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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, 2004
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
------------------------------- -------------------
(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, 2004
as reported on the NASDAQ National Market, was approximately $10.2 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 31, 2005, 4,956,123 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, dispositions, financing, construction management, property
management, marketing, and accounting. As of December 31, 2004, we had
approximately 900 employees, with our senior officers averaging more than 15
years experience in the hotel industry. Our hotels are located in 15 states,
primarily in the Midwestern United States. The table below sets forth
information regarding our hotels at December 31, 2004:
Open Under
Hotels Construction Total
--------------- ---------------- ---------------
Hotels Rooms Hotels Rooms Hotels Rooms
------ ------ ------ ------- ------ ------
Consolidated (1):
AmeriHost Inn hotels 40 2,575 - - 40 2,575
Other brands 3 504 - - 3 504
------ ------ ------ ------- ------ ------
43 3,079 - - 43 3,079
------ ------ ------ ------- ------ ------
Unconsolidated:
AmeriHost Inn hotels 7 533 1 82 8 615
Other brands - - - - - -
------ ------ ------ ------- ------ ------
7 533 1 82 8 615
------ ------ ------ ------- ------ ------
Totals:
AmeriHost Inn hotels 47 3,108 1 82 48 3,190
Other brands 3 504 - - 3 504
------ ------ ------ ------- ------ ------
50 3,612 1 82 51 3,694
====== ====== ====== ======= ====== ======
(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, averaging 60 to 65 rooms, with 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, 80 to 100 room, three-story AmeriHost Inn & Suites prototype, with the
ability to add more rooms, with more public space and certain other enhancements
for this purpose. Each of our other brand hotels are franchised through Days Inn
or Ramada Inn. As of December 31, 2004, we were constructing one 82-room
AmeriHost Inn hotel for a joint venture in which we are a partner.
In addition to our 47 AmeriHost Inn hotels, unaffiliated third parties also
operated 60 AmeriHost Inn hotels under franchise agreements with Cendant as of
December 31, 2004, nearly all of which were previously developed, owned and
operated by us, until we sold them. As of December 31, 2004, according to a
franchise system report provided by Cendant, there were a total of 107 AmeriHost
Inn hotels open, including those owned, operated or managed by us, versus 103 as
of December 31, 2003.
- 2 -
STRATEGIC BUSINESS PLAN
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 these 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;
- 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 continue to sell certain existing hotel properties as part of a
formal plan 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; and
- to improve our capital structure by reducing existing debt, while
exploring new, long-term sources of growth and operating capital.
As a result of the sale of a significant number of hotels over the last two
years, our revenue mix has changed, with hotel operating revenues decreasing and
sale of hotel revenues, hotel development revenues and development incentive and
royalty sharing fee revenues increasing, a trend which we expect to continue in
2005. We believe this shift will help us increase profit margins and provide a
greater return on capital.
In summary, we are pursuing the following four major initiatives:
- complete the formal plan initially adopted in 2003 to sell 35 - 40%
of our existing owned hotel portfolio;
- 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; and
- increase and accelerate fees under the Cendant agreement.
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. To date, we have sold all but one of these non-AmeriHost Inn hotels
and the remaining one is currently under a sales contract. We anticipate using
the proceeds from the sale of hotels to:
- provide liquidity for operational needs, at both the corporate and
hotel level;
- reduce outstanding debt;
- provide capital for future hotel development; and
- provide capital for other corporate uses.
During 2004, in an effort to enhance the hotel disposition plan and maximize the
activity from potential buyers, we continually assessed the timing, expected
sales prices, and brokerage groups to be used. As a result, we slightly
- 3 -
changed the mix of hotels offered for sale as part of the formal disposition
plan, 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. We continue to reevaluate hotels offered for sale in 2005 and expect to
complete the formal plan for hotel disposition during 2005. Even after the
formal hotel disposition plan is completed, we expect to continue to sell
additional hotels as part of our strategic business plan.
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:
2004 2003 2002
--------- --------- ---------
Hotels Sold:
Consolidated hotels:
AmeriHost Inn hotels 11 8 5
Other brand hotels 2 2 -
--------- --------- ---------
Total Consolidated hotels: 13 10 5
--------- ---------- ---------
Unconsolidated hotels:
AmeriHost Inn hotels - 1 2
Other brand hotels 2 - 1
--------- --------- ---------
Total Unconsolidated hotels: 2 1 3
--------- --------- ---------
Total 15 11 8
========= ========= =========
Net Proceeds from the sale of consolidated hotels
(in thousands):
AmeriHost Inn hotels $ 3,558 $ 8,631 $ 2,531
Other brand hotels 940 137 -
--------- --------- ---------
$ 4,498 $ 8,768 $ 2,531
========= ========= =========
Debt paid off from the sale of consolidated hotels
(in thousands):
AmeriHost Inn hotels $ 16,215 $ 14,200 $ 7,187
Other brand hotels 2,276 2,267 -
--------- --------- ---------
$ 18,491 $ 16,467 $ 7,187
========= ========= =========
Upon successful completion of the sale of the properties in the formal plan, we
expect to own or lease 30 to 35 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 operating these
hotels, such as hotel development for third parties and joint ventures.
Improve Hotel Operating Results
The lodging industry was negatively impacted beginning in 2001, due to the
economic downturn and its impact on both leisure and corporate travel patterns,
as well as other geopolitical events, which impact continued through 2003.
According to industry analysts, such a prolonged downturn in revenues had not
happened in the industry in the thirty years prior. During the latter part of
2003, and through 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
2005. During 2004, our hotel revenue growth has lagged 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 behind 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
- 4 -
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 employ a
revenue manager who monitors these initiatives, and works 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 were successful in significantly reducing property and other
commercial insurance costs. We have also started to implement energy control
systems at many hotels and are expanding this program.
In addition, due to numerous economic and market-driven factors, we modified the
leases for 20 hotels with PMC Commercial trust ("PMC") (AMEX:PCC) effective
October 1, 2004 resulting in 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.
Increase hotel development
In 2003 and 2004, we developed two AmeriHost Inn hotels for joint ventures in
which we have an ownership interest. We currently are constructing one AmeriHost
Inn hotel for a joint venture in which we have an ownership interest, and
anticipate starting construction on another AmeriHost Inn hotel for a joint
venture in the near future, where the funding has been fully committed by the
partners and mortgage debt lender. In addition, we have executed purchase
contracts for five land parcels where we have performed extensive due diligence
and hotel feasibility analyses. We are currently in the process of identifying
equity investors as well as mortgage lenders in order to finance these projects
through 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 evaluate and possibly acquire hotels on a selective basis where the
opportunity exists to convert them to the AmeriHost Inn brand, again primarily
on a joint venture basis. We intend to increase the development activity for
third parties and joint ventures, reaching a pace of developing or acquiring and
converting 8 to 12 hotels annually in the short term and eventually 10 to 15
hotels annually. We anticipate that these new developments will be our larger
hotel prototype having 80 to 100 rooms, to be located in larger markets with
multiple demand generators, compared to the smaller market 60 to 65 room hotels
in our current portfolio. 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 growth opportunity for limited-service
hotels.
We will seek to develop hotels through joint ventures, which 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.
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.
- 5 -
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 our
strategic plan. In addition, our development of larger hotels (80 - 100 room
prototype) is also expected to result in our being paid larger fees from
Cendant, since these hotels are expected to comprise a greater number of rooms
and 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 brand hotels for our own account, or
developing hotels 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 until September 2005. After
September 2005, we intend to evaluate the possibility of pursuing such other
alternative opportunities.
LEASED HOTEL PROPERTIES
In 1998 and 1999, we 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, one of our subsidiaries entered into
agreements to lease back the hotels. The original leases had an initial term of
10 years, and in January 2001, the master lease agreement with PMC was amended
to allow either PMC or us to extend the leases for a five-year period, through
2013. In 2004, through September, the lease payments were 10.51% of the original
sale price (the "Assigned Values"), subject to annual CPI increases with a 2%
annual maximum. As discussed below, we entered into another amendment with PMC
(the "Third Amendment") reducing and fixing the lease payment at a rate to 8.5%
of Assigned Values, as of October 1, 2004, as long as certain conditions are
met.
We facilitated the sale of one of these leased hotels to a third party in August
2004, based on the terms of a temporary sales letter agreement with PMC. Upon
the sale of this hotel, PMC received the sale proceeds, net of closing costs,
plus a termination fee from us. In accordance with the terms of the temporary
sales agreement, since the total proceeds to PMC were less than the Assigned
Value for this hotel, the shortfall amount of approximately $683,000 became our
obligation evidenced by a promissory note bearing interest at the rate of 8.5%
on an annual basis, due May 1, 2005. This obligation was reduced by the
application of security deposit funds, and the payment of a termination fee in
October 2004 as discussed below. Furthermore, the terms of this note under the
temporary sales agreement were superceded by the terms of the Third Amendment
(Proceeds Deficit Note), as discussed below.
Due to numerous economic and market-driven factors, we have had to fund, on
behalf of our subsidiary, a significant portion of the annual lease obligation
to PMC, as the aggregate operating cash flow from the hotels leased from PMC has
been insufficient to meet the lease obligation. In 2004, we entered into
discussions with PMC, on behalf of our subsidiary, with the objective to modify
the original leases, and to allow for the sale of the hotels to third parties.
Our subsidiary entered into a series of temporary letter agreements with PMC
that provided for a reduced monthly rent payment from March through July 2004,
however the base rent continued to accrue at the contractual rate as set forth
in the lease agreements. This accrued rent was paid later in 2004 using our
security deposit held with PMC, in accordance with a temporary letter agreement
and the Third Amendment.
On October 4, 2004, we entered into a third amendment with PMC, which became
effective as of October 1, 2004. The third amendment provides the following:
- The lease rate is fixed at 8.5% of the original Assigned Values of
the leased hotels as long as we are not in default of the agreement
(including sale of hotels in accordance with schedule below).
- We are required to cause all hotels under the lease to be sold in
accordance with the following schedule:
- A minimum of five (5) hotels on or before October 1, 2005;
- A minimum of ten (10) hotels (cumulative) on or before October
1, 2006;
- A minimum of fifteen (15) hotels (cumulative) on or before
October 1, 2007; and
- A minimum of twenty (20) hotels (cumulative) on or before
October 1, 2008.
- 6 -
As of date of this report, we have facilitated the sale of two PMC hotels,
including one hotel sold during the first quarter of 2005, which count towards
the minimum of five hotels required to be sold by October 1, 2005. Additionally,
there are three more PMC hotels under executed sale contracts, and another two
with pending sales contracts. If the required hotel sales schedule is not met,
the lease rate reverts back to the original contractual rate on a prospective
basis.
Upon the sale of each hotel, PMC is entitled to receive (i) net sales proceeds
upon closing, defined as total gross sales price less normal closing costs and
brokerage fees, and (ii) an "Arlington Fee," equal to 25.3% of the gross room
revenues for such hotel for the preceding 12-month period, due within 45 days of
the hotel sale closing. If the net sale proceeds are less than the original
Assigned Value of the hotel, we must provide a note payable to PMC in the amount
of this difference ("Proceeds Deficit Note"). The payment of the Arlington Fee
to PMC will reduce the outstanding balance of the Proceeds Deficit Note, if any.
If the net sale proceeds is greater than the original Assigned Value, including
the Arlington Fee, the excess will be (i) first, applied to any outstanding
Proceeds Deficit Note balance from prior hotel sales, (ii) second, applied to
reduce the original Assigned Values of the remaining hotels at PMC's discretion,
and (iii) third, kept by PMC if it is from the sale of the last hotel, or if the
total original Assigned Value has been reduced to zero. As of December 31, 2004,
the balance of the Proceeds Deficit Note, as a result of the sale of two PMC
hotels in 2004, one of which qualifies toward the October 1, 2005 minimum of
five hotels sold referred to above, was approximately $850,000.
Interest on the Proceeds Deficit Note is payable monthly at a fixed rate of 8.5%
per annum until principal payments begin, at which time interest will be payable
at the greater of the U.S. Treasury rate plus 4.5%, or 8.5%. Principal payments
will commence on the earlier of October 1, 2008 or the closing date of the sale
of the last hotel, with aggregate annual principal payments in an amount equal
to one-third of the principal balance of the Proceeds Deficit Note as of the
principal payment commencement date. If at any time during the term of the
Proceeds Deficit Loan Agreement, the principal balance of the Proceeds Deficit
Note exceeds $4.0 million, we must immediately make a principal payment to PMC
in an amount necessary to reduce the principal balance of the Proceeds Deficit
Note to $4.0 million.
HOTEL PROPERTIES
At December 31, 2004, we owned or managed 50 hotels in 15 states, primarily
concentrated in the Midwestern United States and had one additional hotel under
construction in Michigan.
