn hotels, generating gross
proceeds of approximately $7.1 million, and simultaneously paid off the related
mortgage loans of approximately $3.9 million.
RISK FACTORS
The following important factors, among others, have affected, and may in the
future continue to affect, our business, results of operations and financial
condition, and could cause our operating results to differ materially from those
expressed in any forward-looking statements made by us or on our behalf
elsewhere in this report.
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DEBT, CAPITAL, AND LIQUIDITY
We have substantial long-term obligations, which could limit our flexibility or
otherwise adversely affect our financial condition.
We have a significant amount of debt and obligations under long-term leases,
such as the leases with PMC, requiring us, or our subsidiaries, to dedicate a
substantial portion of our, or their, cash flow from operations to make these
required payments. These payments reduce the cash flow otherwise available to
fund capital expenditures, expansion efforts and other general corporate needs.
For the last three years our cash flow from hotel operations, after the payment
of mortgage debt service, lease obligations, and ongoing capital expenditures,
has been negative and we have used the proceeds from the sale of hotels to
primarily fund these payments and other operational expenses. There is no
assurance that we will generate positive cash flow from hotel operations. If our
hotel operating cash flow or other sources of cash is not sufficient to fund our
expenditures or to make our debt and lease payments, we will have to raise
additional funds through:
- the sale of capital stock;
- additional borrowings; or
- selling a greater number of assets and sooner than planned.
We cannot assure you that any of these sources would be available to us on
acceptable terms, if at all. An inability to fund our operating or capital
needs, including our debt and lease payments, would have a material adverse
effect on our results of operations and financial condition. Further, pursuant
to a commitment letter from our existing line-of-credit provider to extend the
facility for a one-year period, we will be required to use the proceeds from the
sale of hotel properties to repay draws on the line. The maximum availability on
this credit facility will decrease to $4.0 million from its current $5.5 million
by August 31, 2004, and further to $3.5 million by February 28, 2005, however
the majority of net proceeds from the sale of hotels must be used to reduce the
outstanding balance under the line-of-credit until our balance is at or below
$4.0 million, at which time the reduction of the line of credit availability to
$4.0 million will be accelerated. There is no assurance that this line will be
sufficient to meet our needs or that we would be able to obtain a replacement
line on terms and conditions acceptable to us, if at all.
Additionally, our loan facility for new construction expired on October 31,
2003, and we are currently attempting to renew the facility. There is no
assurance that we will be able to renew this facility. If we are unable to renew
this facility, or if we are unable to obtain an alternative new construction
credit facility, or other hotel debt arrangements, on acceptable terms, our
ability to develop new hotels will be significantly limited and our future
prospects will be adversely effected.
We require significant amounts of capital in our business.
Our business model requires us to have, or be able to obtain, significant
amounts of capital. We rely on the availability of debt or equity capital,
including joint venture sources, or the sale of hotels, to fund hotel
development and capital improvements. We may not, however, be able to raise
sufficient monies, or sell hotels, on acceptable terms, if at all. In addition,
geopolitical or global or regional trends and events deemed negative by debt and
equity providers could adversely affect the availability and cost of capital for
our business. Failure to adequately fund our business would have a material
adverse effect on our results of operations, financial condition and prospects.
Rising interest rates could have an adverse effect on our cash flow and interest
expense.
Most of the money we have borrowed requires us to pay interest that varies over
time. In addition, we may borrow money in the future requiring us to pay
interest at "variable rates." Accordingly, increases in interest rates have a
material adverse effect on our results of operations and financial condition
including our ability to pay increased interest costs.
We have restrictive debt covenants that could adversely affect our ability to
run our business.
The agreement governing our corporate line of credit contains various
restrictive covenants including, among others, provisions that could restrict
our ability to:
59
- borrow additional money;
- make common and preferred distributions;
- make capital expenditures or acquire or develop hotels in
excess of certain amounts;
- engage in transactions with affiliates;
- make investments, including repurchasing our common stock;
- merge or consolidate with another person; and
- dispose of all or substantially all of our assets.
These restrictions may adversely affect our ability to finance our operations or
engage in other business activities that may be in our best interest. In
addition, these agreements require us to maintain certain specified financial
ratios. Our ability to comply with these ratios may be adversely affected by
events beyond our control. The breach of any of these covenants and limitations
could result in the accelerated payment of amounts outstanding under our line of
credit. We may not be able to refinance or repay our debt in full under those
circumstances.
REAL ESTATE AND GROWTH
Our development activities may be more costly and take longer than we have
anticipated.
As part of our strategy, we plan to develop hotels for third parties and joint
ventures in which we have an ownership interest. Development involves many
substantial risks, including:
- actual development costs may exceed budgeted or contracted
amounts;
- construction delays may prevent us from opening hotels on
schedule;
- we may not be able to obtain all necessary zoning, land use,
building, occupancy and construction permits;
- the properties may not achieve our desired revenue, operating
profit, and profit on sale goals; and
- we compete for suitable development sites, and may not be able
to locate attractive sites in terms of location or economic
feasibility.
Our ability to sell hotels in a timely manner and at favorable prices could be
adversely affected by market conditions and other factors.
Our ability to increase our revenues and operate profitably depends to a large
extent on our ability to sell existing hotels, or hotels that we develop, at
favorable prices. The price and timing of each sale is affected by numerous
factors, such as the demand and supply of hotel product and conditions in the
real estate and capital markets, as well as the uncertainties associated with
negotiating conditions and terms of sales and our buyer's ability to obtain
sufficient financing. In addition, our cash flow needs may dictate, to a certain
extent, the timing of attempted sales. For example, the sales price we can
obtain for a hotel may be adversely affected because we may accelerate sale of a
hotel to generate cash flow to fund other needs. Further, even if we do not
accelerate the sale of any particular hotel or hotels, actual sales prices may
be materially less than we expect. There is no assurance, for example, that we
will generate the expected proceeds from our formal plan for hotel disposition.
If we are not able to sell the hotels we develop in a timely manner and at
favorable prices, our ability to find future growth, our ability to retire
maturing debt, our revenues and our ability to operate profitably will be
significantly impaired.
We will encounter risks that may adversely affect real estate ownership.
Our investments in hotels are subject to the numerous risks generally associated
with owning real estate, including among others:
- adverse changes in general or local economic or real estate
market conditions;
- changes in zoning laws;
- changes in traffic patterns and neighborhood characteristics;
- increases in assessed valuation and real estate tax rates;
- increases in the cost of property insurance;
60
- governmental regulations and fiscal policies;
- the potential for uninsured or underinsured property losses;
- the impact of environmental laws and regulations; and
- other circumstances beyond our control.
Moreover, real estate investments are relatively illiquid, and we may not be
able to vary our portfolio in response to changes in economic and other
conditions.
OPERATIONAL RISKS
Insufficient cash flow from many of our existing hotels.
The net cash flow from the operations of many of our hotels has been
insufficient to support their related mortgage debt payments or long-term lease
obligations, as well as their necessary and ongoing capital expenditures. This
negative cash flow at many of our hotels affects several aspects of our
business, including our ability to raise capital whether through debt or equity
sources, our ability to purchase and/or develop hotels, and our ability to make
capital improvements to our existing hotels.
As described in the "Executive Overview" above, we have implemented strategies
and programs to improve hotel operation results, and while the improvement in
the economy and industry is expected to have a positive impact, there can be no
assurance that such initiatives or expected positive impact from the economy
will occur or will have a material position impact on our hotel operations.
If we are not able to restructure our lease agreements with PMC Commercial
Trust, our financial results may suffer.
One of our wholly-owned subsidiaries is the lessee for 21 hotels with PMC. We
have guaranteed the obligations under these leases. To date, we have been making
a significant portion of the lease payments for our subsidiary, since the cash
flow generated by these hotels has been insufficient to cover the annual lease
payment obligation of approximately $5.3 million. On March 12, 2004, we and our
subsidiary entered into an interim agreement with PMC. This interim agreement
temporarily deferred a portion of the March and April 2004 payments required
under the leases. This interim agreement expires on April 30, 2004 at which time
the deferred portion is due. If this interim agreement is not renewed or
extended, or a revised agreement not entered into, the terms of the original
agreement will return in effect. Thus, if the operations of the hotels subject
to the leases do not improve sufficiently, we will either have to continue
subsidizing the lease payments or take other actions to restructure the leases.
Any such actions could cause us to default under other credit agreements or our
agreement with Cendant. Any such default would have a material adverse effect on
our results of operations, financial condition and prospects.
Our financial performance depends in part on Cendant promoting and supporting
the AmeriHost Inn brand.
The successful operation of the hotels we own, operate or manage depends in part
on the promotion of the AmeriHost brand by Cendant, the owner of the AmeriHost
Inn brand and on Cendant devoting sufficient resources to support services, such
as reservation systems, frequent guest loyalty and marketing programs, provided
to franchisees. We do not control what Cendant spends on brand promotion or
franchisee support. Cendant's failure or inability to promote the AmeriHost
brand or to provide adequate support to franchisees would have a material
adverse effect on our results of operations, financial condition and prospects.
Further, if we sold an AmeriHost Inn hotel and received a development incentive
fee from Cendant, since the hotel remained an AmeriHost Inn hotel, and
subsequently the buyer of the hotel defaults under the franchise agreement
within the first 76 months, under certain circumstances, we may be required to
refund back to Cendant, from future fees, a portion of the development incentive
fee. To date, we have not been required to refund any development incentive
fees; however, there can be no assurance that we will not be required to refund
development incentive fees in the future.
We may be adversely affected by the requirements contained in our franchise and
licensing agreements.
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As of December 31, 2003, all of our hotels were operated pursuant to existing
franchise or licensing agreements with nationally recognized hotel brands. The
franchise agreements generally contain specific standards for, and restrictions
and limitations on, the operation and maintenance of a hotel in order to
maintain uniformity within the franchisor system. Standards are often subject to
change over time, in some cases at the discretion of the franchisor, and may
restrict a franchisee's ability to make improvements or modifications to a hotel
without the consent of the franchisor. In addition, compliance with standards
could require us to incur significant expenses or capital expenditures. Action
or inaction on our part could result in a breach of standards or other terms and
conditions of the franchise agreements, and could result in the loss or
cancellation of a franchise license. Loss of franchise licenses without
replacement would likely have an adverse effect on our hotel revenues.
Typically, the buyers of our hotels maintain the existing brand affiliation and
enter into a franchise agreement with the franchisor upon the sale. Part of our
strategic plan is to sell AmeriHost Inn hotels to buyers who continue to operate
the hotels as AmeriHost Inn hotels. As a result, Cendant must approve the
franchise application of the buyer, which is based solely on their evaluation of
the buyer's experience and ability to effectively operate the hotel, the
physical condition of the hotel, and other factors. If we choose to sell an
AmeriHost Inn hotel, or other brand hotel, where the buyer does not execute an
AmeriHost Inn, or other, franchise agreement, we may be subject to liquidated
damages under our franchise agreements, which is computed as a percentage of
room revenue or a fixed amount per room.
Uninsured and underinsured losses could result in loss of value of hotel
properties.
Our insurance coverage may not be sufficient to fully protect our business and
assets from all claims or liabilities, including environmental liabilities.
Further, we may not be able to obtain existing or additional insurance at
commercially reasonable rates. There are certain types of losses, generally of a
catastrophic nature or related to certain environmental liabilities, that are
either uninsurable or not insurable at a reasonably affordable price. In the
event losses or claims are beyond the limits or scope of our coverage, our
results of operations or financial condition could be materially adversely
affected.
We may have to make significant capital improvements to maintain our hotel
properties.
We may be required to replace, from time to time, furniture, fixtures and
equipment and to make other capital improvements at the hotels we own, or lease
and operate. We must also make periodic capital improvements to comply with
standards established by Cendant, the franchisor of our hotels, under our
franchise agreements. Generally, we are responsible for the costs of these
capital improvements, which give rise to the following risks:
- cost overruns and delays;
- the disruption to operations and potential lost room revenue
associated with renovations;
- the cost of funding renovations and the possibility that
financing for these renovations may not be available on
attractive terms; and
- the return on our investment in these capital improvements may
not be adequate.
In the past, we have generally funded capital improvements from cash flow from
operations and, to a lesser degree, by borrowing. Our future cash flow may not
be sufficient to fund future capital improvements and there is no assurance that
we will be able to borrow any needed monies on acceptable terms, if at all.
Thus, we may not be able to fund required capital improvements, which could
cause us to default on certain agreements which would have a material adverse
effect on our results of operations, financial condition and prospects.
Our business is concentrated in particular segments of a single industry and our
hotels are primarily operated under a single brand name.
Nearly all of our business has been, and will likely continue to be, hotel
related. We are thus exposed to downturns in the hotel industry and are more
susceptible to adverse conditions in the mid-market segment of the hotel
industry than more diversified hotel companies. Finally, our hotels are operated
primarily under the AmeriHost brand name, and our success depends heavily on the
strength of this single brand. Downturns in business or leisure travel could
have a material adverse effect on our results of operations, financial condition
and prospects.
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We may not be able to effectively compete for guests with other branded and
independent hotels.
The mid-market segment of the hotel business is highly competitive. Our hotels
compete on the basis of location, room rates and quality, service levels,
reputation, and reservation systems, among many other factors. There are many
competitors in our market segment, and many of them or the brands under which
they are franchisees, may have substantially greater number of hotels in their
brands, greater contributions from their central reservation system, greater
name recognition, and greater marketing and financial resources. New hotels are
continually being constructed and opened, in some cases without corresponding
increases in demand for hotel rooms. There is no assurance that we will be able
to compete effectively, which could have a material adverse effect on our
results of operations, financial condition and prospects.
We are subject to the risks of hotel operations.
We are subject to the risk of fluctuating hotel operating expenses at our
hotels, including but not limited to:
- wage and benefit costs;
- repair and maintenance expenses;
- gas and electricity costs;
- insurance costs, including health, general liability and
workers compensation; and
- other operating expenses.
Increases in operating expenses could have a material adverse effect on our
results of operations and financial condition.
Our revenues are significantly influenced by economic conditions in the Midwest.
Our hotels are located primarily in the States of Illinois, Ohio, Indiana,
Michigan, and Wisconsin. In 2003, more than two-thirds of our hotel revenues
were derived from hotels in the Midwest. As a result, our results of operations
and financial condition are largely dependent on economic conditions in the
Midwest where growth may be weaker than that in other regions, and a decline in
economic conditions in this region could have a material adverse affect on us.
Geopolitical events could adversely affect us.
Geopolitical events including terrorist attacks have adversely affected the
travel and hospitality industries. The impact which these terrorist attacks have
had, or could have on our business in particular and the United States economy,
the global economy and global financial markets in general is indeterminable.
These attacks or the potential for future attacks could have a material adverse
effect on our business, our ability to finance our business, our ability to
insure our properties.
The seasonal nature of the lodging industry may cause our quarterly results to
fluctuate significantly.
Travel and leisure spending in the lodging industry is seasonal in nature. Our
hotel revenues are generally greater in the second and third calendar quarters
than in the first and fourth calendar quarters. Similarly, both hotel sales and
construction activity are also seasonal. Thus, our quarterly revenues and
earnings vary from quarter to quarter and may be adversely affected by events
beyond our control, such as extreme weather conditions, economic and other
factors affecting travel.
Our revenues and the value of our properties are subject to conditions affecting
the lodging industry.
The lodging industry has experienced a difficult period, and operations have
generally been declining for the past several years, which has caused declines
in our revenue per available room, or RevPAR, and profit margins. The decline in
the lodging industry has been attributed to a number of factors including a weak
economy, and the effect of potential terrorist activity in the United States
which have changed the travel patterns of both business and leisure travelers.
It is not clear whether these changes are permanent or whether they will
continue to evolve creating new opportunities or difficulties for the industry.