The following is a list of hotel properties under the Company's management at
December 31, 2004, by state:
Date
State Hotel (1) Rooms Operations Began
- -------- --------- ----- ----------------
Georgia AmeriHost Inn Eagles Landing, Stockbridge (3), (4) 60 08/08/95
Illinois AmeriHost Inn Macomb (4) 60 05/19/95
AmeriHost Inn Players Riverboat Hotel, Metropolis 120 02/25/94
AmeriHost Inn Rochelle (4) 61 03/07/97
AmeriHost Inn Sycamore (4) 58 05/31/96
Days Inn Niles 150 01/01/90
-----
449
-----
Indiana AmeriHost Inn & Suites Decatur (2) 60 08/30/98
AmeriHost Inn Hammond (2) 86 03/29/96
AmeriHost Inn Plainfield (4) 60 09/01/92
-----
206
-----
Iowa AmeriHost Inn & Suites Boone (2) 60 08/21/98
AmeriHost Inn & Suites Mt. Pleasant (4) 63 07/02/97
AmeriHost Inn & Suites Pella 60 11/02/01
AmeriHost Inn Storm Lake (4) 61 08/13/97
-----
244
-----
Kentucky AmeriHost Inn Murray 60 11/01/96
-----
- 7 -
Date
State Hotel (1) Rooms Operations Began
- -------- --------- ------ ----------------
Michigan AmeriHost Inn Coopersville (4) 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 (4) 60 07/05/95
AmeriHost Inn Grand Rapids South (4) 61 06/11/97
AmeriHost Inn & Suites Monroe (4) 63 09/19/97
------
383
------
Mississippi AmeriHost Inn Batesville 60 04/26/96
AmeriHost Inn Tupelo (4) 61 07/25/97
------
121
------
Missouri AmeriHost Inn Fulton (3) 62 01/21/99
AmeriHost Inn Warrenton 63 11/07/97
------
125
------
Ohio AmeriHost Inn Ashland (4) 62 08/09/96
AmeriHost Inn Athens (2) 100 11/04/89
AmeriHost Inn Cambridge 71 02/06/98
AmeriHost Inn Canal Winchester (2) 60 04/17/98
AmeriHost Inn East Liverpool (2) 66 10/20/00
AmeriHost Inn Jeffersonville South 60 10/14/98
AmeriHost Inn Jeffersonville North 61 07/20/96
AmeriHost Inn Lancaster 60 09/04/92
AmeriHost Inn Logan 60 04/16/93
AmeriHost Inn Marysville (4) 78 06/01/90
AmeriHost Inn Maumee (2) 85 07/24/02
AmeriHost Inn Oxford (2) 61 12/04/00
AmeriHost Inn Rickenbacker (2) 96 04/18/03
AmeriHost Inn St Mary's 61 11/25/97
AmeriHost Inn Wilmington 61 02/21/97
AmeriHost Inn Wooster East (4) 57 01/18/94
AmeriHost Inn Wooster North (4) 60 10/20/95
Ramada Inn Dayton (3) 215 01/20/92
------
1,374
Oklahoma AmeriHost Inn & Suites Enid (2) (3) 60 06/11/98
------
Pennsylvania Days Inn Altoona (3) 139 08/31/92
------
Tennessee AmeriHost Inn Jackson (4) 60 04/01/98
------
Texas AmeriHost Inn McKinney (4) 61 01/07/97
------
West Virginia AmeriHost Inn Parkersburg North 78 06/26/95
AmeriHost Inn Weirton (2) 79
------
157
Wisconsin AmeriHost Inn & Suites Lomira 60 06/08/01
AmeriHost Inn Mosinee (4) 53 04/30/93
------
113
------
TOTAL ROOMS 3,612
TOTAL PROPERTIES 50
(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 were sold or disposed of subsequent to December
31, 2004.
(4) Indicates properties that are leased from PMC.
- 8 -
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, averaging 60 to 65 rooms, interior corridors and
an indoor pool area with the newer hotels being built with our larger prototype
expected to average 80 to 100 rooms. The AmeriHost Inn hotel's amenities and
services include a whirlpool in the indoor pool area, exercise room, meeting
room and extensive exterior lighting for added security. The standard AmeriHost
Inn guest room features an electronic card-key lock, in-room safe, in-room
coffee maker, telephone with data port for personal computer, a work area and a
25" color television with premium cable service or movies on demand. In
addition, each AmeriHost Inn hotel typically contains 10% to 20% 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 hotel development.
Over the past two years, we changed our focus and primarily seek to develop
hotels in 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 47 AmeriHost Inn hotels at December 31, 2004, 28 were either wholly owned
by us or we participate in as joint venture partner while our wholly owned
subsidiary leased the remaining 19 hotels from PMC pursuant to long-term lease
agreements that were recently modified to provide for their sale over the next
four years (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 or Ramada Inn. Cendant
also owns these brands. As of December 31, 2004, we had an ownership interest in
two non-AmeriHost Inn hotels and leased one non-AmeriHost hotel through a joint
venture. Two of the non-AmeriHost Inn hotels are full-service hotels that
contain food and beverage facilities. These hotels have generally under
performed our AmeriHost Inn hotels.
As part of our strategy to focus on development and ownership of AmeriHost Inn
hotels, we intend to dispose of all our non-AmeriHost Inn hotels. In February
2005, the lease was terminated on the Ramada Inn Dayton hotel and one of the
owned non-AmeriHost Inn hotels was sold. The last non-AmeriHost Inn is currently
under contract for sale which is expected to be consummated within the next six
months. The net proceeds from the sales of these hotels, will be used for
working capital purposes or the development of additional AmeriHost Inn hotels.
- 9 -
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 had been open as of December 31, 2004 and
operating for at least 13 full months during the periods presented.
Three Months Ended Twelve Months Ended
December 31 December 31
------------------ -------------------
Occupancy - 2004 51.5% 56.4%
Occupancy - 2003 52.1% 56.0%
Increase (decrease) (1.2)% 0.7%
Average Daily Rate - 2004 $57.70 $57.72
Average Daily Rate - 2003 $56.86 $57.11
Increase (decrease) 1.5% 1.1%
Revenue per Available Room - 2004 $29.71 $32.56
Revenue per Available Room - 2003 $29.65 $32.00
Increase (decrease) 0.2% 1.8%
The table below shows our same room average occupancy, ADR and RevPAR in 2004
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, 2004.
Average Average Revenue Per
Occupancy Daily Rate Available Room
--------- ---------- --------------
AmeriHost Inn (46 hotels) 57.2% $58.09 $33.24
Other Brand (3 hotels) 42.2% $52.98 $22.36
All hotels (49) 55.1% $57.53 $31.67
The table below shows our AmeriHost Inn hotel averages for occupancy percentage,
average daily rate ("ADR") and RevPAR in 2004, 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, 2004.
Average Average Revenue Per
Occupancy Daily Rate Available Room
--------- ---------- ---------------
Ohio (17 hotels) 54.4% $62.60 $34.05
Illinois, Iowa and Wisconsin (10 hotels) 60.5% $53.84 $32.57
Michigan (6 hotels) 48.2% $57.19 $27.58
Georgia, Mississippi and West Virginia (4 hotels) 63.2% $58.75 $37.15
Indiana and Kentucky (4 hotels) 60.5% $57.27 $34.66
Texas (1 hotel) 59.8% $52.19 $31.24
Other hotels (4 hotels located in Tennessee,
Missouri and Oklahoma) 64.6% $53.90 $34.84
---- ------ ------
All AmeriHost Inn hotels (46 hotels) 57.2% $58.09 $33.24
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 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
- 10 -
decline slowed in 2002 versus 2001, the industry remained in a
stagnant-to-downward trend during most of 2003 and has improved in 2004, which
improvement is expected to continue in 2005. The following statistics, as
reported by Smith Travel Research, a leading industry analyst, represent the
results for the mid-scale without food & beverage segment for the East North
Central region of the U.S. (defined as Illinois, Indiana, Michigan, Ohio, and
Wisconsin), which is where the majority of our hotels are located:
2001 2002 2003 2004
---- ---- ---- ----
Occupancy % 58.2% 58.0% 57.7% 58.7%
Percentage change in -5.6% -0.3% -0.6% +1.8%
occupancy from prior year
Percentage change in average +1.4% -0.9% +0.3% +2.0%
daily rate from prior year
Percentage change in RevPAR -4.2% -1.2% -0.3% +3.8%
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
1.2% decrease in the East North Central region of the limited-service sector
according to Smith Travel Research. In 2003, RevPAR decreased 0.3% for the East
North Central region of the mid-scale without food and beverage segment,
according to Smith Travel Research. Same room RevPAR for our AmeriHost Inn
hotels decreased 0.3% in 2003, consistent with the results reported by Smith
Travel Research. Same room RevPAR for our AmeriHost Inn hotels increased 1.8% in
2004, compared to a 3.8% increase reported for the East North Central region of
the mid-scale without food and beverage segment. While the RevPAR results for
our AmeriHost Inn hotels improved during 2004 compared to the prior year, they
did not increase at the same rate as the East North Central industry segment.
The lodging industry's performance, and the related travel patterns of both
business and leisure travelers, generally follows the trends of the overall U.S.
economy, with the lodging industry typically lagging six to nine months behind
the U.S. economy. Both the U.S. economy and the lodging industry began to
decline in 2001. As the U.S. economy began to show signs of improvement in 2003,
the lodging industry has followed in the latter part of 2003 and continued to
improve in 2004. However, the economic recovery in the Midwestern United States,
which is primarily where our hotels are located, has lagged behind the general
U.S. economic recovery. In fact, the lodging industry in certain Midwestern
states has not shown any significant signs of recovery. While our hotel revenues
have increased in 2004, they have not increased to the same extent as the
overall U.S. lodging industry, as reported by industry analysts. Nevertheless,
based on the economic forecasts such as the GDP growth forecast, our industry
outlook for the remainder of 2005 is optimistic with respect to hotel revenue
growth.
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 2005, an
improvement in 2005 in lodging demand is predicted by industry analysts. Such
improvement, and its continuation beyond 2005 will be dependent upon several
factors including: the strength of the economy; the correlation of hotel demand
to new hotel supply; and the impact of global or domestic events on travel and
the hotel industry.
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. 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.
- 11 -
DEVELOPMENT AND CONSTRUCTION
We pursue new hotel development business utilizing an interdisciplinary staff
composed of architects, interior designers, purchasing consultants, 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.
Our newer hotel development prototype meant for larger markets includes
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 prototype in
most of our new developments in 2005, subject to Cendant's approval as
franchisor on all new development projects.
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. Part of our development growth objectives include the pursuit of
such third-party income streams. Hotel development activity is summarized as
follows:
2004 2003 2002
---------------------------- ---------------------------- ----------------------------
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 - 1 3 2 3
Starts 1 - 1 - 1 2
Completions 1 - 1 3 2 2
--- --- --- --- --- ---
Under construction at
end of year 1 - 1 - 1 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 2004, we completed construction on one AmeriHost Inn hotel, which was
started in 2003 and began construction on one additional AmeriHost Inn hotel. We
also formed another joint venture in 2004 for the construction of an AmeriHost
Inn hotel. The financing for this project has been committed by the equity
partners and mortgage debt lender, however this project has been delayed due
primarily to weather conditions. We expect to close on the financing and
- 12 -
begin construction on this project in the second quarter of 2005. The one
AmeriHost Inn hotel currently under construction is scheduled to open in the
second quarter of 2005.
The pace of new developments slowed over the past few years, primarily as a
result of the economic downturn, especially as it related to the lodging
industry, as well as the lack of capital available to us for the development of
new hotels. However, we currently have five land sites under contract to
purchase for potential hotel developments located in California and North
Carolina. Several additional potential AmeriHost Inn sites have been identified
in California, 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 U. S. has been identified as a region for possible expansion due to
its positive population and employment growth trends, availability of reasonably
priced land sites, and supply of existing older hotels which are deemed to be
competitively "at risk" to the introduction of more modern and physically
attractive hotel facilities. We are also assessing a strategy involving the
acquisition of existing hotels with the conversion to the AmeriHost Inn brand.
An increase in the pace of our hotel development activity is essential to our
strategic business plan. We are currently in discussions with potential joint
venture partners, and have engaged a financing specialist, on a fee for success
basis, to assist us in identifying and securing both equity and mortgage debt
financing for all of the pending hotel development projects. In addition, in an
effort to accelerate our hotel development program, we have also entered into a
non-binding letter of intent with a lender to provide $3.0 million under a term
note, with the majority to be used for land acquisition prior to the formation
and funding of joint ventures, however there can be no assurance that this
facility will be consummated, or on terms deemed favorable to us.
In 2005, we will continue our 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
Commercial Trust, a real estate investment trust. The AmeriHost Inn hotel under
construction at December 31, 2004, is being financed by a joint venture
ownership entity through a combination of mortgage 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 Cendant
franchisees will also assist us in reaching our financial objectives.
Joint Venture Hotel Development
As of December 31, 2004, we had 14 hotel joint ventures (including one vacant
parcel holding and one hotel under construction), including multiple projects
with certain joint venture partners, and additional potential 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 serving 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 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
- 13 -
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.
HOTEL OPERATIONS
Our operating goal is to provide 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.
Our Senior Vice President of Operations is responsible for implementing
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 our 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. Our
corporate level Revenue Manager position 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 maintains 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
- 14 -
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 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 835 hotel personnel, the costs of certain payroll and
related expenses 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, 2004 we managed,
co-managed, or provided accounting services for all of the hotels in which we
had an ownership interest, including fourteen joint ventures.
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 our 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 835 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 and in the
markets in which we operate. 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 provide.
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, 2004, 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., and 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
- 15 -
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 has 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 all 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 2024. Two of our franchise agreements for non-AmeriHost Inn hotels were
terminated subsequent to December 31, 2004 in connection with their sale or
disposition (see Item 7, Management's Discussion and Analysis of Financial
Condition and Results of Operations under the heading "Subsequent Events"). The
remaining non-AmeriHost Inn franchise agreement expires in 2015.
EMPLOYEES
As of December 31, 2004, the Company and its subsidiaries had 889 full and
part-time employees:
Hotel Management:
Operations 25
Accounting and finance 8
Property general managers 50
Hotel Development and Construction: 10
Hotel Operations: 672
Corporate:
General and administrative 6
Executive officers 3
Employee Leasing:
General and administrative 2
Operations 113
---
889
===
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.
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, 2004, 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, 2005. See also, Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations, under the heading, "Government Regulation."
ITEM 2. PROPERTIES.
- 16 -
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 13,000 square feet. Approximately 73% 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 continuously monitor alternatives with respect to
ownership and operation of this office building, including a sale of the
building.
At December 31, 2004, we had a 100% or controlling ownership or leasehold
interest in 41 operating hotels located in 15 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, 2004. These
assets were substantially pledged to secure related long-term mortgage debt and
secondarily, our Corporate line of credit. See Item 1 - Business and Notes 6 and
7 to the Consolidated Financial Statements contained 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.
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 December 22, 2004. Two matters were
voted with the following results:
Matter 1: Election of Directors
Director For Authority Withheld
------------------ --------- ------------------
Kenneth M. Fell 3,786,710 62,477
Andrew E. Shapiro 3,786,810 62,377
Salomon J. Dayan 3,786,610 62,577
Thomas J. Romano 3,786,810 62,377
Gerald T. LaFlamme 3,786,810 62,377
Steven J. Belmonte 3,786,710 62,477
Matter 2: Ratify Appointment of Grant Thornton LLP as Independent Auditors
For Against Abstain
--------- ------- -------
Total Shares Voted 3,787,910 59,377 1,900
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
During 2004, our Common Stock was included for quotation on the NASDAQ National
Market under the symbol HOST. Effective January 28, 2005, our Common Stock began
trading on the NASDAQ Small Cap Market, also under the symbol HOST. As of March
29, 2005, there were 515 holders of record of our Common Stock. The following
table shows the range of reported high and low closing prices per share.
High($) Low($)
------ ------
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
- 17 -
FISCAL 2004
First quarter 3.98 2.55
Second quarter 3.66 3.01
Third quarter 3.45 2.61
Fourth quarter 3.40 2.50
FISCAL 2005
First quarter (through March 29, 2005) 3.12 2.58
- 18 -
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 2005. However, from time to time,
we may utilize cash to purchase our common stock. Currently, the Board of
Directors has authorized us to buy back, at any time and without notice, up to
1,000,000 shares of our common stock under certain conditions. To date, under
this authorization we have repurchased 36,800 shares. In addition to the shares
repurchased under this authorization, we executed a reverse-forward stock split
in 2003 whereby approximately 33,000 shares held by shareholders owning less
than 100 shares each were redeemed and converted into a right to receive cash.
No shares of common stock were repurchased during the fourth quarter of 2004.
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 2004.
The following table sets forth information, as of December 31, 2004, with
respect to compensation plans under which equity securities of the Company are
authorized for issuance, aggregated by (i) all compensation plans previously
approved by the shareholders, and (ii) all compensation plans not previously
approved by the shareholders:
Number of shares
remaining available
(a) for future issuance
Number of shares Weighted average under equity
to be issued upon exercise price of compensation plans
exercise of outstanding (excluding shares
outstanding options, options, warrants reflected in
warrants and rights and rights column (a))
-------------------- ----------------- -------------------
Equity compensation plans
approved by shareholders 308,500 $ 4.43 663,858
Equity compensation plans not
approved by shareholders(1) 957,458 $ 4.20 -
--------- -------- -------
Total 1,265,958 $ 4.25 663,858
========= ======== =======
(1) Includes issuances made under our 1996 Nonemployee Director Stock
Option Plan and 1996 Omnibus Incentive Stock Plan. Both of these Plans
were terminated in 2003.
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 registered public accounting firms, whose reports on such
consolidated financial statements for each year of the three-year period ended
December 31, 2004, are 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 Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
(in thousands, except per share data)
(this presentation not covered by independent registered public accounting
firms' reports)
Fiscal Year Ended December 31,
-----------------------------------------------------------
2004 2003 2002 2001 2000
---------- --------- --------- ---------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue $ 63,442 $ 70,916 $ 66,643 $ 68,124 $ 76,151
Operating costs and expenses 52,957 56,931 51,598 51,187 58,736
Depreciation and amortization expense 2,334 3,281 4,028 3,899 4,542
Leasehold rents - hotels 4,088 4,823 4,908 5,833 6,525
Corporate general and administrative 3,498 2,420 2,199 1,908 1,695
Impairment provision 1,292 5,070 542 - -
Operating income (loss) (727) (1,609) 3,368 5,297 4,653
Interest Expense, Net 4,567 4,087 4,273 3,790 4,819
Gain on sale of fixed assets 283 400 727 1,286 6,663
Net Income (Loss) Before Discontinued
operations (3,454) (3,710) (376) 971 4,010
Discontinued operations (2,183) (1,909) (1,334) (215) -
---------- --------- --------- ---------- ---------
Net income (loss) $ (5,637) $ (5,619) $ (1,710) $ 755 $ 4,010
========== ========= ========= ========== =========
Net income (loss) per share - basic:
From continuing operations $ (0.69) $ (0.74) $ (0.08) $ 0.19 $ 0.81
From discontinued operations (0.43) (0.38) (0.26) (0.04) -
---------- --------- --------- ---------- ---------
$ (1.12) $ (1.12) $ (0.34) $ 0.15 $ 0.81
========== ========= ========= ========== =========
Net income (loss) per share-diluted:
From continuing operations $ (0.69) $ (0.74) $ (0.08) $ 0.17 $ 0.74
From discontinued operations (0.43) (0.38) (0.26) (0.04) -
---------- --------- --------- ---------- ---------
$ (1.12) $ (1.12) $ (0.34) $ 0.13 $ 0.74
========== ========= ========= ========== =========
Weighted average shares outstanding:
Basic 5,014 5,012 4,958 4,975 4,976
========== ========= ========= ========== =========
Diluted 5,014 5,012 4,958 5,182 5,272
========== ========= ========= ========== =========
BALANCE SHEET DATA:
Total assets $ 103,362 $ 99,713 $ 119,934 $ 114,888 $ 98,143
Long-term debt, including current portion 38,818 27,708 76,242 76,198 58,604
Liabilities of assets held for sale 43,508 38,126 - - -
Working capital (deficiency) (6,392) (2,500) (8,995) (4,575) (4,172)
Shareholders' equity 6,507 11,787 17,370 19,067 18,266
Deferred income 6,126 11,362 10,867 10,715 12,196
OTHER DATA:
Cash provided by (used in) operating
activities 17,853 20,366 14,330 15,507 1,218
Cash provided by (used in) investing
activities 4,197 (6,013) (17,073) (27,105) 2,728
Cash (used in) provided by financing
activities (23,115) (14,699) 1,964 14,617 (5,983)
Capital expenditures (992) (7,088) (18,583) (25,400) (10,434)
AMERIHOST INN HOTEL OPERATING STATISTICS:
Hotels operated/managed at December 31 47 57 62 66 72
Hotel rooms operated/managed at December 31 3,108 3,735 3,995 4,229 4,590
Average occupancy 57.2% 55.7% 57.4% 56.1% 59.1%
Average daily rate $ 58.09 $ 57.36 $ 57.48 $ 58.53 $ 56.75
- 20 -
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 "intend," "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
rising fuel prices and 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.
- 21 -
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
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 and sales in 2004 is summarized as follows:
Hotels at Hotels Hotels Consolidation of Hotels at
12/31/03 Sold/Disposed Opened/Acquired Joint Ventures (2) 12/31/04
------------- -------------- --------------- ------------------ -------------
Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
------ ----- ------ ------ ------ ----- ------ ----- ------ -----
Consolidated (1):
AmeriHost Inn hotel 49 3,161 (11) (706) - - 2 120 40 2,57
Other brands 5 692 (2) (188) - - - - 3 504
-- ----- --- ------ -- -- -- --- -- ----
54 3,853 (13) (894) - - 2 120 43 3,07
-- ----- --- ------ -- -- -- --- -- ----
Unconsolidated:
AmeriHost Inn hotels 8 574 - - 1 79 (2) (120) 7 53
Other brands 2 228 (2) (228) - - - - - -
-- ----- --- ------ -- -- -- --- -- ----
10 802 (2) (228) 1 79 (2) (120) 7 53
-- ----- --- ------ -- -- -- --- -- ----
Totals:
AmeriHost Inn hotels 57 3,735 (11) (706) 1 79 - - 47 310
Other brands 7 920 (4) (416) - - - - 3 50
-- ----- --- ------ -- -- -- --- -- ----
64 4,655 (15) (1,122) 1 79 - - 50 3,61
== ===== === ====== == == == === == ====
(1) Consolidated hotels are those in which we have a 100% or controlling
ownership interest or a leasehold interest.
(2) Includes two unconsolidated AmeriHost Inn hotels that became consolidated
hotels in 2004 in accordance with FIN 46.
Our AmeriHost Inn hotels operate under franchise agreements with Cendant. Our
other brand hotels are those hotels operated under other national franchise
affiliations, Days Inn, and Ramada Inn. 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, syndication, construction and renovation activities.
- 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.
Sources of Revenue (continued)
We also generate revenue from additional secondary sources:
- Management and employee leasing revenues consisting of fees from
third parties and joint ventures for hotel management and employee
leasing services.
- Rental revenue from the third-party tenants in our office building.
- 22 -
Operating Expenses
Operating expenses consist of the following:
- 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.
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 have engaged a
financing specialist, on a fee for success basis, to assist us in identifying
and securing both equity and mortgage debt financing for our pending hotel
development projects.
In an effort to accelerate our hotel development program and provide working
capital, we have entered into non-binding letters of intent with two separate
lenders to provide us with $2.75 - $3.0 million. If one of these financing
transactions is consummated, the other financing would not be pursued. We intend
to utilize a portion of the proceeds for working capital, and the majority for
land acquisition prior to the formation and funding of joint ventures, or other
uses to assist in the acceleration of our hotel development program. We believe
that the ability to purchase desirable land sites on a timely basis would create
additional investment opportunities for joint venture developments. We may
terminate either non-binding commitment at any time prior to a closing, however
would be responsible for due diligence and legal costs incurred by us or the
lender, which is expected to be less than $25,000.
There can be no assurance that we will obtain the financing evidenced by these
non-binding term sheets on terms and conditions favorable to us, if at all. If
we do not obtain such financing or similar financing, our development activities
may not be able to continue as expected.
-23-
We paid off approximately $18.5 million in mortgage debt in 2004, in connection
with the sale of consolidated hotels. We expect to decrease our mortgage debt
further as we sell additional hotels. Total debt service for 2005, excluding
mortgages which mature in 2005, is approximately $4.3 million for all of our
consolidated hotels. Total debt service for our unconsolidated joint ventures in
2005, excluding mortgages which mature in 2005, is approximately $1.7 million.
However, if certain anticipated hotel sales occur, these obligations would
decrease as the related mortgage debt would be paid off with the proceeds from
the sales.
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, 11 hotels, leaving 19 hotels leased from PMC as of December
31, 2004. One additional PMC leased hotel was sold to a third party in March
2005. The leases expire in 2013 and 2014, including an automatic five-year
extension by either our subsidiary or PMC. However, effective October 1, 2004,
we modified the lease with PMC (the "Third Amendment"), providing for a 19%
reduction in the lease payments and provides for the sale of all hotels over the
four years ending September 30, 2008. Our subsidiary's current annual lease
payment amount for the remaining PMC leased hotels is approximately $3.7
million. We have guaranteed our subsidiary's obligation under the leases.
Pursuant to the Third Amendment, we have also guaranteed certain values to PMC
upon the sale of each hotel, with any shortfall becoming our corporate
obligation. This shortfall obligation is being financed by PMC, with interest
only due monthly at the annual fixed rate of 8.5%. Principal amortization on
this obligation begins the earlier of the date the last PMC leased hotel is
sold, or October 1, 2008, with one-third of the principal due each year for the
following three years. However, if the obligation balance exceeds $4.0 million
at any time, we must immediately make a principal payment to reduce the balance
to $4.0 million or less. The Deficit Proceeds Note had an outstanding balance of
approximately $850,000 as of December 31, 2004.
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 $4.0 million, subject to reduced
availability as follows: $3.5 million on May 1, 2005, $3.0 million on July 31,
2005 and $2.5 million on October 31, 2005.
We have recently engaged an investment banker/financing specialist, on a fee for
success basis, to assist us in identifying and analyzing alternatives to our
existing operating line of credit, with the objective of obtaining more
favorable terms, including increased availability and a longer duration.
However, there can be no assurances that any such alternative financing will be
consummated on terms deemed favorable to us, if at all.
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 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 and continued to improve in 2004.
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 2005 is optimistic.
The downturn in the lodging industry negatively impacted the values of hotel
assets. We believe that hotel values stabilized in 2004. Fluctuations in values
could have a material impact on net sales proceeds as we intend to complete our
formal plan to sell a significant number of hotels in 2005, as well as the
continued sale of hotels as part of our strategic business plan and sales
required under the PMC lease.
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.
-24-
The table below shows our same room AmeriHost Inn hotel RevPAR results versus
the East North Central region of the mid-scale without food and beverage segment
of the limited service hotel industry over the past five years. The results from
our AmeriHost Inn hotels have generally been consistent with overall lodging
industry performance. Our AmeriHost Inn hotels are concentrated primarily in the
Midwestern United States where the trends have lagged 6-12 months behind the
overall United States results.
RevPAR Growth
-------------------------------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
AmeriHost Inn Hotels (1) 5.9% (2.1%) 3.7% (0.3%) 1.8%
Limited service segment,
without food and
beverage (2) 3.1% (4.2%) (1.2%) (0.3%) 3.8%
(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) Results for the East North Central region, according to Smith Travel
Research, a leading industry analyst.
A related revenue measure for our hotels is the RevPAR penetration index. The
RevPAR penetration index reflects each property's RevPAR in relation to the
RevPAR for that property's competitive set. We use the measure as an indicator
of a property's market share. For example, a RevPAR penetration index of 100
would indicate that a hotel's RevPAR is, on average, the same as its
competitors. A RevPAR penetration index exceeding 100 would indicate that a
hotel maintains a RevPAR premium in relation to its competitive set, while a
RevPAR penetration index below 100 would be an indicator that a hotel is under
performing its competitive set. One critical component in this calculation is
the determination of a hotel's competitive set. Factors that we consider include
geographic proximity, as well as the level of service provided at the property.