Our results of operations may be affected and can change based on the following
risks:
- changes in the national, regional and local economic climate
- changes in business and leisure travel patterns;
63
- local market conditions such as an oversupply of hotel rooms
or a reduction in lodging demand;
- the attractiveness of our hotels to consumers relative to our
competitors;
- the performance of the managers of our hotels; and
- changes in room rates and increases in operation costs due to
inflation and other factors.
Our expenses may not decrease if our revenue drops.
Many of the expenses associated with owning and operating hotels, such as debt
payments, property taxes, insurance, utilities, and employee wages and benefits,
are relatively inflexible and do not necessarily decrease in tandem with a
reduction in revenue at the property. Because of weak economic conditions over
the last several years, particularly in the lodging industry, we have been
working with our managers to reduce the operating costs of our hotels. While we
have achieved reductions in some operating costs as a result of these efforts,
further cost reductions would be difficult to achieve if operating levels
continue to decline. Some of the cost reduction efforts undertaken may
eventually need to be reversed even if operations remain at reduced levels.
Regardless of these efforts to reduce costs, our expenses will be affected by
inflationary increases, and in the case of certain costs, such as wages,
benefits and insurance, may exceed the rate of inflation in any given period.
Our managers may be unable to offset any such increased expenses with higher
room rates. Any of our efforts to reduce operating costs or failure to make
scheduled capital expenditures could adversely affect the growth of our business
and the value of our hotel properties.
OTHER RISKS
It may be difficult for a third party to acquire us, even if doing so would be
beneficial to our shareholders.
Some provisions of our certificate of incorporation and bylaws, as well as some
provisions of Delaware law, may discourage, delay or prevent third parties from
acquiring us, even if doing so would be beneficial to our shareholders. Each of
these provisions makes it more difficult for shareholders to obtain control of
our board or initiate actions that are opposed by the then current board. For
example, our certificate of incorporation allows for the issuance of
undesignated preferred stock, which gives our board the ability to issue
preferred stock with voting or other rights and preferences that could impede
the success of any attempted change of control. Delaware law also could make it
more difficult for a third party to acquire us. Section 203 of the Delaware
General Corporation Law may have an anti-takeover effect with respect to
transactions not approved in advance by our board, including discouraging
attempts that might result in a premium over the market price of our common
stock.
Cendant has the right to terminate our development agreement upon a change in
control of our company, as defined, if, after the change in control, the company
(or successor company) fails to begin construction on a certain specified number
of new AmeriHost Inn hotels within a specified period of time. In addition, the
provision which allows for any refunds on development incentive fees, as a
result of terminated franchise agreements by the buyers of our AmeriHost Inn
hotels within the first 76 months, to be offset against future fees payable by
Cendant is terminated, and any such refunds would be payable to Cendant
immediately.
We depend on our key personnel.
Our success depends on the efforts of our executive officers and other key
personnel. We cannot assure you that these key personnel will remain employed by
us. While we believe that we could find replacements for these key personnel,
the loss of their services could have a significant adverse effect on our
financial performance.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our long-term debt obligations. We have some cash flow exposure on our long-term
debt obligations to changes in market interest rates. We primarily enter into
long-term debt obligations in connection with the development and financing of
hotels. We maintain a mix of fixed and floating debt to mitigate our exposure to
interest rate fluctuations. We do not enter into any market risk sensitive
investments for trading purposes.
64
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 December 31, 2003. As the table incorporates only those
exposures that existed as of December 31, 2003, it does not consider those
exposures or positions that could arise after that date. Moreover, the
information presented therein is merely an estimate and has limited predictive
value. As a result, the ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arise during future periods,
hedging strategies and prevailing interest rates at the time.
Average Nominal
Carrying Value Interest Rate
-------------- -------------
Operating line of credit - variable rate $ 3,850,000 6.75%
Mortgage debt - fixed rate $ 22,677,787 7.60%
Mortgage debt - variable rate $ 42,500,127 5.64%
If market rates of interest on our variable debt increased by 10%, the increase
in interest expense on the variable rate debt would be approximately $240,000
annually.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements filed as part of this Form 10-K are
included under "Exhibits, Financial Statements and Reports on Form 8-K" under
Item 15. Selected quarterly financial data is presented in Note 17 to the
consolidated financial statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no disagreements with KPMG LLP on accounting and financial
disclosure matters which are required to be described by Item 304 of Regulation
S-K.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days of the filing date of this
report, that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in the reports that are filed
or submitted under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
65
[THE FOLLOWING ITEM HAS NOT YET BEEN FULLY UPDATED]
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers and directors are:
Name Age Position
---- --- --------
Kenneth M. Fell 46 Chairman of the Board of Directors
Andrew E. Shapiro 42 Vice Chairman of the Board of Directors
Jerry H. Herman 50 President, Chief Executive Officer and Director
James B. Dale 40 Senior Vice President of Finance, Secretary, Treasurer and Chief
Financial Officer
Steven J. Belmonte 51 Director
Salomon J. Dayan 58 Director
Gerald T. LaFlamme 64 Director
Thomas J. Romano 51 Director
Kenneth M. Fell has been a member of the Board of Directors since August 2002.
In December 2002, Mr. Fell was elected independent Chairman of the Board of
Directors. Mr. Fell is a member of the Audit Committee, the Compensation
Committee, and the Corporate Governance/Nominating Committee. Mr. Fell also
serves as a member of various ad hoc committees of the Board, which are formed
to address specific issues. Since 1983, Mr. Fell has been an independent floor
trader and member of various divisions of the Chicago Mercantile Exchange. These
include the Index and Options Market (1983-present), the International Monetary
Market (1984-present), and the Growth and Emerging Market (1995-present). Since
1986, Mr. Fell has been the President and sole owner of K.F., Inc., a financial
derivatives trading corporation.
Andrew E. Shapiro has been a member of the Board of Directors since September
2002, and was elected independent Vice Chairman of the Board of Directors in
February 2003. Mr. Shapiro is Chairman of the Company's Corporate
Governance/Nominating Committee, and also serves as a member of the Compensation
Committee. Mr. Shapiro also serves as a member of various ad hoc committees of
the Board, which are formed to address specific issues. Mr. Shapiro is Managing
Member and President of Lawndale Capital Management, LLC, a San Francisco Bay
area investment advisory firm, and Chairman and President of a predecessor
investment advisor, and now holding company, Lawndale Capital Management, Inc.,
since 1992. Prior to forming the Lawndale Capital entities, Mr. Shapiro obtained
numerous years of experience in highly leveraged investments and lending. He has
been a Board Observer of Earl Scheib, Inc. (AMEX-ESH), pursuant to an agreement
with that company's Board, and he is a member of the National Association of
Corporate Directors (NACD).
Jerry H. Herman is President and Chief Executive Officer, and a member of the
Board of Directors, since January 2003. Mr. Herman is responsible for the
development and implementation of the Company's strategic objectives, business
plan, core businesses, and asset decisions. Mr. Herman also serves as a member
of various ad hoc committees of the Board, which are formed to address specific
issues. From 1992 to 2002, Mr. Herman was Chief Executive Officer and a member
of the Board of Directors of City Hotels USA, the U.S. holding company of a
publicly traded ownership, development, management and hospitality company
headquartered in Belgium with assets in Europe and the United States. Prior to
that, from 1984 to 1991, he was General Counsel and then Senior Vice President
of Hotel Acquisitions for C.R.I., Inc., a national real estate investment and
management firm with multi-family, hotel, and commercial ownership and mortgage
66
portfolios. Mr. Herman is a member of the District of Columbia Bar and the
American Bar Association, and he recently served as a founding member of the
National Franchise Advisory Boards of the Doubletree and Homewood Suites brands.
James B. Dale was promoted to Chief Financial Officer in 1998, in addition to
his responsibilities as Senior Vice President of Finance. Mr. Dale began his
employment with the Company in May 1994 as the Company's first Corporate
Controller. He has been responsible for overseeing all aspects of the Company's
property and corporate accounting departments, including preparation of all SEC
filings. In 1999, Mr. Dale was elected Corporate Secretary by the Board of
Directors. Prior to joining the Company, Mr. Dale was an Audit Manager with an
international public accounting firm, with nearly nine years of experience in
auditing, financial reporting and taxation. Mr. Dale is a Certified Public
Accountant and is a member of the American Institute of Certified Public
Accountants and the Illinois CPA Society.
Steven J. Belmonte, CHA, has been a member of the Board of Directors since
August, 2002. Mr. Belmonte is Chairman of the Company's Compensation Committee,
and also serves as a member of various ad hoc committees of the Board, which are
formed to address specific issues. In 2002, Mr. Belmonte launched Hospitality
Solutions, LLC, a full-service, nationwide consultation firm specializing in
lodging industry issues at the hotel and corporate level. Hospitality Solutions
offers expert witness and mediation services, litigation support, license
agreement formulation or termination negotiation assistance, asset management,
special projects, targeted training programs, and motivational speaking. From
1991 to 2002, Mr. Belmonte oversaw the Ramada hotel chain, which had over 1,000
hotels and nearly 135,000 hotel rooms throughout the United States, becoming the
longest standing president of a national franchised hotel chain. Mr. Belmonte
has assumed leadership roles in charities related to the hotel industry as
follows: Chairman of the American Hotel Foundation (AHF) and Vice Chairman of
the American Hotel & Lodging Educational Foundation (AH&LEF). Furthermore, Mr.
Belmonte's charitable leadership has also extended to Childreach, whose
activities have included constructing two medical facilities, a Food and Science
Laboratory and a library in Africa, and schools in the Dominican Republic and
Honduras.
Salomon J. Dayan, M.D., has been a member of the Board since August, 1996. Dr.
Dayan also serves as a member of various ad hoc committees of the Board, which
are formed to address specific issues. In 1980, Dr. Dayan, a physician certified
in internal and geriatric medicine, founded the Salomon J. Dayan Ltd., a
multi-specialty medical group, which is dedicated to the care of the elderly in
hospital and nursing home settings. He was Chief Executive Officer from 1980
until the medical group was sold in 1998. Dr. Dayan was the Medical Director and
Executive Director of Healthfirst, a corporation that operates multiple medical
ambulatory facilities in the Chicago, Illinois area from 1986 until the
corporation was sold in 1996. Since 1994, he has been an assistant professor at
Rush Medical Center in Chicago. Dr. Dayan is currently the Chairman of the Board
of Directors of J. D. Financial, a bank holding company owning Pan American
Bank. Dr. Dayan also has numerous investments in residential and commercial real
estate.
Gerald T. LaFlamme has been a member of the Board of Directors since August
2002. Mr. LaFlamme is Chairman of the Company's Audit Committee, and also serves
as a member of various ad hoc committees of the Board, which are formed to
address specific issues. He has been the President and Chief Executive Officer
of JL Development Company, Inc. a real estate development and consulting firm,
since March 2004. From 2001 through 2003, Mr. LaFlamme was the Senior Vice
President and Chief Financial Officer of Davidson Communities, LLC, a real
estate development company, where his responsibilities include land
acquisitions, joint venture transactions and the financing of real estate
projects. From 1997 through 2001, Mr. LaFlamme was retired. From 1978 to 1997,
Mr. LaFlamme was a Managing Partner with Ernst & Young LLP, and a predecessor
accounting firm, and had responsibility for managing the firm's Real Estate
Office in San Diego, California. Mr. LaFlamme has extensive experience in
structuring real estate transactions and in developing business strategies for
Real Estate Investment Trusts, residential and commercial developers, and
hospitality management companies. Mr. LaFlamme is a Certified Public Accountant.
Thomas J. Romano has been a member of the Board since November 1999. Mr. Romano
is a member of the Audit Committee and Corporate Governance/Nominating
Committee. Mr. Romano also serves as a member of various ad hoc committees of
the Board, which are formed to address specific issues. Mr. Romano has been an
Executive Vice President and a member of executive management for Bridgeview
Bank Group since 1997. He served as Chief Credit Officer and President of the
Lake County, Illinois region, responsible for a significant loan portfolio from
1997 until June 2002, at which time he became, responsible for leading the
community banks' marketing efforts for Bridgeview Bank Group and Bridgeview
Capital Solutions. Prior to Bridgeview Bank Group, his experience includes 19
years with First of America Bank where his responsibilities included the
management of the commercial lending functions across the Northern Illinois
67
Region. Mr. Romano is currently a member of Robert Morris Associates and serves
as a director for Vista National Insurance, Laserage Technology Corporation and
the Goldman Philanthropic Partnerships.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based upon a review of Section 16(a) filings furnished to the Company, the
Company is not aware of any failure to file reports required by Section 16(a) on
a timely basis during 2003.
CODE OF BUSINESS CONDUCT AND ETHICS
Our Board of Directors adopted a Code of Business Conduct and Ethics, which
governs business decisions made and actions taken by our directors, officers,
and employees. A copy of this code is available on our website at
http://www.arlingtonhospitality.com under the heading of "About Us" and
subheading "Corporate Governance" and we intend to disclose on this website any
amendment to, or waiver of, any provision of this Code applicable to our
directors and executive officers that would otherwise be required to be
disclosed under the rules of the SEC or NASDAQ. A copy of this code is also
available in print to any stockholder upon written request addressed to Investor
Relations, Arlington Hospitality, Inc., 2355 S. Arlington Heights Road, Suite
400, Arlington Heights, Illinois 60005.
See also Item 1 - Business, under the heading "Corporate Governance."
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the annual and
long-term compensation for services as officers to the Company for the fiscal
years ended December 31, 2003, 2002 and 2001, of those persons who were, at
December 31, 2003: The chief executive officer and the other executive officer
of the Company (the "Named Officers"). See "Compensation of Directors" under
Item #11.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
----------------------------
Annual Compensation Restricted Securities
Name and Principal ---------------------------- Stock Underlying All Other
Position Year Salary (5) Bonus(1) Awards (6) Options(#)(2) Compensation(3)
- ------------------------------------ ---- ----------- -------- ---------- -------------- ---------------
Jerry H. Herman 2003 287,308 - - - 2,732
President, Chief Executive Officer,
and Director
James B. Dale 2003 160,442 7,200 - - 1,871
Senior Vice President Finance, 2002 145,000 17,850 - 21,000 2,036
Secretary, Treasurer, and 2001 132,115 9,000 - 21,000 2,214
Chief Financial Officer
Richard A. Gerhart (4) 2003 132,500 9,700 - - 2,329
Senior Vice President Hotel
Operations
(1) Mr. Dale and Mr. Gerhart received cash bonuses of $7,200 and &9,700,
respectively in 2003.
(2) Includes 14,000 and 7,000 options issued in 2002 and 2001,
respectively, to Mr. Dale which did not vest and were forfeited. All
other options issued to Mr. Dale were fully vested as of December 31,
2003.
(3) Includes life insurance premiums paid by the Company on behalf of the
Named Officers and the Company's 401(k) matching contributions of $256
for Mr. Gerhart in 2003 and $1,646, $1,586 and $1,764 for Mr. Dale in
2003, 2002 and 2001, respectively.
(4) Mr. Gerhart, who has been employed by the Company since 1999, was made
an executive officer in August 2003.
(5) Mr. Dale received $8,387 in 2003 for his services as our interim chief
executive officer from December 12, 2002 to January 6, 2003.
(6) Mr. Dale and Mr. Gerhart were awarded 750 and 971 shares of restricted
stock, respectively, valued at $2,550 and $3,300, in recognition of
their leadership roles in 2002, which restricted stock will be issued
in 2004.
68
STOCK OPTIONS
The following table summarizes the number and terms of stock options granted to
each of the Named Officers during the year ended December 31, 2003.
OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at
Assumed Annual Rates of
Stock Price Appreciation
Individual Grants for Option Term
--------------------------------------------------------- -----------------------------
% of Total Options
Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($)
- --------------- --------- ------------------ ----------- ---------- ----- ------
Jerry H. Herman 75,000 46.9% $3.16 Feb. 2003 - -
Jerry H. Herman 35,000 21.9% $3.33 Mar. 2003 - -
As part of his initial employment with us on January 7, 2003, Mr. Herman was
granted a 60 day option to purchase 75,000 shares of restricted stock using an
upward exercise price reset formula to the greater of a floor price, the price
on the date of his start date or, with respect to options not yet exercised on
the one month anniversary of his start date, the fair market value of our shares
on that date. Prior to his one-month anniversary, Mr. Herman exercised 40,000 of
the options that were issued. The exercise price of the remaining 35,000 options
was reset upward on his one-month anniversary and expired without exercise.
There were no stock options granted to Messrs. Dale and Gerhart during 2003.
The following table provides information concerning the exercise of stock
options during 2003 and the year-end value of unexercised options for each of
the Named Officers of the Company.
OPTION EXERCISES AND YEAR-END VALUE TABLE
Number of Unexercised Value of Unexercised
Options Held at in-the-Money Options at
Shares December 31, 2003 December 31, 2003 (1)
Acquired Value -------------------------- --------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------ ----------- -------- ----------- ------------- ----------- -------------
Jerry H. Herman 40,000 $ 12,400 - - $ - $ -
James B. Dale - - 80,500 - 22,277 -
Richard A. Gerhart - - 57,000 - 20,754 -
(1) The closing sale price of the Company's Common Stock on such date on
the Nasdaq National Market was $3.76.
EMPLOYMENT AGREEMENTS
On January 7, 2003, Jerry H. Herman became our president and chief executive
officer under the terms of an employment agreement dated as of December 19,
2002. The agreement expires on December 31, 2005, unless terminated earlier.
Under the agreement, we pay Mr. Herman a base salary of $300,000 per year and
Mr. Herman is eligible to earn a bonus consisting of a cash portion and
restricted stock portion subject to his and our satisfying certain performance
criteria. The budget for the performance criteria is established each year by
the board of directors. The criteria consist of a pre-tax income benchmark, an
adjusted stockholder equity per share benchmark, and a third benchmark comprised
of up to two components relating to development of franchises or joint ventures,
growth of the AmeriHost brand or construction and development of hotels. In each
case, there are limits on the amount of cash and equity performance bonus that
Mr. Herman may earn each year. Mr. Herman has the right under the agreement to
sell shares received as part of the stock portion of the bonus, some of which
would otherwise had been restricted from transfer, to us in an amount necessary
to pay income taxes, with the number of shares allowed to be sold determined
according to a formula specified in the agreement but no less than fair market
at the time of grant. Mr. Herman is also entitled to bonuses upon the occurrence
of specified capital events, such as the assignment, conveyance, sale or
termination of our agreements with Cendant, a merger of us into another
69
corporation, a sale of our assets, a sale of all of our stock to a new purchaser
or the bulk sale of fifteen or more of our hotels to a new purchaser which
result in consideration to us above certain levels. Mr. Herman also participates
in our employee benefit plans and is reimbursed for business expenses. The
agreement granted Mr. Herman the right to purchase up to 75,000 restricted
shares of our common stock for 60 days beginning January 7, 2003, with the
exercise price determined according to an upward reset formula specified in the
agreement but no less than fair market value of the stock on the date of the
grant. On January 17, 2003, Mr. Herman exercised this right with regard to
40,000 restricted shares of our common stock, which he purchased at a price of
$3.16 per share. We also agreed to nominate Mr. Herman during the term of his
employment for election to our board of directors and to recommend that
stockholders vote in favor of his election.
Mr. Herman's employment agreement may terminate, at Mr. Herman's option, on a
"change in control," which is defined as a sale of all or substantially all of
our assets, a merger resulting in the ownership of over 50% of our voting stock
by parties unaffiliated with us before the transaction or the sale of over 50%
of our shares or other equity interests to parties unaffiliated with us before
the transaction. If Mr. Herman is terminated without cause, or resigns as the
result of a change in control or for "good reason," as defined in the agreement,
he is entitled to severance compensation equal to the base salary for the
remaining term of the agreement but no less than twelve months and no greater
than twenty-four months. "Good reason" is defined in the agreement to include,
among other things, a material reduction in Mr. Herman's responsibilities not
consistent with the agreement, a material decrease in Mr. Herman's salary or
benefits, our failure to nominate and recommend Mr. Herman for election to the
board of directors and any material breach by us of the agreement.
Our senior vice president of finance and chief financial officer, James B. Dale,
provides services to us under the terms of an employment agreement dated January
12, 2001. The agreement originally expired January 12, 2004, but its term has
since been extended to January 12, 2005, as discussed below. Under the
agreement, we paid Mr. Dale a base salary equal to $152,000 in 2003, which
automatically increased by 5% in 2004, to approximately $160,000 per year. The
agreement provided for cash bonuses based on the sale of AmeriHost Inn hotels
and the timing of our financial reporting. Mr. Dale received some, but not all
of the performance bonuses. Mr. Dale also earned 750 shares of restricted stock
in 2003, in recognition of his leadership effort in 2002, which are expected to
be issued in 2004. Mr. Dale's employment agreement entitles him to receive
severance payments equal to six months salary if his employment is terminated by
us "without cause," as defined in the agreement. In addition, if we are sold,
Mr. Dale is entitled to receive the sum of six months base salary, at his salary
level at the time of sale.
Our senior vice president of hotel operations, Richard A. Gerhart, provides
services to us under the terms of an employment agreement dated July 1, 2002.
The agreement has a three-year term. Under the agreement, we pay Mr. Gerhart a
base salary equal to $132,500 for the first year of the agreement, $137,800 for
the second year, and $144,000 for the third year. In addition, Mr. Gerhart is
entitled to cash bonuses if various company performance criteria are achieved.
These criteria relate to increases in revenue for AmeriHost Inns owned by us for
at least thirteen months, gross operating profit for AmeriHost Inns as compared
with budgeted and prior year amounts, gross operating profit of non-AmeriHost
Inn hotels and sales of AmeriHost Inn hotels. The performance criteria also
include achieving certain levels of net income, income before taxes,
depreciation and amortization or cash flow. Mr. Gerhart also earned 971 shares
of restricted stock in 2003, in recognition of his leadership efforts in 2002,
which is expected to be issued in 2004. If we terminate Mr. Gerhart "without
cause," he is entitled to receive his salary and bonus for six months from the
date of termination.
We entered into supplemental retention and performance agreements with Mr. Dale
and Mr. Gerhart as of December 1, 2002, concurrent with our former Chief
Executive Officer's resignation. Under these agreements, Mr. Dale and Mr.
Gerhart were entitled to severance payments in addition to the severance
payments described above, payable in five monthly installments, had their
employment been terminated before December 31, 2003 other than because of death,
disability, voluntary termination or "for cause." In addition, under the
agreements we agreed to pay each of Mr. Dale and Mr. Gerhart a performance
retention bonus in the form of cash and restricted stock if various performance
criteria were satisfied, and they remained employed with us through January 1,
2004. The performance criteria in Mr. Dale's agreement relate primarily to the
timely preparation of financial statements, periodic reports and meeting
minutes, sales of hotels, and assistance in our obtaining financing within
certain time periods. The performance criteria in Mr. Gerhart's agreement relate
primarily to hotel revenue and profitability results. Mr. Dale's supplemental
agreement also extended the term of Mr. Dale's employment agreement with us to
January 12, 2005. The amount due under these supplemental agreements has not yet
been determined, however is not anticipated to be greater than $20,000 in the
aggregate, including both cash and restricted stock.
70
COMPENSATION OF DIRECTORS
In February 2003 our Board of Directors approved a compensation plan for
non-employee directors that called for each of our non-employee directors to
receive the following compensation for serving as a member of our board of
directors: (i) an annual cash retainer, (ii) a grant of restricted stock, and
(iii) fees for attending board and committee meetings as well as reimbursement
for all out-of-pocket expenses relating to attendance at these meetings.
Cash Retainer
Each non-employee director received an annual cash retainer of $9,000 paid in
equal monthly installments, except that as of March 2003, Mr. Fell and Mr.
Shapiro received cash retainer payments at an annual rate of $13,500 and
$11,250, respectively, for serving as chairman and vice-chairman of the board,
respectively.
Restricted Stock
In November 2003, each non-employee director received 6,000 shares of our common
stock, except for Messrs. Fell and Shapiro, who received 9,000 and 7,500 shares
of our common stock, respectively, for serving as chairman and vice-chairman of
the board, respectively. The restricted stock was issued under our 2003
Non-Employee Director Restricted Stock Plan that was approved at out annual
shareholder meeting held on October 29, 2003. These shares may not be
transferred for a one-year period, except in the case of a "change of control."
After this one-year period, the shares may not be transferred until the earlier
of a "change of control," five years from the date of the grant, or the date the
director ceases to be a director. "Change of control" is defined in the plan to
cover various circumstances in which 50% or more of the beneficial ownership of
our issued and outstanding stock, either directly or by merger or other
extraordinary transaction is acquired by others.
Meeting Fees
The meeting fees for non-employee directors are summarized in the following
tables:
BOARD OF DIRECTOR MEETING FEES
TELEPHONE IN-PERSON
--------- ---------
Meetings of 1.5 hours or less $250 $1,500
Meetings over 1.5 hours $500 $1,500
The above fees for each meeting of the full board are increased by 50% for the
chairman when he presides and 25% for the vice chairman in the event he presides
over a board meeting.
COMMITTEE MEETING FEES
TELEPHONE IN-PERSON
--------- ---------
Meetings of 1.5 hours or less $150 $ 500
Meetings over 1.5 hours $300 $1,000
The above fees for each committee meeting are increased by 50% for the chairman
of the audit committee and 30% for the individuals who chair other committee
meetings.
71
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of March 29, 2004, by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's Directors, (iii) each of the Named
Officers and (iv) all Directors and executive officers as a group.
Shares Beneficially Owned
Name As of March 29, 2004 Percent
- --------------------------------- ------------------------- -------
Wellington Management Company LLP 565,000 (1) 11.3%
Kenneth M. Fell 507,200 (2) 10.1
Andrew E. Shapiro 496,200 (3) 9.9
Lawndale Capital Management LLC 488,700 (3) 9.9
Michael P. Holtz 470,000 (4) 9.4
H. Andrew Torchia 426,032 (5) 8.5
Richard A. D'Onofrio 338,519 (6) 6.8
Salomon J. Dayan 310,812 (7) 6.1
Dimensional Fund Advisors, Inc. 307,500 (8) 6.1
Raymond and Liliane R. Dayan 269,314 (9) 5.4
James B. Dale 82,525 (10) 1.6
Richard A. Gerhart 60,471 (11) 1.2
Jerry H. Herman 40,000 (12) 0.8
Thomas J. Romano 26,500 (13) 0.5
Steven J. Belmonte 21,968 (14) 0.4
Gerald T. LaFlamme 8,480 (15) 0.2
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (9 PERSONS) 1,554,156 29.8%
(1) Based upon information provided in its Form 13F dated December 31,
2003. Wellington Management Company LLP, in its capacity as investment
advisor, may be deemed the beneficial owner of 565,000 shares of our
common stock wich are owned by numerous investment counseling clients.
The address of Wellington Management is 75 State Street, Boston,
Massachusetts 02109.
(2) Based upon information filed on Form 4 dated November 13, 2003.
Includes 9,000 restricted shares held directly, 207,170 shares held by
KF, Inc. Profit Sharing Plan; 199,430 shares held by Kenneth M. Fell
Trust; 88,100 shares held by Mr. Fell's IRA; 2,500 shares held by Mr.
Fell's wife, Margaret A. Fell, IRA; and 1,000 shares issuable upon the
exercise of options. Mr. Fell's address is One South Wacker Drive,
Suite 350, Chicago, Illinois 60606.
(3) Based upon information filed on Form 4 dated November 12, 2003.
Includes 7,500 restricted shares held directly by Mr. Shapiro; 426,200
shares beneficially held by Diamond A. Partners, L.P. and 62,500
shares held by Diamond A. Investors, L.P. Mr. Shapiro is managing
member of Lawndale Capital Management, LLC, the general partner and
investing advisor to these partnerships. Lawndale Capital Management
has only a pro-rata pecuniary interest in the securities with respect
to which indirect beneficial ownership is reported and disclaims
beneficial ownership in these securities, except to the extent of its
pecuniary interest. Mr. Shapiro disclaims beneficial ownership of
these shares. Both Lawndale Capital Management and Mr. Shapiro
disclaim membership in any group in connection with the ownership of
these securities. The address for each of Mr. Shapiro, Lawndale
Capital Management LLC, Diamond A. Partners, L.P. and Diamond A.
Investors, L.P. is 591 Redwood Highway, Suite 2345, Mill Valley,
California 94941.
(4) Based on information filed on Form 4 dated December 11, 2002. Includes
470,000 shares issuable upon the exercise of options. Mr. Holtz's
address is 490 East Route 22, North Barrington, Illinois 60010.
(5) Based upon information provided in a 13D/A joint filing dated January
13, 2003. Includes 80,443 shares owned directly by Mr. Torchia and
150,000 shares issuable upon the exercise of options held by Mr.
Torchia. In addition, includes 195,589 of the 383,508 shares owned by
Urban 2000 Corp. Mr. Torchia is the 51% stockholder of Urban 2000
Corp. and disclaims beneficial ownership of all but these 195,589
shares. The address of Urban 2000 Corp. is 10300 West Higgins Road,
Suite 105, Rosemont, Illinois 60018.
(6) Based upon information provided in a 13D/A joint filing dated January
13, 2003. Consists of 600 shares owned directly by Mr. D'Onofrio and
150,000 options owned by Mr. D'Onofrio, which currently are
exercisable. In addition, includes 187,919 of the 383,508 shares owned
by Urban 2000 Corp. Mr. D'Onofrio is the 49% stockholder of Urban 2000
Corp. and disclaims beneficial ownership of all but these 187,919
shares. The address of Urban 2000 Corp. is 10300 West Higgins Road,
Suite 105, Rosemont, Illinois 60018.
(7) Based upon information filed in Form 4 dated November 12, 2003.
Includes 6,000 restricted shares held directly; 228,812 shares held by
the Salomon J. Dayan UTD 11/08/78; 4,000 shares held by the children
of Dr. Dayan and
72
72,000 shares issuable upon the exercise of options. Dr. Dayan's
address is 2837 Sheridan Place, Evanston, Illinois 60201.
(8) Based upon information provided in its Schedule 13G dated February 6,
2004, Dimensional Fund Advisors, Inc. ("DFA"), in its capacity as
investment advisor, may be deemed beneficial owner of 307,500 shares
of the Company which are owned by numerous investment counseling
clients. Of the shares shown above, DFA has sole voting and investment
power for 307,500 shares. The address of DFA is 1299 Ocean Avenue,
Santa Monica, California 90401.
(9) Consists of 206,814 shares owned by trusts for which Liliane Dayan
acts as trustee, and 62,500 shares issuable upon the exercise of
options held by these trusts. Mrs. Dayan has sole voting and
investment power for all 269,314 shares. Mr. Dayan is the brother of
Dr. Solomon Dayan, who is one of our directors and whose beneficial
ownership of our shares is also reflected in the above table. The
address of Mr. and Mrs. Dayan is c/o Michael Best and Friedrich LLP,
401 N. Michigan Ave., Suite 1900, Chicago, Illinois 60611.
(10) Includes 1,275 shares held directly, 750 shares of restricted stock to
be issued, and 80,500 shares issuable upon the exercise of options.
(11) Includes 2,500 shares held directly, 971 shares of restricted stock to
be issued, and 57,000 shares issuable upon the exercise of options.
(12) Includes 40,000 shares of restricted stock.
(13) Based upon information filed on Form 4 dated November 10, 2003.
Includes 6,000 restricted shares directly held; 10,000 shares held
directly; 5,000 shares held by Ashley E. Romano UGTMA, with Mr. Romano
as custodian; and 5,500 shares subject to options presently
exercisable.
(14) Based upon information filed on Form 4 dated November 10, 2003.
Includes 6,000 restricted shares directly held; 14,968 shares held
directly and 1,000 shares issuable upon the exercise of options.