Our methodology for determining a hotel's competitive set, however, may differ
for those used by other owners and/or managers. From a market penetration
standpoint, in the aggregate, our AmeriHost Inn hotels were at an index of 101.0
as of December 31, 2004. We believe that the following factors may have a
negative impact on our AmeriHost Inn RevPar penetration index:
- 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 and RevPAR
penetration, the cash flow from the operations of many of our hotels in 2003 and
2004 was not sufficient to pay their related mortgage debt service, lease
obligations, and ongoing capital expenditures. Our operating margins declined
significantly in 2003 as many expenses increased substantially, including
employee wages and benefits, insurance, maintenance, utilities, and property
taxes. Many of these expenses continued to increase in 2004, however at a lower
rate. In fact, we have been successful in decreasing certain costs in 2004
compared to 2003, such as general insurance expense, which partially offsets the
increases in other expense areas including wages and benefits, sales and
marketing, and utility costs. However, we anticipate that the cash flow from the
operation of many of our hotels will still not be sufficient to pay their
respective mortgage debt service, lease obligations, and ongoing capital
expenditures. We have a significant amount of debt and obligations under
long-term leases, such as the leases with PMC, requiring us to dedicate a
substantial portion of our cash flow from our overall operations, including our
business activities other than hotel operations, to make these required
payments.
While we believe the combination of improved demand for hotel rooms and our cost
control initiatives create the possibility of improvements in our hotel
operations, 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.
-25-
LaSalle Bank NA, the lender for our corporate line-of-credit has decreased the
availability under this facility over the past two years. In March 2005, we
renewed this facility with LaSalle Bank through April 30, 2006 at an initial
maximum availability of $4.0 million. The terms of the renewal require that the
maximum availability under the facility be reduced to $3.5 million on May 1,
2005, reducing further to $3.0 million on July 31, 2005, and to $2.5 million on
October 31, 2005. The line-of-credit agreement also provides LaSalle Bank with
the right to reduce the maximum availability further, based on future hotel
sales, or as deemed necessary. The facility bears interest at the rate of 10%
per annum and has no prepayment penalty. We have retained an investment banking
firm on a success fee basis to assist in the replacement of this line of credit
on terms more favorable to us. However, there can be no assurance that we will
be successful with the replacement of, and at terms more favorable to us. As of
the date of this report, $4.0 million is outstanding on this line of credit.
However, we have available cash reserves of approximately $1.0 million which
could be used to reduce the amount outstanding.
Mortgage financing is a critical component of the hotel development process and
we are continually seeking financing sources. Periodically, we have engaged
hospitality financing specialists to assist us in obtaining debt or equity
financing on new hotel projects. The contracts typically provide for fees based
on our success in obtaining any such new debt or equity capital on terms
acceptable to the Company. 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 2005 and the next several years include the
following:
- Complete the formal plan to sell a significant number of hotels in
our existing hotel portfolio, which hotels in many instances have
operated with cash flow that is insufficient to pay their debt
service and ongoing capital expenditures during the past year;
- Facilitate the sale of the PMC hotels at the pace required under the
Third Amendment;
- Expand and increase the rate of our hotel development activities to
be developing and/or acquiring and converting hotels at a pace of
approximately 8 to 10 hotels annually in the short term, growing to
a pace of 10 - 15 hotels annually in the longer term. We intend for
this development to primarily be the new construction of our larger
AmeriHost Inn prototype, 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;
- Obtain growth capital to finance both the equity and debt required
for the anticipated development projects;
- 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; and
- 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.
SUMMARY OF YEAR-END RESULTS
Total revenues decreased 10.5% during 2004 compared to 2003, due primarily to
the decrease in total revenues from the operations of Consolidated AmeriHost Inn
hotels which decreased from $39.9 million in 2003 to $33.9 million during 2004,
due primarily to the reduction in the number of Consolidated AmeriHost Inn
hotels operated by the Company as a result of the sale of eight hotels in 2003
and eleven hotels in 2004. Revenues from the sale of Consolidated AmeriHost Inn
hotels decreased 5.7% from $22.8 million in 2003 to $21.5 million in 2004, as
the aggregate sale price of the number hotels sold in 2004 was less than the
aggregate sale price of the number of hotels sold in 2003. Revenues from the
development and construction segment also decreased during 2004, as we
recognized less revenue on the one AmeriHost Inn hotel we opened in 2004 for a
joint venture and one AmeriHost Inn hotel we began construction on in 2004 for
another joint venture, versus the one hotel we built for a joint venture in
2003. Incentive and royalty sharing revenues increased 39.2% to approximately
$1.4 million in 2004. Corporate
-26-
general and administrative expenses increased approximately $1.1 million during
2004 due primarily to strategic advisory and other professional fees, wages and
benefits, non-cash director compensation and a reserve related to the sale of
the Company's interest in a joint venture. Of this $1.1 million, approximately
$889,000 of these general and administrative expenses are related to specific
projects which are not expected to be of a recurring nature, including but not
limited to, the PMC lease modification. We recorded a net loss of $5.6 million
for 2004, compared to net loss of $5.6 million in 2003. These results include
non-cash hotel impairment provisions recorded in 2004 and 2003, and discontinued
operations related to non-AmeriHost Inn hotels which have been recorded in
connection with the implementation of the plan for hotel disposition as
discussed below.
The results for the years ended December 31, 2004, 2003, and 2002 are summarized
as follows:
Year Ended December 31,
(in thousands, except per share information)
--------------------------------------------
2004 2003 2002
-------- --------- --------
Net loss from continuing operations
before impairment $ (2,610) $ (652) $ (7)
Impairment provision, net of tax (844) (3,058) (369)
-------- --------- --------
Net loss from continuing operations (3,454) (3,710) (376)
Discontinued operations, net of tax (a) (2,183) (1,909) (1,334)
-------- --------- --------
Net loss $ (5,637) $ (5,619) $ (1,710)
======== ========= ========
Net loss per share - Diluted:
From continuing operations $ (0.69) $ (0.74) $ (0.08)
From discontinued operations (0.43) (0.38) $ (0.26)
-------- --------- --------
$ (1.12) $ (1.12) $ (0.34)
======== ========= ========
(a) Includes hotel impairment provision related to non-AmeriHost Inn hotels to
be sold of approximately $592,000, $546,000 and $0 net of tax, for the
years ended December 31, 2004, 2003, and 2002, respectively (see Notes 11
and 12 to Consolidated Financial Statements).
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America, or GAAP, requires management
to use judgment in the application of accounting policies, including making
estimates and assumptions. We base our estimates on historical experience and on
various other assumptions believed to be reasonable under the circumstances.
These judgments affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses 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
-27-
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 of these 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. We adopted FIN 46R beginning after October 1,
2004. This Interpretation requires that we present any variable interest
entities in which we have a majority variable interest on a consolidated basis
in our financial statements. As a result of the adoption of this interpretation,
we began consolidating two variable interest entities as of October 1, 2004. The
consolidation of these two joint ventures added approximately $3.2 million in
assets and $3.2 million in liabilities to our consolidated balance sheet. Prior
to their consolidation, we had investments in, and advances to, these joint
ventures of approximately $221,000, which was presented as such under the equity
method of accounting in the accompanying consolidated financial statements. We
expect to continue to present all of our 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 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,
2004.
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 of an
AmeriHost Inn Hotel is consummated, we record the hotel sale price as revenue
and the net cost basis of the hotel asset as expense, as part of our ongoing
operational activity. From time to time, PMC, a REIT that owns certain of our
leased hotels, has sold its hotels, however, we do not recognize any revenue in
connection with the sale of the PMC hotels. Pursuant to a modification of the
lease agreements, we will record a shortfall obligation or surplus upon the sale
of a PMC owned hotel. (See Item 1. Business, under the heading "Leased Hotel
Properties" for further discussion.)
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. Most subcontracts are
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
-28-
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 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
-29-
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. We have provided guarantees related to the mortgage debt of certain
joint ventures, some of which we share the responsibility of the guarantee on a
joint and several basis with our joint venture partners. The guarantees are
effective for the term of the respective mortgage loan and are being amortized
over this period on a straight-line basis. We record as an additional investment
in these joint ventures, and a liability for our share of these guarantees at
the time of issuance, based on its estimated fair value. The net book value of
these guarantees, and offsetting liabilities was approximately $37,000, as of
December 31, 2004.
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 were for an initial term of 15 years, and
provide for rent in the amount of 8.5% of the original sale price. The gains
from the sale of the hotels in 1998 and 1999 were deferred for financial
statement reporting purposes, due to the continuing involvement with the
long-term lease agreement, and through September 30, 2004 were being amortized
on a straight line basis into income as a reduction of leasehold rent expense
over the 15-year initial term. The Third Amendment to the PMC leases, which was
effective October 1, 2004, resulted in capital lease accounting for 17 hotels,
and approximately $5.2 million in unamortized deferred gain related to these
hotels was reclassified as a reduction in the basis of the capital lease assets
and was no longer amortized. The modification also provided for the sale of all
the PMC leased hotels to unrelated third parties over a four-year period. For
the hotels that remained classified as operating leases, the amortization
continued, however beginning October 1, 2004, the deferred gains are being
amortized on a straight-line basis over the anticipated four-year remaining term
of the lease, as modified. Upon the sale of a PMC leased hotel to an
unaffiliated third party, which is classified as an operating lease, the
remaining unamortized deferred income is recognized as gain on sale of fixed
assets in our consolidated financial statements.
Impairment of Long-Lived Assets
We periodically review the carrying value of certain long-lived assets in
relation to historical results, current business conditions and trends to
identify potential situations in which the carrying value of assets may not be
recoverable. If such reviews indicate that the carrying value of such assets may
not be recoverable, we would estimate the undiscounted sum of the expected cash
flows of such assets to determine if such sum is less than the carrying value of
such assets to ascertain if an impairment exists. If an impairment exists, we
would determine the fair value by using quoted market prices, if available for
such assets, or if quoted market prices are not available, we would discount the
expected future cash flows of such assets.
In July 2003, we implemented a plan to sell approximately 25 to 30 hotels over a
two year period. In connection with the implementation of the plan to sell
hotels, and in accordance with Statement of Financial Accounting Standard (SFAS)
No. 144, "Accounting for Long-Lived Assets," we have recorded $2.1 million and
$6.0 million in pre-tax, non-cash impairment charges during 2003 and 2004,
respectively, related to 23 of the hotels targeted for sale. Approximately
$986,000 and $909,000 of the non-cash impairment charges recorded in 2004 and
2003, respectively, relates to 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, 2004. In
accordance with SFAS No. 144, we have ceased depreciating the hotel assets that
have 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
-30-
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.
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". During 2004, certain hotels which had not sold, were being
marketed for sale for more than one year. However, market conditions and
contemplated sale terms have changed for these hotels, including asking price
adjustments in certain cases, and we continue to actively market these hotels
for sale, with the expectation that these properties will be sold within the
next twelve months. Therefore, we anticipate that these hotels will continue to
be classified as "held for sale," until sold.
HOTEL DISPOSITION PLAN
In 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 these and other hotel properties is made
by our senior management team and approved by a majority of the board of
directors or a committee thereof. We sold 15 hotels in 2004 and 11 hotels
(including six hotels as part of this disposition plan) in 2003. The financial
impact of these sales 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 19 $ 12,189 $ 30,415 $ 3,567
Other brand hotels 4 1,077 4,543 -
Unconsolidated hotels:
AmeriHost Inn hotels 1 5 - 229
Other brand hotels 2 1,886 3,579 -
-- -------------- --------- ---------
Total 26 $ 15,157 $ 38,537 $ 3,796
== ============== ========= =========
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.
Currently, the sale of the remaining hotels as part of our hotel disposition
plan, is expected to generate net cash of approximately $2.0 million to $3.0
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.
- 31 -
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2004, COMPARED TO THE YEAR
ENDED DECEMBER 31, 2003
The following tables set forth our selected operations data for the twelve month
periods ended December 31, 2004 and 2003. This data should be read in
conjunction with our financial statements in Item 8 on this Form 10-K.