(15) Based upon information filed on Form 4 dated November 10, 2003.
Includes 6,000 restricted shares held directly; 1,480 shares held by
the 1988 LaFlamme Family Trust dated January 14, 1988 and 1,000 shares
issuable upon the exercise of options.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Dr. Dayan, one of our directors, and parties related to him, have invested
approximately $3.1 million in seven joint ventures with us since 1988 on the
same terms as all other investors in the joint ventures. In three joint
ventures, we guaranteed minimum annual distributions to the partners equal to
10% of their original capital contribution. We also granted these partners the
right to convert their joint venture interests into shares of our common stock,
under certain conditions. We purchased the limited partners' interests in two of
these joint ventures at prices previously agreed to in September 2000 in
connection with our partners' approval of the sale of the AmeriHost Inn brand
and franchising rights to Cendant Corporation. With regard to the third joint
venture, we paid the limited partners a total of $25,000 in January 2003 to
extend the deadline for acquiring the limited partners' interests. We then
acquired the limited partners' interests in this joint venture for $830,000 in
September 2003. The underlying hotels for two of these joint ventures have since
been sold. Currently, Dr. Dayan and related parties are no longer investors in
any joint venture in which we participate.
Dr. Dayan is also the owner and chairman of the board of directors of the
company that owns Pan American Bank. In 2003, a joint venture in which we were a
partner repaid its remaining loan from Pan American Bank, totaling approximately
$940,000, with proceeds from the sales of the hotel securing this loan.
Subsequent to this loan payoff, we have not entered into any transactions with
Pan American Bank, and we do not intend to transact any future business with Pan
American Bank so long as Dr. Dayan continues to serve as a director and is
affiliated with Pan American Bank.
In June 2003, we reimbursed members of the "Committee to Enhance Shareholder
Value," for out-of-pocket expenses paid by the committee to third parties in
connection with the successful election of Messrs. Fell and Belmonte to our
board of directors at our 2002 annual meeting. The total amount reimbursed was
approximately $64,000. Messrs. Fell and Belmonte, as members of the committee
prior to its dissolution, each received their pro-rata share of this
reimbursement. This reimbursement was approved unanimously by all disinterested
members of the Company's Board.
73
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table presents fees for professional audit services rendered and
fees billed for other services rendered by KPMG LLP for the fiscal years ended
December 31, 2003 and 2002, respectively:
2003 2002
---------- --------
Audit fees $ 219,000 $179,500
Audit-related fees -0- 0
Tax fees 78,000 87,000
All other fees -0- 0
---------- --------
$ 297,000 $266,500
========== ========
Audit Fees. This category includes fees paid for the audit of our annual
financial statements and review of financial statements included in our
quarterly reports on Form 10-Q. This category also includes advice on audit and
accounting matters that arose during, or as a result of, the audit or the review
of our annual and interim financial statements, including the application of
proposed accounting rules and the preparation of an annual "management letter"
containing observations and discussions on internal control matters.
Audit-Related Fees. KPMG LLP did not perform any services in this category for
us in 2003 or 2002.
Tax Fees. This category consists of professional services rendered by KPMG LLP
for tax compliance and tax advice. The services for the fees disclosed under
this category include tax advisory services associated with our ongoing business
and business ventures.
All Other Fees. KPMG LLP did not perform any services in this category for us in
2003 or 2002.
Our Audit Committee pre-approved all of the services by KPMG LLP.
74
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
Financial Statements:
The following consolidated financial statements are filed as part of this Report
on Form 10-K for the fiscal year ended December 31, 2003.
(a)(1) Financial Statements:
Independent Auditors' Report.......................................................................... F-1
Consolidated Balance Sheets at December 31, 2003 and 2002............................................. F-2
Consolidated Statements of Operations for the years ended December 31, 2003, 2002 and 2001............ F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2003, 2002 and 2001.. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2003, 2002 and 2001............ F-6
Notes to Consolidated Financial Statements............................................................ F-8
(a)(2) Financial Statement Schedules:
No financial statement schedules are submitted as part of this report because
they are not applicable or are not required under regulation S-X or because the
required information is included in the financial statements or notes thereto.
The following exhibits were included in the Registrant's Report on Form 10-K
filed on March 26, 1993, and are incorporated by reference herein:
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Arlington Hospitality, Inc.
(formerly Amerihost Properties, Inc.)
4.2 Specimen Common Stock Purchase Warrant for Employees
The following exhibits were included in the Registrant's Proxy Statement for
Annual Meeting of Shareholders filed on July 25, 1996, and are incorporated by
reference herein:
Exhibit No. Description
- ----------- -----------
10.2 1996 Omnibus Incentive Stock Plan (Annex A)
10.3 1996 Stock Option Plan for Nonemployee Directors (Annex B)
75
The following exhibit was included in the Registrant's Report on Form 10-K filed
March 30, 1999:
Exhibit No. Description
- ----------- -----------
10.5 Agreement of Purchase and Sale between PMC Commercial
Trust and Arlington Hospitality, Inc. (formerly
Amerihost Properties, Inc.), including exhibits
thereto
The following exhibits were included in the Registrant's Report on Form 10-Q
filed November 7, 2000:
Exhibit No. Description
- ----------- -----------
10.10 Asset Purchase Agreement between Arlington
Hospitality, Inc. and AmeriHost Inn Franchising
Systems, Inc. (a subsidiary of Cendant Corporation)
10.11 Royalty Sharing Agreement between Arlington
Hospitality, Inc. and AmeriHost Inn Franchising
Systems, Inc. (a subsidiary of Cendant Corporation)
10.12 Development Agreement between Arlington Hospitality,
Inc. and AmeriHost Inn Franchising Systems, Inc. (a
subsidiary of Cendant Corporation)
The following exhibits were included in the Registrant's Report on Form 10-Q
filed November 14, 2002:
Exhibit No. Description
- ----------- -----------
10.7 Form of Indemnification Agreement executed by
independent directors
The following exhibits were included in the Registrant's Report on Form 8-K
filed December 19, 2002:
Exhibit No. Description
- ----------- -----------
10.13 Employment agreement between Arlington Hospitality,
Inc. and Jerry H. Herman dated December 19, 2002
The following exhibit was included in the Registrant's Report on Form 10-K filed
March 31, 2003:
Exhibit No. Description
- ----------- -----------
10.14 Line of credit agreement with LaSalle Bank, NA
The following exhibits were included in the Registrant's Proxy Statement for
Annual Meeting of Shareholders filed on September 26, 2003, and are incorporated
by reference herein:
Exhibit No. Description
- ----------- -----------
3.2 Seventh Certificate of Amendment of Restated
Certificate of Incorporation of Arlington
Hospitality, Inc., attached as exhibit F
3.3 Eighth Certificate of Amendment of Restated
Certificate of Incorporation of Arlington
Hospitality, Inc., attached as exhibit G
10.15 2003 Non-Employee Director Restricted Stock Plan,
attached as exhibit D
10.16 2003 Long Term Incentive Plan, attached as exhibit E
The following exhibits were included in the Registrant's Report on Form 10-Q
filed November 14, 2003:
Exhibit No. Description
- ----------- -----------
3.4 By-laws of Arlington Hospitality, Inc. as revised on
September 8, 2003
3.5 Amendment to By-laws of Arlington Hospitality, Inc.
dated September 8, 2003
76
10.17 Employment agreement between Arlington Hospitality,
Inc. and Stephen Miller dated July 25, 2003
10.18 Amendment to employment agreement between Arlington
Hospitality, Inc. and Stephen Miller dated September
10, 2003
10.19 Employment agreement between Arlington Hospitality,
Inc. and James B. Dale dated January 12, 2001 and
Amendment No. 1 thereto dated October 29, 2001.
10.20 Supplemental retention and performance agreement
between Arlington Hospitality, Inc. and James B. Dale
dated December 1, 2002
10.21 Employment agreement between Arlington Hospitality,
Inc. and Richard A. Gerhart dated July 1, 2002
10.22 Supplemental retention and performance agreement
between Arlington Hospitality, Inc. and Richard A.
Gerhart dated December 1, 2002
The following exhibits are included in this Report on Form 10-K filed March 30,
2004:
Exhibit No. Description
- ----------- -----------
10.23 Amended and Restated Master Lease Agreement dated
January 24, 2001 between Arlington Hospitality, Inc.
and PMC Commercial Trust
10.24 Amended and Restate Loan and Security Agreement dated
April 30, 2003 between Arlington Hospitality, Inc.
and LaSalle Bank N.A.
21.1 Subsidiaries of the Registrant
23.1 Consent of KPMG LLP
31.1 Certification of Chief Executive Officer Pursuant to
SEC Rules 13a-15(e) and 15d-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of Chief Financial Officer Pursuant to
SEC Rules 13a-15(e) and 15(d)-15(e), as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Reports on Form 8-K:
The Company filed the following reports on Form 8-K during the three months
ended December 31, 2003:
Date Filed Description
---------- -----------
October 30, 2003 Press Release announcing results of the annual
shareholder meeting
November 17, 2003 Press release announcing operating results for the
three and nine months ended September 30, 2003
December 4, 2003 Press release announcing completion of
reverse/forward stock split
December 19, 2003 Press release announcing November 2003 results and
hotel sales and development activity
77
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ARLINGTON HOSPITALITY, INC.
By: /s/ Jerry H. Herman
------------------------------------
Jerry H. Herman
Chief Executive Officer
By: /s/ James B. Dale
------------------------------------
James B. Dale
Chief Financial Officer
By: /s/ Keith P. Morris
------------------------------------
Vice President Finance
Chief Accounting Officer
March 30, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Jerry H. Herman /s/ Kenneth M. Fell
- ------------------------------------- ------------------------------------
Jerry H. Herman, Director Kenneth M. Fell, Chairman
March 30, 2004 March 30, 2004
/s/ Andrew E. Shapiro /s/ Gerald T. LaFlamme
- ------------------------------------- ------------------------------------
Andrew E. Shapiro, Vice-Chairman Gerald T. LaFlamme, Director
March 30, 2004 March 30, 2004
/s/ Steven J. Belmonte /s/ Thomas J. Romano
- ------------------------------------- ------------------------------------
Steven J. Belmonte, Director Thomas J. Romano, Director
March 30, 2004 March 30, 2004
/s/ Salomon J. Dayan
- -------------------------------------
Salomon J. Dayan, Director
March 30, 2004
78
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Arlington Hospitality, Inc.
We have audited the accompanying consolidated balance sheets of Arlington
Hospitality, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 2003.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Arlington
Hospitality, Inc. and subsidiaries at December 31, 2003 and 2002, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 2003, in conformity with accounting
principles generally accepted in the United States of America.
KPMG LLP
Chicago, Illinois
March 26, 2004
See notes to consolidated financial statements
F-1
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2003 2002
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,623,550 $ 3,969,515
Accounts receivable, less an allowance of $76,500 and
$150,000 at December 31, 2003 and 2002 (including
approximately $382,000 and $166,000 from related parties) 1,289,492 2,064,463
Notes receivable, current portion (Note 2) 146,000 100,000
Prepaid expenses and other current assets 1,142,032 975,432
Refundable income taxes 975,316 1,574,776
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 3) 1,232,481 1,479,101
Assets held for sale - other brands 10,603,160 -
Assets held for sale - AmeriHost Inn hotels 28,162,442 -
------------ ------------
Total current assets 47,174,473 10,163,287
------------ ------------
Investments in and advances to unconsolidated hotel joint
ventures (Note 4) 3,309,344 4,291,504
------------ ------------
Property and equipment (Notes 6 and 7):
Land 5,735,489 13,418,378
Buildings 31,174,776 76,849,071
Furniture, fixtures and equipment 13,176,842 26,553,701
Construction in progress 312,925 6,447,039
Leasehold improvements 2,396,689 2,760,906
------------ ------------
52,796,721 126,029,095
Less accumulated depreciation and amortization 13,242,842 26,417,755
------------ ------------
39,553,879 99,611,340
------------ ------------
Notes receivable, less current portion (Note 2) 867,500 782,083
Deferred income taxes (Note 9) 6,071,000 2,427,000
Other assets, net of accumulated amortization of
approximately $1,259,000 and $1,035,000 (Note 5) 2,737,217 2,658,500
------------ ------------
9,675,717 5,867,583
------------ ------------
$ 99,713,413 $119,933,714
============ ============
See notes to consolidated financial statements
F-2
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2003 2002
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,768,402 $ 3,965,028
Bank line-of-credit (Note 6) 3,850,000 6,384,287
Accrued payroll and related expenses 393,815 827,353
Accrued real estate and other taxes 1,980,015 1,969,297
Other accrued expenses and current liabilities 1,407,511 1,974,350
Current portion of long-term debt (Note 7) 1,195,050 4,038,301
Liabilities of assets held for sale - other brands 9,585,492 -
Liabilities of assets held for sale - AmeriHost Inns 28,540,561
------------ ------------
Total current liabilities 49,720,846 19,158,616
------------ ------------
Long-term debt, net of current portion (Note 7) 26,513,398 72,203,688
------------ ------------
Deferred income (Note 14) 11,361,927 10,867,418
------------ ------------
Commitments and contingencies (Notes 4, 6, 7, 8 and 14)
Minority interests 329,819 333,888
------------ ------------
Shareholders' equity (Notes 1 and 8):
Preferred stock, no par value; authorized 100,000 shares; none issued - -
Common stock, $.005 par value; authorized 25,000,000 shares;
issued and outstanding 4,994,956 shares at December 31,
2003, and 4,962,817 shares at December 31, 2002 24,975 24,814
Additional paid-in capital 13,220,302 13,184,564
Retained earnings (deficit) (1,020,979) 4,597,601
------------ ------------
12,224,298 17,806,979
Less:
Stock subscriptions receivable (Note 8) (436,875) (436,875)
------------ ------------
11,787,423 17,370,104
------------ ------------
$ 99,713,413 $ 119,933,71
============ ============
See notes to consolidated financial statements
F-3
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Revenue (Note 10):
Hotel operations:
AmeriHost Inn hotels $ 39,823,522 $ 43,216,506 $ 45,081,431
Other hotels 1,639,306 2,274,089 2,271,675
Development and construction 4,196,878 7,180,222 1,724,249
Hotel sales and commissions 22,831,102 10,017,080 12,922,459
Management services 445,862 957,801 1,066,645
Employee leasing 1,858,103 3,267,491 4,678,189
Incentive and royalty sharing (Note 16) 972,219 588,938 209,633
Office building rental and other 749,782 669,769 169,612
------------ ------------ ------------
72,516,774 68,171,896 68,123,893
------------ ------------ ------------
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 30,624,701 31,570,220 32,919,678
Other hotels 1,855,957 2,144,693 1,881,594
Development and construction 4,739,296 7,205,328 1,479,947
Hotel sales and commissions 19,328,404 8,159,459 9,621,536
Management services 280,383 714,648 716,802
Employee leasing 1,798,714 3,208,708 4,564,508
Office building rental and other 214,232 56,757 2,958
------------ ------------ ------------
58,841,687 53,059,813 51,187,023
------------ ------------ ------------
13,675,087 15,112,083 16,936,870
Depreciation and amortization 3,602,049 4,338,641 3,899,476
Leasehold rents - hotels (Note 14) 5,033,210 5,112,019 5,832,750
Corporate general and administrative 2,419,485 2,198,640 1,907,742
Impairment provision (Note 1) 5,069,781 542,019 -
------------ ------------ ------------
Operating income (loss) (2,449,438) 2,920,764 5,296,902
Other income (expense):
Interest expense (4,087,120) (4,762,527) (4,611,926)
Interest income 467,538 489,747 821,839
Other income (loss) (62,928) 329,959 126,880
Gain on sale of fixed assets (Notes 16) 400,000 727,076 1,286,338
Equity in net income and (losses) from
unconsolidated joint ventures (724,575) (412,094) (925,654)
------------ ------------ ------------
Income (loss) before minority interests and income taxes (6,456,523) (707,074) 1,994,379
Minority interests in operations of consolidated
subsidiaries and partnerships (162,304) (121,088) (264,829)
------------ ------------ ------------
Income (loss) before income taxes (6,618,827) (828,162) 1,729,550
Income tax benefit (expense) (Note 9) 2,456,000 172,000 (759,000)
------------ ------------ ------------
Net income (loss) from continuing operations (4,162,827) (656,162) 970,550
Discontinued operations, net of tax (Note 13) (1,455,753) (1,053,770) (215,450)
------------ ------------ ------------
Net income (loss) $ (5,618,580) $ (1,709,932) $ 755,100
============ ============ ============
Net income (loss) from continuing operations per share:
Basic $ (0.83) $ (0.13) $ 0.19
Diluted $ (0.83) $ (0.13) $ 0.17
Net income (loss) per share:
Basic $ (1.12) $ (0.34) $ 0.15
Diluted $ (1.12) $ (0.34) $ 0.13
See notes to consolidated financial statements
F-4
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Stock
subscrip-
Common stock Additional Retained tions Total
--------------------- paid-in earnings and notes shareholders'
Shares Amount capital (deficit) receivable equity
----------- -------- ------------- ------------ ----------- -------------
BALANCE AT JANUARY 1, 2001 4,979,244 $24,896 $ 13,125,324 $ 5,552,433 $ (436,875) $ 18,265,778
Acquisition of common stock (Note 8) (26,100) (131) (84,984) - - (85,115)
Shares and options issued for compensation 4,937 25 130,811 - - 130,836
Net income for the year ended December 31, 2001 - - - 755,100 - 755,100
---------- ------- ------------ ------------ ---------- ------------
BALANCE AT DECEMBER 31, 2001 4,958,081 $24,790 $ 13,171,151 $ 6,307,533 $ (436,875) $ 19,066,599
Acquisition of common stock (Note 8) (100) - (310) - - (310)
Shares and options issued for compensation 4,836 24 13,723 - - 13,747
Net loss for the year ended December 31, 2002 (1,709,932) - (1,709,932)
---------- ------- ------------ ------------ ---------- ------------
BALANCE AT DECEMBER 31, 2002 4,962,817 $24,814 $ 13,184,564 $ 4,597,601 $ (436,875) $ 17,370,104
Acquisition of common stock (Note 8) (36,840) (184) (122,254) - - (122,438)
Shares and Options issued for compensation 102,311 512 285,487 - - 285,999
Stock redemption (Note 8) (33,332) (167) (127,495) - - (127,662)
Net loss for the year ended December 31, 2003 - - - (5,618,580) - (5,618,580)
---------- ------- ------------ ------------ ---------- ------------
BALANCE AT DECEMBER 31, 2003 4,994,956 $24,975 $ 13,220,302 $ (1,020,979) $ (436,875) $ 11,787,423
========== ======= ============ ============ ========== ============
See notes to consolidated financial statements.