Year Ended Year Ended
December 31, 2004 December 31, 2003
---------------------- ----------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- --------- ---------
Revenue:
Hotel operations:
AmeriHost Inn hotels $ 33,949 53.5% $ 39,862 56.2% (14.8%)
Development and construction 3,580 5.6% 4,197 5.9% (14.7%)
Hotel sales and commissions 21,535 33.9% 22,831 32.2% (5.6%)
Management services 379 0.7% 446 0.6% (15.0%)
Employee leasing 1,943 3.1% 1,858 2.6% 4.6%
Incentive and royalty sharing 1,354 2.1% 972 1.4% 39.3%
Office building rental 702 1.1% 750 1.1% (6.4%)
----------- ----- ----------- ----- -----
63,442 100.0% 70,916 100.0% (10.5%)
----------- ----- ----------- ----- -----
Operating costs and expenses:
Hotel operations:
AmeriHost Inn hotels 27,048 79.7% 30,711 77.0% (11.9%)
Development and construction 4,968 138.8% 4,739 112.9% 4.8%
Hotel sales and commissions 18,720 86.9% 19,188 84.0% (2.4%)
Management services 210 55.4% 280 62.8% (25.0%)
Employee leasing 1,840 94.7% 1,799 96.8% 2.3%
Office building rental 171 24.4% 214 28.5% (19.8%)
----------- ----- ----------- ----- -----
52,957 83.5% 56,931 80.3% (6.9%)
----------- ----- ----------- ----- -----
10,485 16.5% 13,985 19.7% (25.0%)
----------- ----- ----------- ----- -----
Depreciation and amortization 2,334 3.7% 3,282 4.6% (28.9%)
Leasehold rents - hotels 4,088 6.4% 4,823 6.8% (15.3%)
Corporate general & administrative 3,498 5.5% 2,419 3.4% 44.6%
Impairment provision 1,292 2.0% 5,070 7.1% (73.9%)
----------- ----- ----------- ----- -----
Operating loss (727) (1.1%) (1,609) (2.3%) (52.8%)
=========== ===== =========== ===== =====
Segment Data:
Year Ended Year Ended
December 31, 2004 December 31, 2003
---------------------- ----------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- --------- ---------
Operating Income (Loss) by Segment:
Hotel operations:
AmeriHost Inn hotels 769 1.2% 1,321 1.9% (41.8%)
Non-cash impairment provision (1,292) (2.0%) (5,070) (7.1%) (73.8%)
Development and construction (1,397) (2.2%) (546) (0.8%) 155.90%
Hotel sales and commissions 2,815 4.4% 3,644 5.1% (22.7%)
Management services 131 0.2% 121 0.2% 8.3%
Employee leasing 102 0.2% 57 0.1% 78.9%
Incentive and royalty sharing 1,354 2.1% 972 1.4% 39.3%
Office building rental 372 0.6% 374 0.5% (0.5%)
Corporate general & administrative (3,581) (5.6%) (2,482) (3.5%) 44.3%
----------- ---- ----------- ---- ------
Operating loss $ (727) (1.1%) $ (1,609) (2.3%) (52.8%)
=========== ==== =========== ==== ======
- 32 -
Year Ended Year Ended
December 31, 2004 December 31, 2003
----------------- -----------------
Operating Income (Loss) as a percentage
of Segment Revenue:
Hotel operations:
AmeriHost Inn hotels 2.2% 3.3%
Non-cash impairment provision N/A N/A
Development and construction (39.0%) (13.0%)
Hotel sales and commissions 13.1% 16.0%
Management services 34.6% 27.1%
Employee leasing 5.2% 3.1%
Incentive and royalty sharing 100.0% 100.0%
Office building rental 53.0% 49.9%
Corporate general & administrative N/A N/A
----- -----
Total operating loss (1.1%) (2.3%)
===== =====
REVENUES. Revenues from Consolidated AmeriHost Inn hotels decreased due to the
sale of Consolidated AmeriHost Inn hotels from January 1, 2003 through December
31, 2004, whereby the operations of these hotels were included in our hotel
operations segment during all or part of 2003; however such hotels were not
included during all or part of the 2004 period. Same room revenue for
Consolidated AmeriHost Inn hotels was relatively unchanged in 2004 compared to
2003. On a macro basis, our hotel revenues typically follow the general U.S.
economic trends. However, the current economic recovery has lagged in the
Midwestern U.S., which is where the Company's hotels are primarily located. Our
hotels are also affected by local market conditions and trends, including
increased competition from newly constructed hotels. We believe that as the
total number of AmeriHost Inn hotels in the brand increases, the greater the
benefits will be at all AmeriHost locations from marketplace recognition and
repeat business. We are continuing our new business plan to focus on building
new hotels in larger, growing markets where many of our competitors already
exist or where we anticipate a certain level of additional hotel development.
Hotel development and construction revenues are directly related to the number
of hotels being developed and constructed for minority-owned entities or
unrelated third parties, and the timing of the construction period. We completed
the construction of one hotel for a minority-owned entity in April of 2004,
which had begun construction in the third quarter of 2003, and initiated
construction of a new hotel in September 2004 for a joint venture in which we
are a minority partner. One other minority-owned hotel was also completed in the
second quarter of 2003. The revenue recognized by the Company was based on the
construction progress achieved on each project during these periods. Our new
hotel development activity has been minimal during the past few years, due
primarily to a downturn in the economy and its impact on the lodging industry,
as well as our liquidity constraints. Increasing our hotel development activity
is a priority for us. We control five land parcels through purchase contracts,
however we, or joint ventures, have not yet secured the equity and mortgage debt
financing commitments required to consummate these purchases and build the
hotels. We have engaged a financing specialist, on a fee for success basis, to
assist us in identifying and securing both equity and mortgage debt financing
for the pending hotel development projects. We have also entered into a
non-binding letter of intent with a lender to provide $3.0 million under a term
note, with the majority to be used for land acquisition opportunities prior to
the formation and funding of joint ventures, however there can be no assurance
that this facility will be consummated, and if so, on terms acceptable to us.
Hotel sales revenue decreased as a result of the sale of ten wholly owned
AmeriHost Inn hotels during 2004, at an aggregate price that was less than the
sale of eight wholly owned AmeriHost Inn hotels during 2003. Hotel sales revenue
is directly related to the specific hotels sold and their individual sale
prices. Hotel sale prices are driven by many factors, including the size of
hotel, location, historical operating performance, and age of hotel, among
others. We intend to continue to build and sell AmeriHost Inn hotels in order to
generate increased fees under the agreement with Cendant while enhancing our
operating results and cash flow.
Hotel management services revenue decreased due primarily to the sale of one
hotel by a joint venture during the first nine months of 2004, which had a
management contract with the Company, the 2004 first quarter transfer of the
hotel management responsibilities for a joint venture from the Company to an
affiliate of the joint venture partner, and the acquisition of a joint venture
hotel under a management contract in 2003.
Employee leasing revenue increased due primarily to an increase in hotel
employee payroll related costs, which are the basis for the employee leasing
revenue.
- 33 -
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
$1,840,000 and $1,959,000 during 2004 and 2003, respectively, in development
incentive fees from the sale of AmeriHost Inn hotels. Approximately $969,000 and
$673,000 was recognized during 2004 and 2003, respectively, from the
amortization of this deferred income. We also recorded approximately $383,000
and $299,000 in royalty sharing revenue during 2004 and 2003, respectively.
Office building rental revenue consisting of leasing activities from our office
building, decreased due to the termination of the lease with one tenant,
partially offset by annual rent increases as stipulated in the various lease
agreements with the remaining tenants, and the leasing of additional office
space during 2003. We occupy approximately 25% of the rentable square feet, as
reduced in 2003 as part of a restructuring. Approximately 50% of the space is
leased to unrelated third parties pursuant to long-term lease agreements. During
2004, we were not successful in leasing any of the additional available space.
We have recently switched commercial real estate brokers to a firm that
specializes in leasing office space in the local marketplace to assist us in
leasing the remainder of the available space.
OPERATING COSTS AND EXPENSES. Total operating costs and expenses decreased,
primarily due to a decrease in operating costs and expenses from the
Consolidated AmeriHost Inn hotels. A decrease in the total amount of operating
costs in the hotel operations segment was due primarily to the fewer number of
AmeriHost Inn hotels included in this segment -- 38 hotels at December 31, 2004,
as compared to 49 hotels at December 31, 2003. Operating costs and expenses as a
percentage of revenues for the consolidated AmeriHost Inn hotels increased due
primarily to increases in certain costs during 2004, including salaries and
wages, sales and marketing, energy and maintenance costs, partially offset by
decreases in general insurance.
Operating costs and expenses for the hotel development and construction segment
increased slightly due to business development personnel additions, and the
recording of a reserve during 2004 of approximately $225,000 for construction
work to repair water damage at a hotel, offset by lower expenses associated with
the difference in the development activity of the joint ventures under
construction during 2004 versus 2003. The personnel additions are the result of
the Company's strategic business plan to accelerate the pace of new hotel
development and the additional support needed to execute the plan of hotel
disposition. With respect to the water damage, an insurance claim is pending
with the State of Illinois, due to the fact that the outside sub-contractor's
insurance company is currently in receivership. As a result of the
sub-contractor's and the insurance company's insolvency status, we have reserved
100% of the claim costs expended to repair the water damage.
Hotel sales operating expenses decreased slightly as a result of the lower
aggregate net depreciated cost basis related to the sales of ten wholly owned
AmeriHost Inn hotels during 2004 versus the net depreciated cost basis of the
eight wholly owned AmeriHost Inn hotels sold during 2003. The net depreciated
cost basis is expensed upon consummation of the sale.
Hotel management services segment operating costs and expenses decreased
primarily due to a lower number of hotels under management contracts during 2004
versus 2003, and a focused effort to reduce costs and the restructuring
beginning in the third quarter of 2003, partially offset by the expansion of
sales and marketing activity designed to increase hotel revenues.
Employee leasing operating costs and expenses increased slightly due primarily
to higher payroll and insurance costs at minority joint venture hotels during
2004 versus 2003.
Office building rental operating costs and expenses consisted primarily of
expenses related to the operations and management of our office building. The
decrease in operating expenses from 2003 to 2004 was due primarily to a decrease
in repair and maintenance and utility expenses.
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 eighteen months. Consequently, the hotels
classified as "held for sale" were depreciated for the first six months of 2003,
if open, and not during 2004.
Leasehold rents - hotels decreased slightly during 2004 compared to 2003, due to
the purchase of one leased AmeriHost Inn hotel and the termination of another
non-AmeriHost Inn hotel lease upon its expiration during the third quarter of
2003, the sale of two leased AmeriHost Inn hotels in August and December 2004,
partially offset by
- 34 -
annual rent increases pursuant to the lease agreements. The lease agreements for
the AmeriHost Inn hotels leased from PMC were modified effective October 1,
2004. See "Executive Overview - hotel and corporate level financing" above for a
detailed description of the modifications.
Corporate general and administrative expense increased due primarily to
increases in professional fees, corporate finance staff, non-cash director
expenses in the form of restricted stock, and a fourth quarter 2004 CEO
severance pay accrual. Professional fees include legal services, analytical and
financial consulting services incurred in connection with our 2004 discussions
with PMC and the related lease restructuring as well as investment banking
services. As previously disclosed in prior SEC filings, we hired a Vice
President of Finance in December 2003 to assist us in all aspects of corporate
accounting and financial analysis, in addition to some incremental support in
the area of new development and corporate financing. Director expenses include
director fees, which were revised during the first quarter of 2003 to be
competitive with other public companies of a similar size, including non-cash
compensation in the form of restricted common stock. Of the $1,079,000 increase
in general and administrative expenses during 2004, as compared to 2003,
approximately $889,000 is related to specific projects, which are expected to be
non-recurring in nature.
The hotel impairment provision was recorded primarily in connection with our
plan for the disposition of certain hotel assets, as adopted in July 2003 that
we have marketed for sale as discussed above. Approximately $1,093,000 of the
impairment adjustments recorded in 2004 represents additional adjustments for
certain AmeriHost Inn hotel assets to decrease the carrying value of the assets
to the anticipated market value, net of closing costs, based on our most recent
analysis and market information. Approximately $188,000 of the 2004 impairment
relates to a reduction in the carrying value of a land parcel to its estimated
fair market value as the land was marketed for sale. This parcel was initially
purchased as the site for a future hotel, however the current local market
economics do not support sufficient demand for additional hotel rooms. In March
2005, this parcel was sold for net proceeds of approximately $830,000 to the
Company.
OPERATING INCOME BY SEGMENT. The following discussion of operating income by
segment excludes any corporate general and administrative expense and the
non-cash hotel impairment charges.
Operating loss from consolidated AmeriHost Inn hotels improved slightly, due
primarily to:
- - the sale of consolidated AmeriHost Inn hotels during the past 18 months
which operated with an operating loss;
- - the decrease in depreciation expense due to the implementation of the plan
for hotel disposition; and
- - the decrease of certain expenses, including general insurance.
These factors were partially offset by:
- - the sale of consolidated AmeriHost Inn hotels during the past 18 months
which operated with operating income; and
- - the increase of certain expenses, including salaries and wages, sales and
marketing, maintenance, and energy.
We believe that aggregate hotel revenue growth is critical to improving the
results of our hotel operations. As such, if our revenue enhancement programs
are not successful, or if the economic recovery now underway is not sustained,
or if the recovery does not have a corresponding improvement in the lodging
industry and our hotels, it could have a significant, negative impact on our
results of operation and financial condition.
The hotel development and construction segment incurred a greater operating loss
in 2004 versus 2003, due to the decrease in hotel development and construction
activity for minority-owned joint ventures during 2004, as compared with 2003,
and an increase in operating expenses. Operating costs and expenses increased
due to the addition of business development personnel in connection with our
strategic business plan to accelerate the pace of hotel development in larger
markets, and the recording of a reserve during 2004 of approximately $225,000
for construction work to repair water damage at a hotel.
Operating income from hotel sales decreased due to the sale of ten AmeriHost Inn
hotels at a lesser total profit during 2004, versus the sale of eight AmeriHost
Inn hotels during 2003. Operating income from the sale of an AmeriHost Inn hotel
is determined based on that hotel's specific sale price, and our basis in the
hotel asset at the time of sale.
- 35 -
The increase in hotel management services segment operating income from 2003 to
2004 was due primarily to decreased operating expenses, partially offset by an
increase in sales and marketing expenses as a result of a focused effort to
increase hotel revenues.
Employee leasing operating income increased, due primarily to lower operating
expenses. Office building rental operating income increased, attributable to the
change in allocation of expenses among our other business segments.
INTEREST EXPENSE. The increase in interest expense from 2003 to 2004 is
primarily the result of incremental non-cash interest expense of approximately
$1.4 million as a result of the capital lease treatment of the PMC leased hotels
as of October 1, 2004, arising from the Third Amendment to the PMC Agreement and
a higher interest rate on our operating line-of-credit, partially offset by the
reduction in our overall level of debt as a result primarily of 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 interest rate reductions on
floating rate debt, partially offset by the mortgage financing of newly
constructed or acquired consolidated hotels. 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. Approximately $283,000 was recognized in 2004 versus a
gain of $400,000 during 2003. The 2004 gain is primarily the result of the third
quarter proceeds received from the sale of a land parcel owned by the Company.
The $400,000 gain recorded in 2003 represents the final installment received in
the third quarter in connection with the Company's sale of the AmeriHost Inn
brand name to Cendant in 2000. 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. There were two consolidated non-AmeriHost Inn
hotels sold during both the twelve months ended December 31, 2004 and the same
period in 2003. Any gain or loss on the sale of these hotels is reported as
"discontinued operations," for consolidated non-AmeriHost Inn hotels, in the
period in which the sale is consummated.