F-5
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------- ------------- -------------
Cash flows from operating activities:
Cash received from customers $ 75,726,970 77,501,677 78,329,783
Cash paid to suppliers and employees (51,339,097) (57,969,651) (58,192,786)
Interest received 425,241 551,838 870,945
Interest paid (4,830,621) (5,516,449) (5,194,741)
Income taxes paid 383,460 (236,446) (305,750)
------------ ------------ ------------
Net cash provided by operating activities 20,365,953 14,330,969 15,507,451
------------ ------------ ------------
Cash flows from investing activities:
Distributions, and collections on advances,
from affiliates 570,219 3,020,396 1,183,012
Purchase of property and equipment (7,087,994) (18,582,826) (25,399,733)
Purchase of investments in, and advances
to, minority-owned affiliates (1,391,407) (2,142,492) (2,687,328)
Acquisitions of partnership interests,
net of cash acquired (777,237) (796,786) (804,613)
Collection on notes receivable (131,417) (15,362) 201,332
Proceeds from sale of assets and franchising rights 2,804,497 1,443,701 402,500
------------ ------------ ------------
Net cash used in investing activities (6,013,339) (17,073,369) (27,104,830)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 6,888,098 13,016,749 20,612,595
Principal payments on long-term debt (19,095,114) (10,440,190) (9,206,128)
Net (repayments) borrowings of line of credit (2,534,287) (409,415) 3,385,569
Distributions to minority interests (90,255) (203,075) (90,255)
Common stock repurchases (144,346) (310) (85,115)
Issuance of Common Stock 277,325 - -
------------ ------------ ------------
Net cash provided by (used in) financing activities (14,698,579) 1,963,759 14,616,666
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (345,965) (778,641) 3,019,287
Cash and cash equivalents, beginning of year 3,969,515 4,748,156 1,728,869
------------ ------------ ------------
Cash and cash equivalents, end of year $ 3,623,550 $ 3,969,515 $ 4,748,156
============ ============ ============
F-6
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------------ ------------ ------------
Reconciliation of net income (loss) to net cash provided
by operating activities:
Net income (loss) $ (5,618,580) $ (1,709,932) $ 755,100
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 4,412,112 5,516,302 4,676,069
Equity in net (income) loss and interest income from
unconsolidated joint ventures and amortization
of deferred income 553,602 230,402 1,174,630
Minority interests in operations of consolidated
subsidiaries and partnerships 86,186 80,331 343,437
Bad debt expense (73,500) 15,000 50,000
Issuance of common stock and common stock options 8,675 13,747 130,836
Gain on sale of assets and franchising rights (337,856) (727,076) (1,286,338)
Deferred income taxes (3,644,000) 235,000 740,000
Amortization of deferred gain (1,358,105) (1,079,047) (966,232)
Proceeds from sale of hotels 22,831,102 9,865,111 11,511,336
Income from sale of hotels (3,479,500) (1,705,651) (2,189,256)
Provision for impairment 5,963,218 642,019 -
Other - (298,022) -
Changes in assets and liabilities, net of effects
of acquisitions:
Decrease in accounts receivable 819,033 68,101 255,675
(Increase) decrease in prepaid expenses and
other current assets (242,985) 88,369 99,344
Decrease (increase) in refundable income taxes 599,460 (1,276,446) (430,750)
Decrease (increase) in costs and estimated
earnings in excess of billings 246,620 (399,964) (703,357)
Increase in other assets (807,854) (331,689) (413,336)
(Decrease) increase in accounts payable (982,699) 1,473,684 23,530
(Decrease) increase in accrued payroll and other
accrued expenses and current liabilities (732,493) 1,552,416 165,246
Decrease in accrued interest (21,026) (1,684) (41,151)
Increase in deferred income 2,144,543 2,079,998 1,612,668
------------ ------------ ------------
Net cash provided by operating activities $ 20,365,953 $ 14,330,969 $ 15,507,451
============ ============ ============
F-7
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and business:
Arlington Hospitality, Inc. was incorporated under the laws of Delaware on
September 19, 1984. Arlington Hospitality, Inc. also acts through its
wholly-owned subsidiaries which have been formed since 1984 under the laws
of several states (Arlington Hospitality, Inc. and its subsidiaries,
collectively, where appropriate, the "Company"). The Company is engaged in
the development and construction of limited service hotels, without food
and beverage facilities, as well as the ownership, operation, management
and sale of these hotels. During the past several years, the Company has
focused almost exclusively on AmeriHost Inn hotels, with limited ownership
and operation of other branded hotels. The AmeriHost Inn brand is used by
the Company to provide for the consistent, cost-effective development and
operation of mid-price hotels in various markets. To date, all of the
Company's AmeriHost Inn hotels have been developed and constructed using a
two- or three-story prototype, featuring 60 to 120 rooms, interior
corridors and an indoor pool area and generally have been located in
smaller town markets, and to a lesser extent, secondary markets. The
Company intends to focus its new AmeriHost Inn development on larger,
secondary markets, and has designed a larger, three-story AmeriHost Inn &
Suites prototype with more public space and certain other enhancements for
this purpose.
The Company's operations are seasonal by nature. The Company's hotel
operations and sales revenues are generally greater in the second and third
calendar quarters than in the first and fourth calendar quarters, due to
weather conditions in the markets in which the Company's hotels are
located, as well as general business and leisure travel trends.
Principles of consolidation:
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and entities in which the Company has a
majority or controlling ownership interest. All significant intercompany
accounts and transactions have been eliminated.
Revenue recognition:
The revenue from the operation of a consolidated hotel is recognized as
part of the hotel operations segment when earned.
Development fee revenue from construction/renovation projects with
unaffiliated third parties or entities in which the Company has a minority
ownership interest is recognized using the percentage-of-completion method.
Construction fee revenue from construction/renovation projects with
unaffiliated third parties or entities in which the Company has a minority
ownership interest is recognized on the percentage-of-completion method,
generally based on the ratio of costs incurred to estimated total contract
costs. Revenue from contract change orders is recognized to the extent
costs incurred are recoverable. Profit recognition begins when construction
reaches a progress level sufficient to estimate the probable outcome.
Provision is made for anticipated future losses in full at the time they
are identified.
The Company records an AmeriHost Inn hotel sale price as operating revenue
and the net cost basis of the AmeriHost Inn hotel asset as operating
expense, when the sale is consummated, as part of the ongoing operational
activity of the Company.
F-8
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
The Company recognizes management fee revenue when it performs hotel
management services for unrelated third parties and unconsolidated joint
ventures. The management fees are computed based upon a percentage of total
hotel revenues, plus incentive fees in certain instances, in accordance
with the terms of the individual written management agreements. The Company
recognizes the management fee revenue in the hotel management segment as
the related hotel revenue is earned.
F-9
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The Company recognizes employee-leasing revenue when it staffs hotels and
performs related services for unrelated third parties and unconsolidated
joint ventures. Employee leasing revenues are generally computed as the
actual payroll costs, plus an administrative fee, in accordance with the
terms of the individual written staffing agreements. The Company recognizes
the employee leasing revenue in the employee leasing segment as the related
payroll cost is incurred.
The franchisor of the AmeriHost Inn brand, Cendant Corporation ("Cendant"),
has agreed to pay the Company a development incentive fee every time the
Company sells one of its existing AmeriHost Inn hotels, or one it develops
and sells, to a buyer who executes an AmeriHost Inn franchise agreement
with the franchisor (see "Deferred income" below). The franchisor of the
AmeriHost Inn brand has agreed to pay the Company a portion of all royalty
fees received from all of its AmeriHost Inn franchisees through September
2025. Generally, the royalty fees from each franchisee are based upon a
percentage of guest room revenue. The Company includes the amortization of
the deferred development incentive fees and the royalty sharing fees as
incentive and royalty sharing fee revenue in the accompanying consolidated
financial statements.
The Company owns the building in which its headquarters is located and
leases a portion of the office space to third-party tenants under lease
terms that expire from 2004 through 2009. Rental revenue is recognized
monthly in accordance with the terms of the leases, including charges for
common area expenses and real estate taxes.
Cash equivalents:
The Company considers all investments with an initial maturity of three
months or less to be cash equivalents.
Concentrations of credit risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk, consist principally of temporary cash
investments, accounts receivable and notes receivable. The Company invests
temporary cash balances in financial instruments of highly rated financial
institutions generally with maturities of less than three months.
Fair values of financial instruments:
The carrying values reflected in the consolidated balance sheets at
December 31, 2003 and 2002, reasonably approximate the fair values for cash
and cash equivalents, accounts and contracts receivable and payable, and
variable rate long-term debt. The carrying value of the notes receivable
approximate their fair values based upon the estimated fair value of the
underlying collateral (Note 2). The Company estimates that the fair value
of its long-term debt at December 31, 2003, approximates the carrying value
considering the property specific nature of the notes. In making such
assessments, the Company considered the current rate at which the Company
could borrow funds with similar remaining maturities.
Investments:
Investments in entities in which the Company has a non-majority,
non-controlling ownership interest are accounted for using the equity
method, under which method the original investment is increased (decreased)
for the Company's share of the joint venture's net income (loss), increased
by contributions made and reduced by distributions received.
F-10
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Property and equipment:
Property and equipment are stated at cost. Repairs and maintenance are
charged to expense as incurred, and renewals and betterments are
capitalized. Depreciation is being provided for assets placed in service,
principally by use of the straight-line method over their estimated useful
lives. Leasehold improvements are being amortized by use of the
straight-line method over the term of the lease. Construction period
interest of approximately $57,000, $287,000 and $337,000 was capitalized in
2003, 2002 and 2001, respectively, and is included in property and
equipment.
For each classification of property and equipment, depreciable periods are
as follows:
Building 31.5-39 years
Furniture, fixtures and equipment 5-7 years
Leasehold improvements 1-15 years
Other assets:
Deferred lease costs:
Deferred lease costs represent the amounts paid for the acquisition of
leasehold interests for certain hotels. These costs are being amortized by
use of the straight-line method over the terms of the leases.
Deferred loan costs:
Deferred loan costs represent the costs incurred in issuing mortgage notes.
These costs are being amortized by use of the interest method over the life
of the debt.
Initial franchise fees:
Initial franchise fees paid by the Company to franchisors for certain
hotels are capitalized and amortized by use of the straight-line method
over the terms of the franchise licenses, ranging from 10 to 20 years.
Deferred income:
Deferred income includes the gain from the sale of 21 hotels in 1998 and
1999, which were simultaneously leased-back (Note 14). This gain is being
recognized on a straight-line basis over the 15-year term of the lease, as
amended, as an adjustment to leasehold rent expense.
Deferred income also includes incentive fees received in connection with
the sale of AmeriHost Inn hotels. These fees are recognized on a
straight-line basis over a 76-month period in which the unamortized portion
of the fees may be considered refundable under certain conditions.
Deferred income also includes that portion of development, construction and
renovation fees earned from entities in which the Company holds an
ownership interest. The portion of fees deferred is equal to the Company's
proportional ownership interest in the entity and is being recognized in
income over the life of the operating assets. The balance of the fees is
recorded in income as earned.
F-11
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Income taxes:
Deferred income taxes are provided on the differences in the bases of the
Company's assets and liabilities, as determined for tax and financial
reporting purposes, and relate principally to hotel impairment charges,
depreciation of property and equipment and deferred income. The deferred
income tax balance at December 31, 2003 also includes a net operating loss
carry forward of approximately $5.2 million expiring in 2024.
Earnings per share:
Basic earnings per share ("EPS") is calculated by dividing the income
(loss) available to common shareholders by the weighted average number of
common shares outstanding for the period, without consideration for common
stock equivalents. Diluted EPS gives effect to all dilutive common stock
equivalents outstanding for the period. The Company excluded stock
equivalents which had an anti-dilutive effect on the EPS computations.
The calculation of basic and diluted earnings per share for each of the
three years ended December 31, is as follows:
2003 2002 2001
------------- ------------- -------------
Net income (loss) before discontinued operations $ (4,162,827) $ (656,162) $ 970,550
Discontinued operations, net of tax (1,455,753) (1,053,770) (215,450)
------------- ------------- -------------
Net income (loss) (5,618,580) (1,709,932) 755,100
Impact of convertible partnership interests - - (78,178)
------------- ------------- -------------
Net income (loss) available to common
shareholders - diluted $ (5,618,580) $ (1,709,932) $ 676,922
Weighted average common shares outstanding 5,011,572 4,958,438 4,974,821
Dilutive effect of:
Stock options - - 38,650
Convertible partnership interests - - 168,100
------------- ------------- -------------
Dilutive common shares outstanding 5,011,572 4,958,438 5,181,571
============= ============= =============
Net income (loss) per share - Basic:
From continuing operations (0.83) (0.13) 0.19
From discontinued operations (0.29) (0.21) (0.04)
------------- ------------- -------------
$ (1.12) $ (0.34) $ 0.15
============= ============= =============
Net income (loss) per share - Diluted:
From continuing operations (0.83) (0.13) 0.17
From discontinued operations (0.29) (0.21) (0.04)
------------- ------------- -------------
$ (1.12) $ (0.34) $ 0.13
============= ============= =============
F-12
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Advertising:
The costs of advertising, promotion and marketing programs are charged to
operations in the year incurred. These costs were approximately $1,117,000,
$1,411,000 and $1,389,000 for the years ended December 31, 2003, 2002 and
2001.
Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the statements and reported amounts of revenue
and expenses during the reported periods. Actual results may differ from
those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform to current
year presentation. These reclassifications had no effect on previously
reported net income or total shareholders' equity.
Long-lived assets and impairment:
On January 1, 2002, the Company adopted SFAS 144, "Statement of Financial
Accounting Standard (SFAS) No. 144, Accounting for Long-Lived assets (SFAS
144)". SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of" ("SFAS 121"), and related literature
and establishes a single accounting model, based on the framework
established in SFAS 121, for long-lived assets to be disposed of by sale.
SFAS 144 requires a long-lived asset to be sold to be classified as "held
for sale" in the period in which certain criteria are met, including that
the sale of the asset within one year is probable. SFAS 144 also requires
that the results of operations of a component of an entity that either has
been disposed of or is classified as held for sale be reported in
discontinued operations if the operations and cash flows of the component
have been or will be eliminated from the Company's ongoing operations.
The Company periodically reviews the carrying value of certain of its
long-lived assets in relation to historical results, current business
conditions and trends to identify potential situations in which the
carrying value of assets may not be recoverable. If such reviews indicate
that the carrying value of such assets may not be recoverable, the Company
would estimate the undiscounted sum of the expected cash flows of such
assets to determine if such sum is less than the carrying value of such
assets to ascertain if an impairment exists. If an impairment exists, the
Company would determine the fair value by using quoted market prices, if
available for such assets, or if quoted market prices are not available,
the Company would discount the expected future cash flows of such assets.
In July 2003, the Company implemented a plan to sell approximately 25 to 30
hotels over a period of two years. In connection with the implementation of
the plan to sell hotels, the Company has recorded a $6.0 million non-cash
impairment charge during 2003, related to 18 of the hotels targeted for
sale as a result of current market conditions and the change in holding
periods of the properties. Approximately $909,000 of the non-cash
impairment charges relates to three consolidated non-AmeriHost Inn hotels
anticipated to be sold, and has been included in "discontinued operations"
(Note 13). 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.
F-13
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
As a result of the implementation of this plan for hotel dispositions, the
hotel assets identified for sale, which are being actively marketed and
expected to be sold within a twelve month period, have been classified as
"held for sale" on the accompanying consolidated balance sheet as of
December 31, 2003. Accordingly, the debt that 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
13). However, the disposition of AmeriHost Inn hotels, although classified
as "held for sale" on the accompanying consolidated balance sheet, have not
been treated as discontinued operations due to the ongoing royalty fees to
be earned by the Company after their disposition. In addition, in
accordance with this literature, we have ceased depreciating the hotel
assets that have been classified as "held for sale".
If the Company determines that a property is no longer held for sale, or if
a property does not sell after a certain period of time, under certain
conditions, a depreciation expense adjustment may be recorded at that time,
up to the amount of depreciation that would have been recorded during the
period that the asset was classified as "held for sale." During the fourth
quarter of 2003, two AmeriHost Inn hotels previously classified as "held
for sale" were reclassified back to operating assets since the Company was
no longer actively marketing these properties for sale. In accordance with
SFAS 144, depreciation was recorded through December 31, 2003, as if the
hotels were never classified as "held for sale".
Stock-based compensation
Prior to 2003, the Company applied Accounting Principles Bulletin ("APB")
No. 25, Accounting for Stock Issued to Employees, and related
interpretations, and the intrinsic method, of accounting for options
granted to employees. Accordingly, no compensation costs were recognized
for stock options granted, when the exercise price was equal to the market
value of the underlying stock on the date of grant. During the second
quarter of 2003, the Company adopted Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation," (SFAS 123),
as amended by Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation - Transition and Disclosure"
prospectively, with an effective date of January 1, 2003. Under SFAS No.
123, the Company records the fair value of any stock based award as
compensation expense as of the date the award is granted.
On August 13, 2003, the 1996 Non-Employee Director Stock Option Plan was
terminated. At December 31, 2003, options to purchase 27,000 shares of
common stock issued under this plan, were outstanding. On October 29, 2003,
the shareholders approved the Non-Employee Director Restricted Stock Plan.
This plan provides for the issuance of restricted common stock to
non-employee directors as part of their overall compensation. A total of
200,000 restricted shares of common stock can be issued under the plan. On
November 10, 2003, the Company granted 40,500 shares of restricted common
stock to the directors pursuant to the plan, of which 75% vested
immediately, as these shares related to services performed during the first
three quarters of 2003, and 25% vested on December 31, 2003. The Company
expensed approximately $156,000 in the fourth quarter of 2003 in connection
with these restricted stock grants.
On October 29, 2003, the Company's 1996 Omnibus Incentive Stock Plan was
terminated. At December 31, 2003, options to purchase 300,500 shares of
common stock issued under this plan, were outstanding. Also, on October 29,
2003, the shareholders approved the 2003 Long-Term Incentive Plan ("LTIP")
for key employees. The LTIP provides for the issuance of stock based awards
to key employees as part of their overall compensation. A total of 550,000
restricted shares of common stock, stock options, or other stock based
awards can be issued under the plan. To date, total of 2,718 restricted
shares of common stock have been granted pursuant to this plan
F-14
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
From 1992 to 2002, the Company granted to various current and former key
employees and directors, non-qualified options to purchase shares of common
stock with exercise prices ranging from $3.25 to $6.50 per share. The
exercise price is the market price on the date of grant. At December 31,
2003, options to purchase 1,041,833 shares of common stock were
outstanding. These options are currently exercisable and expire through
September 2012.
In 1997, the Company granted to two then officers, options to purchase
65,625 shares of common stock with an exercise price of $1.53 per share.
These options currently are exercisable and expire in February 2007.
As part of his initial employment with the Company on January 7, 2003, the
Chief Executive Officer was granted a 60-day option to purchase 75,000
shares of restricted stock using an upward exercise price reset formula to
the greater of a floor price, the price on the date of his start date or,
with respect to options not yet exercised on the 1 month anniversary of his
start date, the fair market value of the Company's shares on that date.
These options were considered to be two successively granted 30-day
options. Prior to his one-month anniversary in 2003, the Chief Executive
Officer exercised 40,000 of the options that were issued at a total price
of approximately $126,000. The exercise price of the remaining 35,000
options was reset upward on his one-month anniversary and expired without
exercise. The fair value of this right to purchase restricted stock was
nominal, and was recorded as compensation expense pursuant to the
transition rules of FASB Statement No. 148.
As part of his initial employment with the Company on August 18, 2003, an
Executive was granted successive 30-day options to purchase 25,000 shares
of restricted stock using a price formula that reset to the greater of a
floor price, the price on the date of his start date or, with respect to
options not yet exercised on the one month anniversary of his start date,
the fair market value of our shares on that date. These options went
unexercised during both 30-day periods. The fair value of these rights to
purchase restricted stock was nominal, and was recorded as compensation
expense during the third quarter of 2003. This option expired on October
18, 2003, without exercise.
The following table summarizes the employee stock options granted,
exercised and outstanding:
Weighted Average
Shares Exercise Price
------ --------------
Options outstanding January 1, 2001 1,764,558 4.39
Forfeitures (16,000) 3.23
Options granted 201,500 3.34
--------- -----
Options outstanding December 31, 2001 1,950,058 4.29
Forfeitures (140,500) 2.84
Exercised (100,000) 2.48
Options granted 213,000 2.85
--------- -----
Options outstanding December 31, 2002 1,922,558 4.33
Forfeitures (527,100) 4.55
Exercised (85,500) 3.24
Options granted 125,000 3.33
--------- =====
Options outstanding and exercisable as of
December 31, 2003 1,434,958 $4.23
========= =====
F-15
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The weighted-average grant-date fair value of stock options granted to
employees prior to January 1, 2003, the effective date of the Company's
adoption of Statement of Financial Accounting Standards No. 123 (SFAS No.
123), and the weighted-average significant assumptions used to determine
those fair values, using a Black-Scholes option pricing model, and the pro
forma effect on earnings of the fair value accounting for employee stock
options under SFAS No. 123 are as follows:
2003 2002 2001
------------- ------------- -------------
Grant-date fair value per share:
Options issued at market $ - $ 1.16 $ 2.04
Weighted average exercise prices:
Options issued at market $ - $ 2.85 $ 3.34
Significant assumptions (weighted-average):
Risk-free interest rate at grant date n/a 3.39% 5.19%
Expected stock price volatility n/a 0.43 0.53
Expected dividend payout n/a n/a n/a
Expected option life (years) (a) n/a 4.62 7.91
Net income (loss):
As reported $ (5,618,580) $ (1,709,932) $ 755,100
Stock-based employee compensation,
expense, net of tax $ (47,771) $ (126,182) $ (197,032)
Pro forma $ (5,666,351) $ (1,836,114) $ 558,068
Net income (loss) per share - Basic:
As reported $ (1.12) $ (0.34) $ 0.15
Pro forma $ (1.13) $ (0.37) $ 0.11
Net income (loss) per share - Diluted:
As reported $ (1.12) $ (0.34) $ 0.13
Pro forma $ (1.13) $ (0.37) $ 0.09
(a) The expected option life considers historical option exercise patterns and
future changes to those exercise patterns anticipated at the date of grant.
The following table summarizes information about employee stock options
outstanding at December 31, 2003:
Options Outstanding Options Exercisable
------------------------------------------------- ---------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ----------- ---------------- -------------- ----------- --------------
$1.53 to 3.56 842,625 3.00 Years $3.35 842,625 $3.35
$3.74 to 4.38 229,000 2.99 4.00 229,000 4.00
$6.31 to 7.81 363,333 3.18 6.43 363,333 6.43
- ------------- --------- ---------- ----- --------- -----
$1.53 to 7.81 1,434,958 3.04 $4.23 1,434,958 $4.23
============= ========= ========== ===== ========= =====
F-16
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2. NOTES RECEIVABLE:
2003 2002
---------- ----------
Notes receivable consist of:
Hotel sale related notes $ 996,000 $ 850,000
Other notes 17,500 32,083
---------- ----------
1,103,500 882,083
Less current portion 146,000 100,000
---------- ----------
Notes receivable, less current portion $ 867,500 $ 782,083
========== ==========
Notes receivable at December 31, 2003, consists primarily of notes received
in connection with the sale of hotels. The notes provide for the monthly
payment of interest only at rates ranging from 7.0% to 9.0% and mature
through December 31, 2021. Certain of the notes are collateralized by the
related hotel or other tangible assets.
3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS:
Information regarding contracts-in-progress is as follows at December 31,
2003 and 2002:
2003 2002
---------- ----------
Costs incurred on uncompleted contracts $2,159,650 $1,606,580
Estimated earnings 487,808 643,215
---------- ----------
2,647,458 2,249,795
Less billings to date 1,414,977 770,694
---------- ----------
Costs and estimated earnings in excess of
billings on uncompleted contracts $1,232,481 $1,479,101
========== ==========
Costs and estimated earnings in excess of billings on uncompleted contracts
includes $1,216,666 and $1,348,565 as of December 31, 2003 and 2002, from
joint ventures in which the Company has a minority ownership interest (Note
10).
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES:
The Company has non-controlling ownership interests, ranging from 1.0% to
50.0%, in general partnerships, limited partnerships and limited liability
companies formed for the purpose of owning and operating hotels. These
investments are accounted for using the equity method. The Company had
investments in 14 hotel joint ventures at December 31, 2003, with a total
investment balance of $859,000, and 12 hotel joint ventures at December 31,
2002, with a total investment balance of approximately $1,399,000. The
Company is secondarily liable for the obligations and liabilities of the
limited partnerships in which it holds a general partnership interest.
The Company advances funds to hotels in which the Company has a minority
ownership interest for working capital and construction purposes. The
advances bear interest ranging from the prime rate to 10% per annum and are
due on demand. The Company expects the partnerships to repay these advances
through the sale of the properties, cash flow generated from hotel
operations and mortgage financing. The advances were approximately
$2,451,000 and $2,892,000 at December 31, 2003 and 2002, respectively, and
are included in investments in and advances to unconsolidated hotel joint
ventures in the accompanying consolidated balance sheets.
F-17
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES
(CONTINUED):
On September 18, 2000, in connection with obtaining the approval to sell
the AmeriHost Inn brand and franchising rights to Cendant Corporation, the
Company entered into an agreement to purchase the interests owned by the
joint venture partners in the 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 (Note 8),
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 acquisition of these interests was completed in 2001 at a cost to
the Company of approximately $800,000. 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, was completed as of August 31, 2003. As a result of this last
transaction, the assets, liabilities, and results of operations of the
hotel owned by this joint venture were consolidated in the Company's
financial statements, including the subsequent sale of the hotel in
September 2003. 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 no longer has any joint ventures in which it has guaranteed a
minimum return to its limited partners. In addition, the Company no longer
has any joint ventures in which a director of the Company, or parties
related to him, is a partner.
The following is a summary of the acquisitions during the twelve months
ended December 31, 2003 and 2002:
2003 2002
----------- -----------
Property and equipment acquired $ 2,006,246 2,279,309
Other assets acquired 15,358 38,400
Long-term debt assumed (1,142,941) (1,466,510)
Other liabilities assumed (101,426) (54,413)
----------- -----------
Cash paid, net of cash acquired $ 777,237 $ 796,786
=========== ===========
The following represents condensed financial information for all of the
Company's investments in affiliated companies accounted for under the
equity method at December 31, 2003, 2002 and 2001.
2003 2002 2001
------------ ------------ ------------
Current assets $ 1,987,939 $ 677,290 $ 581,390
Noncurrent assets 26,502,009 26,732,517 29,215,768
Current liabilities 3,781,468 3,667,191 6,049,363
Long-term debt 23,429,037 23,591,779 26,095,565
Equity (deficit) 1,279,443 150,837 (2,347,770)
Gross revenue 8,906,962 9,641,145 12,173,902
Gross operating profit 2,533,023 3,036,726 3,716,282
Depreciation and amortization 1,228,750 1,315,745 1,824,408
Net loss (892,323) (478,350) (1,680,699)
The Company has provided approximately $16.7 million in guarantees as of
December 31, 2003, on mortgage loan obligations for nine joint ventures in
which the Company holds a minority equity interest, which expire at various
F-18
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
dates through March 2024. Other partners also have guaranteed portions of
the same obligations. The partners of one of the partnerships have entered
into a cross indemnity agreement whereby each partner has agreed to
indemnify the others for any payments made by any partner in relation to
the guarantee in excess of their ownership interest.
The Company applies the provisions of FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others," with respect to
mortgage loan guarantees for joint ventures in which the Company is a
partner. This interpretation elaborates on the disclosures required by the
guarantor and requires the guarantor to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken.
During the third quarter of 2003, the Company provided a guarantee related
to the mortgage debt of a joint venture in which it shares the
responsibility of the guarantee on a joint and several basis with its joint
venture partners. The guarantee is effective for the 20-year term of the
mortgage loan. The Company has recorded as an additional investment in this
joint venture, and a liability for its share of this guarantee, of
approximately $39,000, as of December 31, 2003, its estimated fair value at
the time of issuance, less accumulated amortization.
5. OTHER ASSETS:
Other assets, net of accumulated amortization, at December 31, 2003 and
2002, are comprised of the following:
2003 2002
------------- --------------
Deposits, franchise fees and other assets $ 1,149,209 $ 1,404,305
Deferred loan costs 935,366 1,189,163
Deferred lease costs 652,642 65,032
------------- --------------
Total $ 2,737,217 $ 2,658,500
============= ==============
6. BANK LINE-OF-CREDIT:
The Company had $3,850,000 and $6,384,287 outstanding on its bank operating
line-of-credit at December 31, 2003 and 2002, respectively. The operating
line-of-credit is collateralized by substantially all the assets of the
Company, subject to first mortgages from other lenders on hotel assets,
bears interest at the rate of prime plus 2.5% per annum, with a minimum
rate of 6.75% per annum, and was scheduled to mature April 30, 2004. The
line-of-credit provides for the maintenance of certain financial covenants,
including minimum tangible net worth, a maximum leverage ratio, minimum
debt service coverage ratio, and minimum net income. The Company was not in
compliance with the minimum tangible net worth requirement and the minimum
net income requirement as of December 31, 2003. The lender has waived these
covenant violations however, in connection with the renewal of the
line-of-credit set forth below.
On March 23, 2004, the Company accepted a commitment from the
aforementioned lender to renew the line-of-credit through April 30, 2005,
with a maximum availability of $5.5 million, reducing to $5.0 million on
June 30, 2004 reducing further to $4.0 million on August 31, 2004, and to
$3.5 million on February 28, 2005. Notwithstanding these dates, the lender
has required that the majority of proceeds from the sale of hotel
properties must be used to reduce the line-of-credit balance until the
balance falls below $4.0 million, at which time the maximum available will
be reduced to $4.0 million, even if prior to the August 31, 2004 scheduled
reduction date. The commitment is subject to the closing of the renewed
loan by April 30, 2004, and certain other conditions. The terms of the
agreement were revised to provide for interest at the rate of 10%. The
renewed credit line renewal provides for the maintenance of certain
financial covenants, similar to, the previous line-of-credit.
F-19
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
7. LONG-TERM DEBT:
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 $28.5 million, which has been classified in current
liabilities in the accompanying consolidated balance sheet as of December
31, 2003. This amount includes approximately $2.6 million, which is
contractually due within the next twelve months regardless of the plan for
hotel disposition. The Company's plan to sell certain non-AmeriHost Inn
hotel assets is expected to result in the payoff of the related mortgage
debt in the amount of approximately $8.9 million, which has been classified
in current liabilities in the accompanying consolidated balance sheet as of
December 31, 2003. This amount includes approximately $400,000, which is
contractually due within the next twelve months regardless of the plan for
hotel disposition.
Approximately $1.2 million is classified as the Company's current portion
of long-term debt, which is the principal amount due within the next twelve
months on mortgages which are not related to the assets held for sale. The
Company also has a mortgage loan on the office building in which its
headquarters is located, and on October 1, 2003, the lender extended the
maturity date to January 1, 2006. The hotel mortgage loans bear interest at
the floating rates of prime minus 0.25% to prime plus 2.5% per annum, and
the office building loan bears interest at the floating rate of either
prime minus 0.25% or LIBOR plus 2.25%, as chosen by the Company.
The aggregate maturities of long-term debt, excluding long-term debt
related to assets held for sale, are approximately as follows:
Year Ending December 31, Amount
- ------------------------ ------------
2004 $ 1,195,000
2005 5,746,000
2006 3,190,000
2007 953,000
2008 1,016,000
Thereafter 15,609,117
------------
$ 27,709,000
============
The Company expects to refinance or extend a mortgage loan due in 2004, or
sell the related hotel asset and repay the mortgage in its entirety, prior
to its maturity.
Certain of the hotel mortgage notes, as well as the office building
mortgage note, provide for financial covenants, principally minimum net
worth requirements, debt to equity ratios and minimum debt service coverage
ratios. At December 31, 2003, the Company was not in compliance with the
minimum debt service coverage ratio contained in two mortgage loans
aggregating approximately $4.6 million. One of these mortgages in the
amount of $1.5 million as of December 31, 2003 relates to a hotel
classified as "held for sale" since it is part of the hotel disposition
plan, and is expected to be sold prior to its maturity in August 2004 with
the proceeds used to pay off this mortgage debt. With respect to the other
hotel with a covenant violation, the Company has obtained a waiver from the
lender. In addition, one joint venture in which the Company has guaranteed
the mortgage debt was not in compliance with the minimum debt service
coverage ratio covenant contained in the mortgage loan. The joint venture
has obtained a waiver from the lender regarding this violation in
connection with the one-year extension of the mortgage loan in November
2003.
8. SHAREHOLDERS' EQUITY:
Authorized shares:
The Company's corporate charter authorizes 25,000,000 shares of Common
Stock with a par value of $0.005 per share and 100,000 shares of Preferred
Stock with no par value. The Preferred Stock may be issued in series and
the
F-20
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Board of Directors shall determine the voting powers, designations,
preferences and relative participation, optional or other special rights
and the qualifications, limitations or restrictions thereof.
Non-employee stock options and warrants:
The Company has issued options to acquire shares of the Company's common
stock to certain of its partners in various hotel joint ventures referred
to in Note 4. During 2001, the Company recognized $167,000 of expense
related to the issuance of stock options to joint venture partners,
including a director of the Company (Note 4). At December 31, 2003, options
to purchase 125,000 shares of common stock continued to be outstanding WITH
an exercise price of $3.794 per share and exercisable through October 2005.
The Company accounted for these options during 2001 at fair value, in
accordance with FASB Statement No. 123.
Limited partnership conversion rights:
The Company was the general partner in a partnership where the limited
partners, including a Director of the Company, had the right at certain
times and under certain conditions to convert their limited partnership
interests into 84,975 shares of the Company's common stock. These
conversion rights expired in 2003 when the Company fulfilled its obligation
to acquire these limited partner interests (Note 4).
Stock subscriptions receivable:
In connection with the purchase of certain management contracts from
Diversified Innkeepers, Inc. ("Diversified"), the Company secured
promissory notes from the principals of Diversified in the total amount of
$436,875 with interest at 6.5% per annum. The notes are collateralized by
125,000 shares of common stock of the Company, which were issued upon the
exercise of stock options in 1993. The total principal balance is due
December 31, 2005. These notes receivable have been classified as a
reduction of shareholders' equity on the accompanying consolidated balance
sheets.
Reverse-Forward stock split:
In November 2003 the Company executed a reverse-forward stock split whereby
the shares held by shareholders owning less than 100 shares on the
effective date were redeemed and converted into the right to receive cash
from the Company. Shareholders owning at least 100 shares as of the
effective date were not impacted. A total of 33,332 shares were converted
on the effective date into the right to receive approximately $127,662 in
cash. Through December 31, 2003, the Company has paid $21,908 for the
redemption of 5,720 shares in connection with the reverse-forward stock
split. All shares that were repurchased or redeemed have been retired.
9. TAXES ON INCOME:
The provision for income taxes in the consolidated statements of operations
excluding tax benefit of $972,000, $633,000, and $144,000 related to
discontinued operations in 2003, 2002, and 2001 respectively, is as
follows:
2003 2002 2001
----------- ----------- -----------
Current $ - $ (407,000) $ 604,000
Deferred (2,456,000) 235,000 155,000
----------- ----------- -----------
Income tax (benefit) expense $(2,456,000) $ (172,000) $ 759,000
=========== =========== ===========
The following reconciles income tax expense for 2003 at the federal
statutory tax rate with the effective rate:
F-21
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
------ ------ ------
Income taxes at the
federal statutory rate (34.0%) (34.0%) 34.0%
State taxes, net of federal tax benefit (3.1%) 2.0% 10.9%
----- ----- ----
Effective tax rate (37.1%) (32.0%) 44.9%
===== ===== ====
9. TAXES ON INCOME (CONTINUED):
Temporary differences between the carrying amounts of assets and
liabilities for financial reporting and income tax purposes that give rise
to a net deferred income tax asset relate to the following:
2003 2002
----------- -----------
Differences in deferred income recognized for tax
purposes and financial reporting purposes $ 333,000 $ 270,000
Gain on sale/leaseback transaction recognized
for tax purposes and deferred for financial
reporting purposes 2,644,000 3,032,000
Start-up costs capitalized for tax purposes and
expensed for financial reporting purposes 35,000 62,000
Differences in the basis of investments, property and
equipment from partner acquisitions and due
to majority-owned partnerships consolidated for
financial reporting purposes but not for tax purposes 824,000 1,201,000
Net operating loss carryforward 1,841,000 -
Other 154,000 61,000
----------- -----------
5,831,000 4,626,000
Impairment provision booked for financial reporting
purposes and deferred for tax purposes 2,151,000 -
Differences in the basis of property and equipment (349,000) (1,127,000)
Cumulative depreciation differences (1,562,000) (1,072,000)
----------- -----------
Net deferred income tax asset $ 6,071,000 $ 2,427,000
=========== ===========
Certain state net operating loss carry forwards are included in the net
deferral tax asset and are fully reserved for.
10. RELATED PARTY TRANSACTIONS:
The following table summarizes related party revenue recorded in 2003, 2002
and 2001 from various unconsolidated partnerships in which the Company has
an ownership interest:
F-22
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
----------- ----------- ----------
Development and construction revenue $ 4,175,878 $ 5,253,226 $ 652,815
Hotel management revenue 371,142 808,598 709,631
Employee leasing revenue 2,097,646 2,895,295 2,830,719
Interest income 110,450 212,346 530,035
11. BUSINESS SEGMENTS:
The Company's business is primarily involved in seven segments: (1) hotel
operations, consisting of the operations of all hotels in which the Company
has a 100% or controlling ownership or leasehold interest, (2) hotel
development, consisting of development, construction and renovation of
hotels for unconsolidated joint ventures and unrelated third parties, (3)
hotel sales and commissions, resulting from the sale of AmeriHost Inn
hotels, (4) hotel management, consisting of hotel management activities,
(5) employee leasing, consisting of the leasing of employees to various
hotels, (6) incentive and royalty sharing fees due from Cendant, the owner
of the AmeriHost Inn brand, and (7) office building rental activities.
Results of operations of the Company's business segments are reported in
the consolidated statements of operations. The following represents
revenues, operating costs and expenses, operating income, identifiable
assets, capital expenditures and depreciation and amortization for each
business segment, which is the information utilized by the Company's
decision makers in managing the business:
2003 2002 2001
----------- ----------- -----------
Revenues
Hotel operations $41,462,828 $45,490,595 $47,353,106
Hotel development and construction 4,196,878 7,180,222 1,724,249
Hotel sales and commissions 22,831,102 10,017,080 12,922,459
Hotel management 445,862 957,801 1,066,645
Employee leasing 1,858,103 3,267,491 4,678,189
Incentive and royalty sharing fees 972,219 588,938 209,633
Office building rental and other 749,782 669,769 169,612
----------- ----------- -----------
$72,516,774 $68,171,896 $68,123,893
=========== =========== ===========
Operating costs and expenses
Hotel operations $32,480,658 $33,714,913 $34,801,272
Hotel development and construction 4,739,296 7,205,328 1,479,947
Hotel sales and commissions 19,328,404 8,159,459 9,621,536
Hotel management 280,383 714,648 716,802
Employee leasing 1,798,714 3,208,708 4,564,508
Incentive and royalty sharing fees - - -
Office building rental and other 214,232 56,757 2,958
----------- ----------- -----------
$58,841,687 $53,059,813 $51,187,023
=========== =========== ===========
F-23
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
11. BUSINESS SEGMENTS (CONTINUED)
2003 2002 2001
------------- ------------- -------------
Operating Income (Loss)
Hotel operations
AmeriHost Inn hotels $ 1,549,031 $ 3,169,201 $ 3,100,053
Other hotels (927,208) (463,289) (132,413)
Impairment provision (5,069,781) (542,019) -
Hotel development and construction (545,811) (30,785) 236,319
Hotel sales and commissions 3,502,698 1,857,621 3,300,922
Hotel management 120,559 191,097 295,356
Employee leasing 57,288 56,462 110,642
Incentive and royalty sharing fees 972,219 588,938 209,633
Office building rental and other 373,918 454,397 130,831
Corporate (2,482,351) (2,360,859) (1,954,441)
------------- ------------- -------------
$ (2,449,438) $ 2,920,764 $ 5,296,902
============= ============= =============
Identifiable assets
Hotel operations $ 82,815,916 $ 104,644,225 $ 99,086,728
Hotel development and construction 1,860,323 2,445,882 1,467,116
Hotel sales and commissions - - -
Hotel management 1,005,159 1,513,640 119,236
Employee leasing 134,974 256,787 70,584
Incentive and royalty sharing fees - - -
Office building rental and other 6,479,267 6,672,294 6,553,474
Corporate 7,417,774 4,400,886 7,877,318
------------- ------------- -------------
$ 99,713,413 $ 119,933,714 $ 115,174,456
============= ============= =============
Capital Expenditures
Hotel operations $ 6,994,136 $ 18,222,595 $ 18,874,420
Hotel development and construction 503 53,673 5,975
Hotel sales and commissions - - -
Hotel management 28,208 16,574 52,173
Employee leasing - - -
Incentive and royalty sharing fees - - -
Office building rental and other 62,511 273,605 6,411,585
Corporate 2,636 16,378 55,580
------------- ------------- -------------
$ 7,087,994 $ 18,582,825 $ 25,399,733
============= ============= =============
F-24
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
11. BUSINESS SEGMENTS (CONTINUED)
2003 2002 2001
------------- ------------- -------------
Depreciation/Amortization
Hotel operations $ 3,327,136 $ 5,135,412 $ 3,751,443
Hotel development and construction 3,393 5,679 7,983
Hotel sales and commissions - - -
Hotel management 44,919 52,056 54,487
Employee leasing 2,100 2,321 3,039
Incentive and royalty sharing fees - - -
Office building rental and other 161,634 158,615 35,822
Corporate 62,867 162,219 46,702
------------- ------------- -------------
$ 3,602,049 $ 5,516,302 $ 3,899,476
============= ============= =============
12. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS:
The Company sold eight wholly-owned AmeriHost Inn hotels during the twelve
months ended December 31, 2003. Net sale proceeds from these hotels was
approximately $22.8 million, which has been included in hotel sales and
commission revenue in the accompanying consolidated financial statements. The
net book value of these hotels at the time of their sales was approximately
$19.2 million, resulting in operating income from the sale of these hotels of
approximately $3.5 million. In addition, approximately $14.2 million in mortgage
debt was paid off with proceeds from the sale of these hotels.
In the third quarter of 2003, a joint venture in which the Company had a
controlling interest, and was therefore consolidated in the Company's financial
statements, sold its non-AmeriHost Inn hotel. This sale resulted in the pay off
of the joint venture's mortgage debt of approximately $1.3 million and a pre-tax
gain of approximately $1,000. Also, during the second quarter of 2003, another
joint venture in which the Company had a controlling ownership interest, sold
its non-AmeriHost Inn hotel. This sale resulted in the reduction of the joint
venture's mortgage debt of approximately $945,000, 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 investment in
2002. A director of the Company owns the bank that provided the mortgage debt to
this joint venture, which was paid off as a result of this sale. There are no
more loans outstanding owed to affiliates of this or any other director. In
addition, a joint venture in which the Company had 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 implemented a plan to sell approximately 25
- - 30 hotel properties over a period of two years. The properties to be sold
included 20-25 AmeriHost Inns and six non-AmeriHost hotels that are wholly owned
or in which the Company has an ownership interest. The Company has hired several
regional and national hotel brokerage firms to market most of the properties and
manage the sales process. The Company
F-25
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
expects this plan to reduce debt (Notes 6 and 7) and generate cash to pursue
development and other strategic objectives as well as accelerate the economic
benefits of the Company's transaction with Cendant Corporation, the owner of the
AmeriHost Inn franchise system. However, there can be no assurances under the
plan as to timing, terms of sale, or that any additional sales will be
consummated.
In conjunction with the implementation of the plan for hotel dispositions 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. The Company follows Financial Accounting
Standards Board Statement No. 146 "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") and recognized the costs associated with this
activity at fair value when the liability was incurred.