CHANGE IN EQUITY OF AFFILIATES. The increase in equity of affiliates of
approximately $629,000 during the twelve months ended December 31, 2004, as
compared to the twelve months ended December 31, 2003, was primarily
attributable to the 2004 second quarter sale of a non-AmeriHost unconsolidated
hotel which had significant operating losses in 2003 and improved operating
results of the hotels owned by the unconsolidated joint ventures. Distributions
from affiliates were approximately $195,000 during 2004, as compared to
approximately $24,000 during 2003.
DISCONTINUED OPERATIONS. Discontinued operations includes the operations, net of
tax, of consolidated non-AmeriHost Inn hotels sold, or to be sold pursuant to
the plan for hotel dispositions, or leased with an accelerated termination date.
As of December 31, 2004, we owned or leased three non-AmeriHost Inn hotels. In
2005, one owned non-AmeriHost Inn hotel was sold and the lease for one
non-AmeriHost Inn hotel was terminated upon the sale of the hotel. The remaining
hotel is under contract for sale and we expect it will be sold within the next
six months. Discontinued operations for the twelve months ended December 31,
2004 includes five hotels, as compared to eight hotels during the same period in
2003. In addition, discontinued operations includes approximately $986,000 and
$910,000 during the twelve months ended December 31, 2004 and 2003,
respectively, in non-cash impairment charges pursuant to the plan of
disposition. The impairment amount included in 2004 relates primarily to one
hotel, which was over 25 years old with exterior corridors and required a
significant amount of capital expenditures. This hotel was sold on February 4,
2005. In addition, the hotel lease for a non-AmeriHost Inn hotel was amended,
which accelerated the termination date from 2010 to November 2005, or earlier
upon the sale of the hotel. The hotel was under contract to be sold at December
31, 2004 and the sale was subsequently consummated in February 2005. As a
result, the depreciation of the leasehold improvements and furniture, fixtures
and equipment at this hotel was accelerated during 2004 by approximately $2.0
million, to reduce the net book value of the assets at December 31, 2004 to
their residual value. Additionally, a $100,000 franchise termination fee was
accrued in 2004 due to the fact that the sale of the hotel in 2005 would result
it in the property no longer operating as a hotel and accordingly the company
would be responsible for a franchise termination fee to Cendant, the franchisor.
Exclusive of the impairment charges, the incremental depreciation, and any
franchise termination fee, the pretax loss from the operations of the hotels
included in "discontinued operations" improved from a loss of approximately $2.2
million during the twelve months ended December 31, 2004 to a loss of
approximately $623,000 during the twelve months ended December 31, 2004. This
improvement was the result primarily of the disposition of three non-AmeriHost
Inn hotels, each of which operated at a pretax loss during 2003, as well as
improved operating results for the five non-AmeriHost Inn hotels included in
discontinued operations during 2004.
- 36 -
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 twelve month
periods ended December 31, 2003 and 2002. This data should be read in
conjunction with our financial statements in Item 8 on this Form 10-K.
Year Ended Year Ended
December 31, 2003 December 31, 2002
---------------------- ----------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- -------- ----------- --------- ----------
Revenue:
Hotel operations 39,862 56.2% 43,962 66.0% (9.3%)
Development and construction 4,197 5.9% 7,180 10.5% (41.5%)
Hotel sales and commissions 22,831 32.2% 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 1.4% 589 0.9% 65.1%
Office building rental 750 1.1% 670 1.0% 11.9%
------ ----- ------ ----- ------
70,916 100.0% 66,643 100.0% 6.4%
------ ----- ------ ----- ------
Operating costs and expenses:
Hotel operations 30,711 77.0% 32,253 73.4% (4.8%)
Development and construction 4,739 112.9% 7,205 100.3% (34.2%)
Hotel sales and commissions 19,188 84.0% 8,159 81.5% 135.2%
Management services 280 62.8% 715 74.6% (60.8%)
Employee leasing 1,799 96.8% 3,209 98.2% (43.9%)
Office building rental 214 28.5% 57 8.5% 277.5%
------ ----- ------ ----- ------
56,931 80.3% 51,598 77.4% 10.3%
------ ----- ------ ----- ------
13,985 19.7% 15,045 22.6% (7.1%)
====== ===== ====== ===== ======
Depreciation and amortization 3,282 4.6% 4,028 6.0% (18.5%)
Leasehold rents - hotels 4,823 6.8% 4,908 7.4% (1.7%)
Corporate general & administrative 2,419 3.4% 2,199 3.2% 10.0%
Impairment provision 5,070 7.1% 542 .8% 835.4%
------ ----- ------ ----- ------
Operating income (loss) (1,609) (2.3%) 3,368 5.1% (147.8%)
====== ===== ====== ===== ======
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 1,321 1.9% 3,617 5.4% (63.5%)
Non-cash impairment provision (5,070) (7.1%) (542) (0.8%) 835.4%
Development and construction (546) (0.8%) (31) 0.0% 1,673.0%
Hotel sales and commissions 3,644 5.1% 1,858 2.7% 96.2%
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 1.4% 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) $ (1,609) (2.3%) $ 3,368 5.1% (147.8%)
=========== ==== =========== ==== =======
- 37 -
Year Ended Year Ended
December 31, 2003 December 31, 2002
----------------- -----------------
Operating Income (Loss) as a percentage
of Segment Revenue:
Hotel operations 3.3% 8.2%
Non-cash impairment provision N/A N/A
Development and construction (13.0%) (0.4%)
Hotel sales and commissions 16.0% 18.5%
Management services 27.1% 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) (2.3%) 5.1%
===== =====
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. The revenues from Consolidated Non-AmeriHost Inn
hotels in 2002 primarily represent the results for a leased property that has
been classified as "discontinued operations" in the 2003 Consolidated Financial
Statement totals.
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.
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.
- 38 -
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 AmeriHost Inn hotels
included in this segment -- 49 hotels at December 31, 2003, as compared to 53
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 secondarily due to several hotels operating during
their initial stabilization period when revenues are typically lower and
significant start-up costs are incurred. The operating expenses from
Consolidated Non-AmeriHost Inn hotels in 2002 primarily represent the costs
related to a leased property that has been classified as "discontinued
operations" in the 2003 Consolidated Financial Statement results.
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 2003 and 2002, 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 primarily to the disposition of one leased hotel during the first quarter of
2002 and the purchase of one leased AmeriHost Inn hotel during the third quarter
of 2003, partially offset by annual rent increases pursuant to our 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. 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.
- 39 -
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
- 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.
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.
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.
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 is 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.
-40-
OFF-BALANCE SHEET ARRANGEMENTS. Through wholly-owned subsidiaries, we are a
general partner or managing member in 15 joint ventures as of December 31, 2004.
As a general partner, we are secondarily liable for the obligations and
liabilities of these joint venture partnerships. As of December 31, 2004, these
joint ventures had mortgage debt as follows (in the thousands):
(off balance
Consolidated sheet) Unconsolidated
Hotels Hotels Total
------------ ------------ --------------
Mortgage debt outstanding $ 7,763 $ 16,991 $ 24,754
Mortgage debt guaranteed
by the Company $ 2,506 $ 14,049 $ 16,555
Mortgage debt maturing in 2005 $ 3,435 $ - $ 3,435
The debt owed by joint ventures in which we have a majority or controlling
ownership interest has been included in our consolidated financial statements as
of December 31, 2004 (Consolidated hotels). If we subsequently obtain a majority
or controlling ownership interest in an unconsolidated joint venture, the joint
venture's debt will be included in our consolidated financial statements. Of the
$24.8 million of joint venture financing, we also have provided approximately
$16.6 million in guarantees to the lenders. Other partners have also guaranteed
$12.5 million of these financings, which may ultimately impact the exposure on
our guarantees. One Consolidated joint venture mortgage loan in the amount of
approximately $1.6 million at December 31, 2004 matured on November 1, 2004,
however the lender has extended the maturity of the loan to November 1, 2005,
and waived the minimum debt service coverage ratio covenant violation for 2005.
Unless the properties collateralizing the debt are sold earlier, the remaining
joint venture mortgage loans mature after 2005. [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
rate to 10% per annum and are due upon demand. Interest is accrued in all loans,
and paid to us periodically. The advances to the unconsolidated joint ventures
totaled $5,000 at December 31, 2004, and are included in investments in and
advance to unconsolidated hotel joint ventures in our consolidated financial
statements. Advances to consolidated joint ventures of approximately $1.5
million as of December 31, 2004 have been eliminated in consolidation. We expect
the joint ventures to repay these advances primarily from the sale of the
related hotels, and cash flow generated from hotel operations, however, there is
no guarantee that we will recover the entire amount advanced.
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. We have provided guarantees related to the mortgage debt of certain
joint ventures, some of which we share the responsibility of the guarantee on a
joint and several basis with our joint venture partners. The guarantees are
effective for the term of the respective mortgage loan and are being amortized
over this period on a straight-line basis. We record as an additional investment
in these joint ventures, and a liability for our share of these guarantees at
the time of issuance, based on its estimated fair value. The net book value of
these guarantees, and offsetting liabilities was approximately $37,000 as of
December 31, 2004.
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. We adopted FIN 46R beginning after October 1,
2004. This Interpretation requires us to present any variable interest entities
in which we have a majority variable interest on a consolidated basis in our
financial statements. As a result of the adoption of this interpretation, we
began consolidating two variable interest entities as of October 1, 2004. The
consolidation of these two joint ventures added approximately $3.2 million in
assets and $3.2 million in liabilities to our consolidated balance sheet. Prior
to their consolidation, we had investments in, and advances to, these joint
ventures of approximately $221,000, which was presented as such under the equity
method of accounting in the accompanying
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consolidated financial statements. These investments in, and advances to, have
been eliminated in consolidation. 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
Currently, 18 hotels are leased from PMC Commercial Trust pursuant to a sale and
leaseback transaction. During 2004, we modified the leases with PMC pursuant to
the Third Amendment [see also Part 1 - Business, under the heading "Leased Hotel
Properties"]. The modification provides, among other things, for the early
termination of the hotel leases upon the sale of the hotels by the landlord over
a four-year period, significantly sooner than the original lease maturity dates
(2013-2014). Pursuant to the Third Amendment, five hotels are required to be
sold by October 1, 2005. If the sales are not consummated when required under
the terms of this amendment, our rental payments to PMC revert to the original
contractual rate until such time the minimum number of hotels are sold. As of
the date of this report, two hotels have been sold, three are under executed
sale contracts, and we are in negotiations for the sale of another two hotels.
According to the Third Amendment, upon the sale of each hotel, PMC is entitled
to receive (i) net sales proceeds upon closing, defined as total gross sales
price less normal closing costs and brokerage fees, and (ii) an "Arlington Fee,"
equal to 25.3% of the gross room revenues for such hotel for the preceding
12-month period, due within 45 days of the hotel sale closing. If the net sale
proceeds of a hotel is less than the original "Assigned Value" of such hotel
(the original sale prices to PMC), we must provide a note payable to PMC in the
amount of this difference ("Proceeds Deficit Note"). The payment of the
Arlington Fee to PMC will reduce the outstanding balance of the Proceeds Deficit
Note, if any. If the net sale proceeds is greater than the original Assigned
Value, including the Arlington Fee, the excess will be (i) first, applied to any
outstanding Proceeds Deficit Note balance from prior sales, (ii) second, applied
to reduce the original Assigned Values of the remaining hotels at PMC's
discretion, and (iii) third, kept by PMC if it is from the sale of the last
hotel, or if the total original Assigned Value has been reduced to zero. As of
December 31, 2004, the balance of the Proceeds Deficit Note, as a result of the
sale of two PMC hotels in 2004, was approximately $850,000.
Interest on the Proceeds Deficit Note is payable monthly at a fixed rate of 8.5%
per annum until principal payments begin, at which time interest will be payable
at the greater of the U.S. Treasury rate plus 4.5%, or 8.5%. Principal payments
will commence on the earlier of October 1, 2008 or the closing date of the sale
of the last hotel under the PMC lease, with aggregate annual principal payments
in an amount equal to one-third of the principal balance of the Proceeds Deficit
Note as of the principal payment commencement date. If at any time during the
term of the Proceeds Deficit Loan Agreement, the principal balance of the
Proceeds Deficit Note exceeds $4.0 million, the Company must immediately make a
principal payment to PMC in an amount necessary to reduce the balance of the
Proceeds Deficit Note to $4.0 million.
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The following table summarizes our contractual obligations, including
off-balance sheet mortgage loan guarantees provided for certain joint ventures:
Payments due by period
-------------------------------------------------------------------------
Less than 1 - 3 3 - 5 More than
Total 1 year years years 5 years
------------- ------------- ------------- ------------- -------------
Consolidated hotel and other obligations:
Long-term debt $ 22,327,204 $ 997,443 $ 8,180,570 $ 1,482,397 $ 11,666,794
Long-term debt of assets held for
sale - non-AmeriHost Inn hotels 6,302,976 1,998,880 4,304,096
Long-term debt of assets held for
sale - AmeriHost Inn hotels 18,491,277 2,433,580 3,183,518 3,064,533 9,809,646
Corporate line of credit 2,225,000 2,225,000 - - -
Capital and Operating lease
payments 15,567,542 3,964,500 10,918,875 111,667 572,500
Proceeds Deficit Note 849,609 133,258 716,351
Construction contracts 1,815,713 1,815,713 - - -
------------- ------------- ------------- ------------- -------------
Total $ 67,579,321 $ 13,568,374 $ 27,303,410 $ 4,658,597 $ 22,048,940
============= ============= ============= ============= =============
Unconsolidated hotel obligations:
Long-term debt (at 100%) $ 16,991,094 $ 623,747 $ 1,382,475 $ 1,908,194 $ 13,076,678
Operating leases - - - - -
------------- ------------- ------------- ------------- -------------
Total $ 16,991,094 $ 623,747 $ 1,382,475 $ 1,908,194 $ 13,076,678
============= ============= ============= ============= =============
We expect these obligations to be funded through operations, including the sale
of hotels, or refinanced/extended prior to maturity.