13. DISCONTINUED OPERATIONS:
The Company has reclassified its consolidated statements of operations for the
twelve months ended December 31, 2003, 2002 and 2001 and its consolidated
balance sheet as of December 31, 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 12). 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, are not presented as "discontinued
operations," nor are the sales of the AmeriHost Inn hotels due to the Company's
long-term royalty sharing agreement for all non-Company owned AmeriHost Inn
hotels. This agreement provides for a revenue stream from Cendant Corporation,
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:
2003 2002 2001
----------- ----------- -----------
Hotel Operations:
Revenue $ 6,205,557 $ 8,358,771 $ 9,029,342
Costs and expenses 6,138,669 7,811,561 7,313,241
----------- ----------- -----------
66,888 547,210 1,716,101
Depreciation and amortization 810,062 1,177,662 776,593
Leasehold rents - hotels 172,933 298,777 677,686
Hotel impairment provision 909,523 - -
----------- ----------- -----------
Operating income (loss) (1,825,630) (929,229) 261,822
Other income (expense):
Interest expense (722,475) (752,238) (541,664)
Other income (expense) (52,026) (46,060) (1,000)
Gain on sale of property 96,260 - -
----------- ----------- -----------
Loss from discontinued
operations, before minority
interests and income taxes (2,503,871) (1,727,527) (280,842)
F-26
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Minority interests in (income) loss
of consolidated joint ventures (76,118) (40,757) 78,608
----------- ----------- -----------
Loss from discontinued operations,
before income taxes (2,427,573) (1,686,770) (359,450)
Income tax expense (benefit) (972,000) (633,000) (144,000)
----------- ----------- -----------
Net loss from discontinued
operations $(1,455,753) $(1,053,770) $ (215,450)
=========== =========== ===========
F-27
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
13. DISCONTINUED OPERATIONS (CONTINUED):
The assets and liabilities of two non-AmeriHost Inn hotels sold in 2003, one
leased non-AmeriHost Inn hotel which was terminated in the third quarter of
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
December 31, 2003. Condensed balance sheet information for these hotels is
as follows:
December 31,
2003
------------
ASSETS
Current assets:
Cash and cash equivalents $ 283,412
Accounts receivable 82,514
Prepaid expenses and other current assets 36,676
------------
Total current assets 402,602
------------
Property and equipment 14,643,713
Less accumulated depreciation and amortization (4,329,857)
------------
10,313,856
------------
Other assets, net of accumulated amortization 170,114
------------
$ 10,886,572
============
LIABILITIES
Current liabilities:
Accounts payable $ 264,747
Accrued payroll and other expenses 391,840
Current portion of long-term debt 1,263,095
------------
Total current liabilities 1,919,682
Long-term debt, net of current portion 7,665,810
Minority interests -
Other long term liabilities -
Equity 1,301,080
------------
$ 10,886,572
============
F-28
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
14. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
Sale/leaseback of hotels:
In 1998 and 1999, the Company completed the sale of 30 AmeriHost Inn hotels to
PMC Commercial Trust ("PMC"), a real estate investment trust ("REIT") for $73.0
million. Upon the respective sales to PMC, a subsidiary of the Company entered
into agreements to lease back the hotels for an initial term of 10 years, with
two five-year renewal options. The lease payments were fixed at 10% of the sale
price for the first three years. Thereafter, the lease payments were subject to
a CPI increase with a 2% annual maximum. In January 2001, the subsidiary amended
the master lease with PMC to provide for the purchase of eight unidentified
hotels from the lessor under specified terms, and to extend the initial lease
term by five years. The amendment provides for four increases in rent payments
of 0.25% each, if these hotels are not sold to a third party or purchased by the
Company by the dates specified. As of December 31, 2003, the first three
scheduled rent increases were not effective due to the sale of hotels by PMC to
the Company. The third scheduled increase was avoided in September 2003, when
the Company purchased a hotel from PMC, using cash of approximately $556,000 and
mortgage financing provided by PMC of approximately $1.7 million. The
unamortized deferred gain related to the initial sale of this hotel to PMC was
recorded as a basis reduction to the hotel asset. Upon its purchase, this hotel
was classified as held for sale, and the difference in the total purchase price,
net of the unamortized deferred gain, and its fair market value was recorded as
a leasehold interest to be amortized over the remaining term of the remaining
PMC leases. If the Company does not either facilitate the sale to a third party,
or purchase from PMC, one hotel at a price of approximately $2.6 million by June
5, 2004, the fourth 0.25% rent increase of approximately $127,000 on an annual
basis becomes effective. If the Company decides to purchase this hotel by June
5, 2004, it intends to fund the $2.6 million purchase price with a combination
of mortgage debt to be obtained and cash from operations or working capital.
The gains from the sale of the hotels to PMC were deferred for financial
statement reporting purposes, due to the continuing involvement with the
long-term lease agreement, and are being amortized on a straight-line basis into
income as a reduction of leasehold rent expense over the 15-year initial term.
At December 31, 2003, the balance of this deferred income was approximately $6.5
million.
In 2002, one hotel owned by PMC was sold; in 2001, four hotels owned by PMC were
sold. Accordingly, the leases with PMC for these hotels were terminated, and the
remaining unamortized gain of approximately $352,000 and $1.0 million was
recognized in 2002 and 2001, respectively, as a gain on sale of property in the
accompanying consolidated financial statements. In addition, the Company
recognized a commission from the sale of these hotels, which is classified as
hotel sales and commissions in the accompanying consolidated financial
statements.
As previously mentioned, the Company acquired one hotel owned by PMC in 2003,
one in 2002, and one in 2001, in accordance with the terms of the amendment.
In 2004, the Company entered into discussions with PMC, on behalf of its
subsidiary, with the objective to restructure these long-term lease agreements.
On March 12, 2004, the subsidiary entered into a temporary letter agreement with
PMC that expires on April 30, 2004. The temporary letter agreement provides that
base rent will continue to accrue at the rate of approximately $445,000 per
month, as set forth in the lease agreements; however the base rent payments
required to be paid on March 1, 2004 and April 1, 2004 were reduced to
approximately $360,000 per month, with the March 1, 2004 payment being due and
payable upon the execution of the temporary letter agreement. In addition, the
subsidiary was allowed to utilize $200,000 of its security deposit held with PMC
to partially fund these payments. Upon the expiration of the temporary letter
agreement on April 30, 2004, the deferred
F-29
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
portion of the base rent (approximately $170,000) will be payable and the
security deposit is to be restored to its March 12, 2004 balance. While the
objective is to reach a restructured agreement prior to the expiration of the
temporary letter agreement, there can be no assurance that the leases will be
restructured on terms and conditions acceptable to the Company, if at all.
Hotel leases:
Including the hotels leased from the REIT, the Company leases 22 hotels as of
December 31, 2003, the operations of which are included in the Company's
consolidated financial statements. All of these leases are triple net and
provide for monthly base rent payments ranging from $14,000 to $27,000. The
leases expire through March 2014.
A joint venture in which the Company has a controlling ownership interest leases
one non-AmeriHost Inn hotel, the operations of which are included in the
Company's consolidated financial statements. This lease is triple net, providing
for rent payments of $20,000 per month, and expires May 31, 2010. This lease
provides for a purchase option price of $4,000,000, which approximated the fair
value at the lease commencement, subject to increases in the consumer price
index. The Company operated another non-AmeriHost Inn hotel under a triple net
lease, which was terminated on August 31, 2003 and was not renewed by the
Company. The Company accrued approximately $107,000 in 2003 in related lease
termination fees.
Total rent expense for all operating leases was approximately $5,131,000,
$5,411,000 and $6,747,000 in 2003, 2002 and 2001, respectively, including
approximately $39,000 and $278,000 in 2002 and 2001, respectively, to entities
in which the Company has a minority ownership interest. Minimum future rent
payments under all operating leases are as follows:
Year Ending December 31, Amount
- ------------------------ ----------------
2004 5,629,000
2005 5,736,000
2006 5,845,000
2007 5,956,000
2008 6,069,000
Thereafter 29,435,000
------------
$ 58,670,000
============
F-30
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Construction in progress:
As of December 31, 2003, the Company had entered into non-cancelable
subcontracts for approximately $857,000 in connection with the construction of a
new hotel, representing a portion of the total estimated construction costs for
this hotel. These commitments will be funded through construction and long-term
mortgage financing currently in place.
Employment agreement:
The Company has entered into employment agreements with its Chief Executive
Officer, its Chief Financial Officer and three other executives. The agreements
expire December 31, 2004 through December 31, 2005, and provide for total annual
base compensation of $907,000. The agreements also provide for performance
bonuses tied to company performance, and are payable in a combination of cash
and restricted common stock of the Company, with the restricted stock to be
issued pursuant to the 2003 Long Term Incentive Plan adopted by the shareholders
in 2003.
Legal matters:
The Company and certain of its subsidiaries are defendants in various litigation
matters arising in the ordinary course of business. In the opinion of
management, the ultimate resolution of all such litigation matters is not likely
to have a material effect on the Company's financial condition, results of
operation or liquidity.
F-31
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
15. SUPPLEMENTAL CASH FLOW DATA:
The following represents the supplemental schedule of noncash investing and
financing activities for the years ended December 31:
2003 2002 2001
----------- ----------- -----------
Sale of assets and franchising rights:
Cost basis of assets sold $ 6,392,462 $ 939,851 $ 192,857
Accumulated depreciation at sale (3,925,821) (168,742) (46,227)
Deferred income - (352,507) (1,030,468)
Notes received, less $50,000 allowance - - -
Gain on sale 337,856 727,076 1,286,338
Income from insurance settlement $ 298,023
----------- ----------- -----------
Net cash proceeds $ 2,804,497 $ 1,443,701 $ 402,500
=========== =========== ===========
Liabilities assumed in connection with
acquisition and consolidation of hotel
partnership interests $ 1,244,367 $ 1,520,923 $ 2,365,422
=========== =========== ===========
Notes received in connection with the
sale of hotels $ 250,000 $ 450,000 $ 300,000
=========== =========== ===========
Deferred income adjustment to hotels acquired $ 262,513 $ 347,989 $ 511,943
=========== =========== ===========
Exchange of note and interest receivable for
partnership interest $ - $ 1,256,639 $ -
=========== =========== ===========
Interest paid, net of interest capitalized $ 4,830,621 $ 5,516,449 $ 5,194,741
=========== =========== ===========
16. SALE OF AMERIHOST INN BRANDS AND FRANCHISING RIGHTS:
Effective September 30, 2000, the Company completed the sale of the AmeriHost
Inn brands and franchising rights to Cendant. The Company simultaneously entered
into franchise agreements with Cendant for its AmeriHost Inn hotels. The Company
received an initial payment of approximately $5.5 million upon closing and
recorded a gain from this payment, net of closing costs of approximately $5.2
million. In addition, the sale agreement provides for three installment payments
to the Company of $400,000 each, payable on September 30, 2001, 2002 and 2003.
These payments are included in gain on sale of assets in the accompanying
consolidated financial statements when received. The agreement with Cendant also
provides for additional incentives to the Company as the AmeriHost Inn hotel
franchise system expanded. In conjunction with this transaction, the Company
changed its name and began conducting business as Arlington Hospitality, Inc. in
May 2001.
F-32
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected quarterly financial data (in thousands, except per share amounts) for
2003 and 2002 is summarized below. The sum of the quarterly earnings (loss) per
share amounts may not equal the annual earnings per share amounts due primarily
to changes in the number of common shares and common share equivalents
outstanding from quarter to quarter.
Three Months Ended
-------------------------------------------- Year Ended
3/31 6/30 9/30 12/31 12/31
-------- -------- -------- -------- --------
2003:
Total revenue $ 17,794 $ 15,792 $ 23,806 $ 15,125 $ 72,517
Net income (loss) from continuing
operations, before impairment (960) 172 1,201 (1,536) (1,123)
Impairment provision, net of tax (60) (2,739) (84) (157) (3,040)
Net income (loss) from continuing
operations (1,020) (2,567) 1,117 (1,693) (4,163)
Discontinued operations, net of tax (462) (791) (35) (168) (1,456)
Net income (loss) (1,482) (3,358) 1,082 (1,861) (5,619)
Net income (loss) per share:
Basic $ (0.30) $ (0.67) $ 0.22 $ (0.37) $ (1.12)
Diluted $ (0.30) $ (0.67) $ 0.22 $ (0.37) $ (1.12)
2002:
Total revenue $ 17,938 $ 20,643 $ 18,390 $ 19,560 $ 76,531
Net income (loss) from continuing
operations, before impairment (331) 360 775 (1,140) (336)
Impairment provision, net of tax - - - (320) (320)
Net income (loss) from continuing
operations (331) 360 775 (1,460) (656)
Discontinued operations, net of tax (427) (126) (29) (472) (1,054)
Net income (loss) (758) 234 746 (1,932) (1,710)
Net income (loss) per share:
Basic $ (0.15) $ 0.05 $ 0.15 $ (0.39) $ (0.34)
Diluted $ (0.15) $ 0.05 $ 0.14 $ (0.39) $ (0.34)
18. PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following condensed pro forma financial information is presented as if the
acquisitions discussed in Note 4 had been consummated as of the beginning of the
period presented but is not necessarily indicative of what actual results of
operations of the Company would have been assuming the acquisitions had been
consummated at that time nor does it purport to represent the results of
operations for future periods.
For the year ended December 31,
2003 2002 2001
------------ ------------ ------------
Total Revenue $ 73,089,796 $ 69,896,115 $ 68,911,381
Net income (loss) (5,590,617) (1,667,411) 730,268
Net income (loss) per share:
Basic $ (1.12) $ (0.34) $ 0.15
F-33
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
Diluted $ (1.12) $ (0.34) $ 0.14
Weighted average number of common shares
outstanding:
Basic 5,011,572 4,958,438 4,974,821
Diluted 5,011,572 4,958,438 5,181,571
19. NEW ACCOUNTING STANDARDS:
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148"). This Statement amends
FASB Statement No. 123, "Accounting for Stock-based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
148 and the disclosure requirements of Statement No. 123 require prominent
disclosures in both annual and interim financial statements. Certain of the
disclosure modifications are required for fiscal years ending after December 15,
2002, and are included in the notes to these consolidated financial statements.
During 2003, the Company has adopted the provisions of FASB No. 123, including
the reporting of the fair value of any options as a charge against earnings.
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," which addresses how a business
enterprise should evaluate whether or not it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of
Variable Interest Entities", which was issued in January 2003. The Company is
required to adopt the requirements of FIN 46R for interim periods beginning
after March 31, 2004. This Interpretation requires that the Company present any
variable interest entities in which it has a majority variable interest on a
consolidated basis in its financial statements. The Company is continuing to
assess the provisions of this Interpretation and the impact to the Company of
adopting this Interpretation. Therefore the following amounts may change based
upon additional analysis. Due to the adoption of this Interpretation, the
Company expects that it will begin to present its investments in four joint
ventures in which it has a majority variable interest, as determined in
accordance with the provisions of this Interpretation, on a consolidated basis
in its financial statements beginning with the consolidated financial statements
issued for the quarterly period ended June 30, 2004. The consolidation of these
joint ventures is expected to add approximately $9.7 million in assets and $7.8
million in liabilities to the Company's consolidated balance sheet. As of
December 31, 2003, the Company had investments in, and advances to, these joint
ventures of approximately $2.0 million, which was presented as such under the
equity method of accounting in the accompanying consolidated financial
statements. The Company expects that it will continue to present all of its
other unconsolidated investments under the equity method.
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. This Statement is effective
for financial instruments entered into or modified after May 31, 2003 and is
otherwise effective at the beginning of the first interim period beginning after
June 15, 2003. The effective date of a portion of the statement has been
indefinitely postponed by the FASB. The Company does not expect that the
implementation of SFAS No. 150 will result in a material financial statement
impact.
20. SUBSEQUENT EVENTS:
F-34
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
On March 26, 2004, the Company sold one AmeriHost Inn hotel generating gross
proceeds of approximately $1.8 million and had simultaneously paid off the
related mortgage loan of approximately $748,000.
F-35