LIQUIDITY AND CAPITAL RESOURCES
General
Our principal liquidity needs for the next twelve months are to:
- fund normal recurring expenses;
- meet normal monthly debt service requirements of approximately
$380,000, based on the current hotel portfolio (which obligation
decreases as hotels are sold and the related mortgage debt is paid
off with the proceeds);
- repay (primarily through the sale of the related hotel) or refinance
approximately $3.4 million of hotel mortgage indebtedness that
matures within the next twelve months;
- meet the obligations under our operating line-of-credit, including
the $1.5 million reduction on its maximum availability over the next
12 months from $4.0 million to $2.5 million;
- meet the monthly lease payment obligations of approximately $314,000
subject to increase if, among other things, we fail to sell the PMC
hotels according to schedule (See Item 1 - Business above, under the
subheading "Leased Hotel Properties") primarily to PMC Commercial
Trust, based on the current portfolio of leased hotels (which
obligation decreases as these leased hotels are sold); and
- fund capital expenditures, primarily hotel and office building
improvements of approximately $1.6 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.
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
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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 $4.0
million to $2.5 million by the end of October 2005. There is no penalty for our
prepayment of this loan and we intend to pursue alternative sources of debt and
equity financing, including longer-term alternatives to our corporate
line-of-credit, as discussed below under the heading "Operating line of credit".
As of the date of this report, we have drawn $4.0 million on this credit line.
However, we have cash reserves of approximately $1.0 million, which could be
applied against this outstanding debt.
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 negative pressure continued in 2004, as 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, even as modified
during 2004 under the Third Amendment, 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 each of 2003 and 2004. As a result,
the cash flow from all of our business segments, with the largest amount funded
by the sale of hotel properties, has been utilized to maintain liquidity and
meet the line-of-credit availability reductions. A smaller amount has been used
for investment in new hotel development. The factors impacting us in 2004, 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 that
generate net proceeds, especially those hotels with insufficient operating cash
flow to cover their mortgage or lease obligation. Without such sales, we may
experience liquidity problems as the line-of-credit reduces further. In
addition, we seek to increase income from our remaining 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. Finally, we seek to increase our development and construction
income through expanded joint venture and third party activity.
Our principal liquidity needs for periods beyond twelve months are for the cost
of our contributed capital in 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 increased development and
continued sales of hotels;
- joint venture developments;
- 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, if at all, 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 needs. In addition, a material adverse change
in our cash provided by
-44-
operations may affect the financial performance covenants under our unsecured
line of credit and certain mortgage notes.
-45-
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 $2.6 million and $3.6 million at December 31,
2004 and December 31, 2003, respectively, or a decrease of approximately $1.1
million. The decrease was a result of the following increases and decreases in
cash flows:
Years ended December 31,
(in thousands)
------------------------------------------
Increase
2004 2003 (Decrease)
--------- ---------- ----------
Net cash provided by operating activities $ 18,160 $ 20,366 $ (2,513)
Net cash provided by (used in) investing activities 4,197 (6,013) 10,210
Net cash used in financing activities (23,422) (14,699) (8,416)
--------- ---------- ----------
Decrease in cash $ (1,065) $ (346) $ (719)
========= ========== ==========
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: and
- 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 were successful in reducing property and workers compensation
insurance costs. We have also realized reductions in energy usage as a result of
the implementation of energy control systems at the majority of our hotels
during the second half of 2004.
Effective October 1, 2004, we modified the hotel leases with PMC, providing for
a 19% permanent reduction in the monthly lease payments. Our subsidiary's lease
obligation for the 18 remaining PMC hotels, as of the date of this report, is
approximately $3.7 million per year subject to increase if we default on lease
agreement. However, this lease obligation remains significantly greater than the
operating cash flow generated from these hotels before the rent payment. The
modification also provides for an early termination of the leases through the
sale of the leased hotels by September 30, 2008, significantly sooner than the
lease maturity date. We have guaranteed certain values to PMC upon the sale of
each hotel, with any shortfall becoming our corporate obligation. This shortfall
obligation is being financed by PMC, with interest only due monthly at the
annual fixed rate of 8.5%. Any excess proceeds over the guaranteed value will be
applied to any outstanding shortfall obligation. Principal amortization on this
obligation begins the earlier of the date the last PMC leased hotel is sold, or
October 1, 2008, with one-third of the principal due
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each year for the following three years. However, if the obligation balance
exceeds $4.0 million at any time, we must immediately make a principal payment
to reduce the balance to $4.0 million or less.
-47-
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.
The decrease in cash flow from operations from 2002 to 2004, 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 $2.5 million in 2002, $8.7 million in 2003,
and $3.6 million in 2004. 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
$137,000 in 2003 and $940,000 in 2004. 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 2004 that were delayed until the first quarter of
2005, or that have 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. Loans underwritten
through SBA programs have historically taken a longer period of time to close,
and can be subject to uncertainties such as federal budget issues. 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 $2.0 to $3.0
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. Six 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 $ 14.1 million in
gross proceeds and the reduction of mortgage debt of approximately $ 12.5
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 our 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 since 2001. 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
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received monthly, based on the actual royalty payments received by Cendant from
all AmeriHost Inn hotel franchisees, except those operated by us.
We received $1.8 million, $2.0 million, and $1.8 million in connection with
hotels sold during 2004, 2003, and 2002, 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 of the franchise agreement. However, any such amounts due would be
reduced by a portion of any damages recovered by Cendant and would only be paid
by us as an offset against future fees earned. To date, there have been no
defaults (by franchisees), and we have not had to repay any incentive fees.
We recognized royalty sharing fees from Cendant in the amount of $383,000 and
$299,000 in 2004 and 2003, respectively, 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 sold 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 if we develop and manage more hotels for joint ventures, and we retain
the management and employee leasing contracts. 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. We are
evaluating value-maximizing alternatives with respect to ownership and operation
of our office building, including a sale of the building.
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 provided by (used in) investing activities for the twelve months ended
December 31, 2004 and 2003, consisted of the following:
(in thousands)
2004 2003
-------- --------
Investments in unconsolidated joint ventures,
net of distributions and collections on advances from affiliates $ (104) $ (821)
Purchase of property and equipment (992) (7,088)
Sale (acquisition) of partnership interests 1,322 (777)
Issuance of notes receivable, net of collections 487 (131)
The cash used in investing was offset by:
Proceeds from the sales of assets 3,484 2,804
-------- --------
Total $ 4,197 $ (6,013)
======== ========
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The purchase of property and equipment in 2003 includes $3.9 million of
construction, furniture and fixtures costs for three new hotel projects, which
opened in 2003 and also includes the acquisition of one AmeriHost Inn hotel from
a joint venture. Purchases of property and equipment were lower in 2004 due to
the fact that 2004 development activity was related to joint ventures as opposed
to wholly owned hotels. The focus of our development efforts in 2005 and beyond
will continue to be primarily joint ventures. The 2004 sale of partnership
interests primarily relates to the November 2004 sale of the Company's interest
in a joint venture that owned a non-AmeriHost Inn hotel for $1,275,000.
From time to time, we advance funds to these joint ventures for working capital
and renovation projects. In 2004, we received $678,000 from joint ventures in
which we are a partner, net of advances, primarily from the sale of one hotel
and from operational cash flow. 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. A joint venture non-AmeriHost Inn hotel was sold
in June 2004, which resulted in a shortfall between the net sales proceeds and
the total of the advances outstanding at the time of the sale, of approximately
$271,000, which was subsequently written off by us. In 2005, 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 (see "Other mortgage debt guaranteed by
the Company" below).
In addition, in 2004 we invested approximately $782,000 in new and existing
joint ventures, net of approximately $195,000 in distributions received from
joint ventures. This amount included approximately $776,000 for two new
development projects expected to open in 2005, one of which began construction
in the fourth quarter of 2004.
Cash used in financing activities
Cash used in financing activities was $23.4 million during 2004, compared to
cash used in financing activities of $14.7 million during 2003, summarized as
follows:
(in thousands)
2004 2003
---------- ----------
Principal payments on long-term debt $ (21,549) $ (19,095)
Net repayments on operating line of credit (1,625) (2,534)
Common stock repurchases - (144)
Distributions to minority interests (248) (90)
The cash used in financing activities was partially offset by:
Proceeds from issuance of long-term debt - 6,888
Issuance of common stock - 277
---------- ----------
$ (23,422) $ (14,699)
========== ==========
Principal payments on long-term debt include the payoffs of mortgages upon the
sale of hotel properties of approximately $18.5 million in 2004, and $16.5
million in 2003. We paid off 11 hotel mortgages in 2004, compared to 10 hotel
mortgages in 2003. Proceeds from the issuance of long-term debt includes
approximately $6.9 million in 2003 as a result of opening three newly
constructed consolidated AmeriHost Inn hotels during 2003.
Future hotel development is dependent upon our ability to attain mortgage debt
financing. Lenders typically advance mortgage debt at the rate of 60% - 75% of
total project value. Assuming the total value of a new hotel development is $5.0
million, the typical mortgage loan amount would range from $3.0 million to $3.75
million. There can be no assurance that we, or the joint ventures we intend to
develop hotels for, will be able to obtain such mortgage financing on terms
acceptable to us and the joint ventures, 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, no shares were bought back in 2004, and 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 $68,500 was
claimed and funded through December 31, 2004. We
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consider the reverse-forward split a one-time transaction, and we do not
anticipate a similar transaction in the foreseeable future. All shares that we
have repurchased or redeemed have been retired. In addition, 37,000 options to
purchase stock were exercised during 2003 resulting in proceeds to us of
approximately $130,000.
- 51 -
Mortgage Debt
The table below summarizes our mortgage notes payable as of December 31, 2004
and 2003:
As of December 31,
------------ ----------
2004 2003
------------ ----------
Mortgage debt outstanding (in thousands):
Fixed rate $ 19,031 $ 22,678
Variable rate 27,969 42,500
----------- ----------
Total $ 47,000 $ 65,178
=========== ==========
Percent of total debt:
Fixed rate 40.49% 34.79%
Variable rate 59.51% 65.21%
----------- ----------
Total 100.00% 100.00%
=========== ==========
Weighted average interest rate:
Fixed rate 7.60% 7.60%
Variable rate 5.58% 5.64%
----------- ----------
Total 6.39% 6.24%
=========== ==========
The variable rate debt shown above bears interest based on various spreads over
the Prime Rate or the London Interbank Offered Rate. The Company's plan to sell
certain hotel assets is expected to result in the payoff of the related mortgage
debt in the amount of approximately $24.8 million, which has been classified in
current liabilities in the accompanying consolidated balance sheet as of
December 31, 2004. This amount includes (i) two hotel loans in the aggregate
amount of $3.4 million which mature in 2005, and (ii) approximately $867,000 in
principal payments which are contractually due within the next twelve months
regardless of the plan for hotel disposition. In March 2005, we sold one of the
hotels with a mortgage maturity date of August 2005, whereby the proceeds were
used to payoff the mortgage balance. The other hotel with a mortgage maturing in
2005 is currently being actively marketed for sale as part of our plan for hotel
disposition. We expect the sale of this hotel to be consummated prior to the
mortgage maturity date, with the proceeds used to payoff the loan. If this hotel
is not sold by its maturity date, we are currently obligated to payoff the
mortgage note 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 agreement, absent any other agreement with this lender. However,
there can be no assurance that this hotel will be sold by its loan maturity
date, or that alternative financing will be available if needed. If this hotel
is not sold prior to its loan maturity date, and absent an extension by the
current lender, or a refinancing with another lender, it could have a
significant impact on our liquidity.
With respect to mortgages on hotels that are not held for sale, approximately
$1.0 million is classified in current liabilities, which is the principal
amortization due within the next twelve months. We also have a mortgage loan on
the office building in which its headquarters is located, and in March 2005, the
lender extended the maturity date to January 1, 2007. 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, 2004, we were in compliance with all applicable financial
covenants.
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Other Mortgage debt guaranteed by the Company
The following is a summary of the mortgage debt held by the various types of
joint ventures:
Balance Guarantee
Number of Outstanding Outstanding
Hotels (thousands) (thousands)
--------- ----------- -----------
Consolidated joint ventures
in which we have a majority
or controlling interest 4 $ 7,763 $ 2,506
Unconsolidated joint ventures
in which we are a general partner - - -
Unconsolidated joint ventures
in which we are a managing
member of a limited liability company 7 16,991 14,049
-- ------- -------
11 $24,754 $16,555
== ======= =======
The mortgage balances for the 4 consolidated joint ventures have been included
in our financial statements at December 31, 2004.
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:
(in thousands)
Year Ending December 31, Amount Guaranteed
- ------------------------ --------- ----------
2005 $ 623 $ 444
2006 674 479
2007 708 499
2008 1,276 1,048
2009 633 394
Thereafter 13,077 11,184
--------- ----------
$ 16,991 $ 14,049
========= ==========
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 $1.8 million of the mortgage debt with unconsolidated
joint ventures relates to an AmeriHost Inn hotel that has been identified to be
sold as part of our strategic hotel disposition plan.
Operating line-of-credit
At December 31, 2004, we had $2.25 million outstanding under our operating
line-of-credit with LaSalle Bank NA. The operating line-of-credit has a limit of
$4.0 million, as reduced from $6.0 million in February 2004, and is
collateralized by substantially all of our assets subject to first mortgages
from other lenders on hotel assets. The facility bears interest at the fixed
rate of 10% per annum, and was scheduled to mature on April 30, 2004. The
operating line of credit limit was scheduled to be reduced to $3.5 million as of
February 28, 2005, however the lender has waived this reduction, allowing the
limit to remain at $4.0 million until April 30, 2005. 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 these covenants as of
December 31, 2004. However, the lender has waived these violations in connection
with the renewal of the line-of-credit set forth below.
In March 2005, we executed a renewal of the line-of-credit with the same lender
through April 30, 2006. The renewal provides that the maximum availability
reduces to $3.5 million on May 1, 2005, reducing further to $3.0 million on July
31, 2005, and to $2.5 million on October 31, 2005. In addition, interest will
remain at the fixed rate
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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.
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We intend to pursue longer term financing options to this line of credit with
other lenders that is consistent with our business plan of developing, building
and selling AmeriHost Inn hotels and have engaged an investment/financial
advisor 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.
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 maintaining compliance
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 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.
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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 at our hotels, 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 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. The Company adopted FIN 46R beginning after
October 1, 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. As a result of the adoption of
this interpretation, the Company began consolidating two variable interest
entities as of October 1, 2004. The consolidation of these two joint ventures
added approximately $3.2 million in assets and $3.2 million in liabilities to
the Company's consolidated balance sheet. Prior to their consolidation, the
Company had investments in, and advances to, these joint ventures of
approximately $221,000, which was presented as such under the equity method of
accounting in the accompanying consolidated financial statements. These
investments in, and advances to, have been eliminated in consolidation. 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. We do not expect that the implementation of
SFAS No. 150 will result in a material financial statement impact.
In December 2004, the Financial Accounting Standards Board issued Statement No.
123R, "Share-Based Payment" ("SFAS 123R"). This Statement is a revision to
Statement 123, "Accounting for Stock-Based Compensation", and supersedes Opinion
No. 25, "Accounting for Stock Issued to Employees". SFAS 123R requires the
measurement of the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award. The cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award. No compensation cost is recognized
for equity instruments for which employees do not render service. We will adopt
SFAS 123R on July 1, 2005, requiring compensation cost to be recognized as
expense for the portion of outstanding unvested awards, based on the grant-date
fair value of those awards calculated using the Black-Scholes option pricing
model under SFAS 123 for pro forma disclosures. We are currently evaluating the
impact SFAS 123R will have on our financial position, results of operations,
earnings per share and cash flows when the Statement is adopted. We do not
expect that the implementation of SFAS 123R will result in a material financial
statement impact.
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SUBSEQUENT EVENTS
In February 2005, the landlord for a non-AmeriHost Inn hotel consummated the
sale of the hotel and our lease was simultaneously terminated pursuant to a
lease modification executed in 2004.
In March 2005, we received a commitment to renew our operating line-of-credit
from the existing lender, LaSalle Bank N.A., through April 30, 2006, which we
accepted and executed. The terms of this renewed facility require that the
maximum availability under the facility be reduced to $3.5 million as of May 1,
2005, from its current $4.0 million. The facility will be reduced to $3.0
million on July 31, 2005, and further reduced to $2.5 million on October 31,
2005. The terms of the agreement 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. There is
no penalty for our prepayment of this loan.
In March 2005, a consolidated joint venture in which we own a majority ownership
interest sold its non-AmeriHost Inn hotel, generating gross proceeds of
approximately $1.9 million, and simultaneously paid off the related mortgage
loan of approximately $1.5 million. The excess funds from the sale were utilized
by the joint venture to partially repay our outstanding operating advances.
In March 2005, an unconsolidated joint venture in which we own a minority
ownership interest sold its AmeriHost Inn hotel, generating a distribution to us
of approximately $507,000, after the related mortgage debt was paid off. Our
partner received a $1.0 million distribution from the net sale proceeds, in
accordance with the terms of an amendment to the joint venture agreement
executed in 2004.
In March 2005, we sold a vacant land parcel generating net proceeds of
approximately $838,000.
In March 2005, we facilitated the sale of a leased hotel as an AmeriHost Inn on
behalf of PMC, the landlord. This sale resulted in approximately $288,000 being
added to the Proceed Deficit Note, before application of the "Arlington Fee",
which will reduce the Proceeds Deficit Note by approximately $155,000 when
received by PMC.
In March 2005, the Company sold a wholly owned AmeriHost Inn hotel, generating
gross proceeds of approximately $2.2 million, and simultaneously paid off the
related mortgage loan of approximately $1.5 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.
DEBT, CAPITAL, AND LIQUIDITY
We have substantial long-term obligations, which could limit our flexibility or
otherwise adversely affect our financial condition. Our operating cash flow may
not be sufficient to satisfy these obligations.
We have a significant amount of debt and obligations under long-term leases,
such as the hotel 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, expand development efforts and other
general corporate needs.
For the past three years our cash flow, after the payment of mortgage debt
service, lease obligations (despite the lease payment reduction achieved by
entering into the Third Amendment with PMC), and ongoing capital expenditures,
has been negative. We have used the proceeds from the sale of hotels and
availability under our line of credit facility to primarily fund these payments
and other operational expenses. Pursuant to the renewal of our line of credit,
however, our line of credit provider is reducing the availability of our line of
credit from $4.0 million to $2.5 million by October 31, 2005. As a result, we
may have liquidity concerns and may need to raise additional funds through:
- selling capital stock;
- obtaining additional borrowings; or
- selling a greater number of assets and sooner than planned.
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We cannot be assured that any of these sources of financing will be available to
us on acceptable terms, if at all. Furthermore, if we are required to sell
capital stock to obtain additional capital, our shareholders could experience
significant dilution; alternatively, if we obtain debt financing, our
liabilities and future cash commitments will increase.
If our operating cash flow does not significantly increase, or we are unable to
obtain additional funding, we could experience liquidity concerns as the
availability under our line-of-credit is reduced. Such prospective liquidity
concerns are highly contingent upon our increasing the rate of hotel sales and
development and construction of new hotels which is, in turn, dependent upon our
obtaining financing for such new hotel development and construction and our
ability to obtain additional funding. We have engaged investment banking firms
to assist us in obtaining this financing. There can be no assurance that we will
be able to increase the rate of our hotel sales or development and construction
activities or obtain additional funding on terms that are favorable to us, if at
all. If we do not have sufficient cash to fund our operations, it will have a
material adverse effect on our liquidity, results of operations, financial
condition and prospects.
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:
- 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.
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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 fund future growth, our ability to retire
maturing debt, our ability to expand 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;
- 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 has had, and is expected to have a positive
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impact, there can be no assurance that such initiatives or expected positive
impact from the economy will occur or will have a material positive impact on
our hotel operations.
The modification of the lease agreement with PMC Commercial Trust requires the
sale of hotels on a specific schedule and principal payments on the Proceeds
Deficit Note, on an accelerated basis under certain conditions.
One of our wholly owned subsidiaries is the lessee for 18 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
aggregate cash flow generated by these hotels has been insufficient to cover the
annual lease payment obligation. Effective October 1, 2004, we modified the
lease agreement with PMC providing for a 19% reduction in the lease payment rate
and the sale of all PMC leased hotels over a four-year period (the "Third
Amendment"). However, even with the reduced rent payments, the aggregate cash
flow generated by these hotels has continued to be insufficient to cover this
reduced lease rate.
Additionally, as provided in the Third Amendment, our failure to facilitate the
sale of all PMC leased hotels, generally at the pace of five hotels per year,
would result in the lease rate returning to the original contractual rate,
without regard to the Third Amendment, or a higher default rate of 15% per annum
under certain conditions. To date, we have facilitated the sale of two of the
five and there are signed sales contracts on another three PMC hotels. A total
of five PMC hotels must be sold by October 1, 2005. There can be no assurance
that the sale of three PMC hotels will be consummated on or before October 1,
2005 as required.
If we do not sell the hotels as required, the lease payments owed to PMC will
increase. Any increase in the lease payment amounts will have a material adverse
effect on our results of operations, financial condition and prospects.
Additionally, we anticipate incurring a Proceeds Deficit Note upon the sale of
the hotels representing the difference between the net sale prices and the
"Assigned Values" in the original lease agreement. If the principal balance of
the Proceeds Deficit Note exceeds $4.0 million at any time, we must make an
immediate principal payment in an amount equal to the excess over $4.0 million.
The "Third Amendment" also contains other covenants that if triggered will
require an acceleration of the principal payments on the Proceeds Deficit Note.
Failure to make a principal payment pursuant to these covenants, if required,
will result in an increase in the interest rate on the Proceeds Deficit Note to
the original contractual rate in the lease agreement without regard to the
"Third Amendment". Failure to make any principal payment on the Proceeds Deficit
Note, including any payment required to reduce the balance to $4.0 million, or
rent payment under the lease agreements, when due, or payments on other
obligations to PMC, would result in a default under the lease agreements, and
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.
As of December 31, 2004, 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
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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 of the hotel sold. If this amount is
significant, it will have a material adverse affect on our results of
operations.
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 that 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.
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
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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.
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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 2004, 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.
Since 2001, the lodging industry has experienced a difficult period, and
operations have generally been declining, 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
that 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;
- 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
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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.
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.
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, 2004. As the table incorporates only those
exposures that existed as of December 31, 2004, it does not consider those
exposures or positions that could arise after that date. Moreover, the
information presented therein is merely an estimate and has limited predictive
value. As a result, the ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arise during future periods,
hedging strategies and prevailing interest rates at the time.
Average Nominal
Carrying Value Interest Rate
-------------- ---------------
Operating line of credit - variable rate $ 2,225,000 10.00%
Mortgage debt - fixed rate $ 19,031,256 7.60%
Mortgage debt - variable rate $ 27,968,913 5.58%
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 $156,000
annually.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements filed as part of this Form 10-K are
included under "Exhibits and Financial Statement Schedules" 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 Grant Thornton 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
Based on management's evaluation as of December 31, 2004, our Interim Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures as defined in Rule 13a - 15(e) and 15d - 15(e) under the
Securities Exchange Act of 1934, 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 our internal controls
or in other factors that could significantly affect these controls subsequent to
the date of the previously mentioned evaluation.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company's executive officers and directors are:
Name Age Position
- ------------------ --- ---------------------------------------------------
Kenneth M. Fell 47 Chairman of the Board of Directors
Andrew E. Shapiro 43 Vice Chairman of the Board of Directors
Stephen K. Miller 49 Senior Vice President Business Development and Real
Estate, interim Chief Executive Officer.
James B. Dale 41 Senior Vice President of Finance, Secretary,
Treasurer and Chief Financial Officer
Steven J. Belmonte 52 Director
Salomon J. Dayan 59 Director
Gerald T. LaFlamme 65 Director
Thomas J. Romano 52 Director
Below is information on the business experience of our directors:
Kenneth M. Fell has been a member of the Board since August 2002. In December
2002, Mr. Fell was elected independent Chairman of the Board. 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 from time-to-time 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). Mr. Fell is a
member of the National Association of Corporate Directors (NACD).
Andrew E. Shapiro has been a member of the Board since September 2002, and was
elected independent Vice Chairman of the Board in February 2003. Mr. Shapiro is
Chairman of the 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 from time-to-time to
address specific issues. Mr. Shapiro has been Managing Member and President of
Lawndale Capital Management, LLC, a Mill Valley, California-based 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 was a Board Observer
of Earl Scheib, Inc. (AMEX-ESH) from August 2002 until September 2004, pursuant
to an agreement with that company's Board, and he is a member of the NACD.
Steven J. Belmonte, CHA, has been a member of the Board since August 2002. Mr.
Belmonte is Chairman of our Compensation Committee, and also serves as a member
of various ad hoc committees of the Board, which are formed from time-to-time 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. Mr. Belmonte is a member of the NACD.
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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 from time-to-time 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. Dr. Dayan is a
member of the NACD.
Gerald T. LaFlamme, C.P.A. has been a member of the Board since August 2002. Mr.
LaFlamme is Chairman of the Audit Committee, and also serves as a member of
various ad hoc committees of the Board, which are formed from time-to-time 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
and a member of the NACD.
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 was an
Executive Vice President and a member of executive management for Bridgeview
Bank Group from 1997 until December 31, 2004. 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
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. Mr. Romano is a member of the NACD.
EXECUTIVE OFFICERS.
The following is information on the business experience of our executive
officers:
Stephen Miller. Mr. Miller has been our senior vice president, real estate and
business development since August 2003. Mr. Miller currently serves as our
Interim President and Chief Executive Officer. From January 2003 to August 2003,
Mr. Miller provided services as a consultant to companies in the hospitality
industry. From 1999 to 2002, Mr. Miller was executive vice president of
development and acquisition for Carlson Hotels Worldwide, responsible for
acquiring, constructing and designing properties. In this position, Mr. Miller
oversaw an acquisition fund of approximately $500 million, and established
development policies, investment guidelines and closing procedures. From 1989 to
1999, Mr. Miller was a vice president for Wyndham International, an owner and
operator of hotels, where he directed the expansion of the Wyndham brand in the
Eastern United States, Canada and the Caribbean. Mr. Miller has also worked in a
senior development capacity for Interstate Hotel Corporation, Embassy Suites
Hotels and Holiday Inns, Inc.
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 us in May 1994 as our first Corporate Controller. He has been
responsible for overseeing all aspects of our 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 us, 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.
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Richard Gerhart. Mr. Gerhart has been our senior vice president of hotel
operations since January 2000. From 1997 to 2000, Mr. Gerhart was senior vice
president of operations for MOA Hospitality, a hotel company with a portfolio of
135 limited and full service properties, representing ten hotel brands with
annual sales in excess of $215 million. At MOA Hospitality, Mr. Gerhart's
responsibilities included overseeing the management of the company's hotels. Mr.
Gerhart's hotel experience includes employment with Motel 6 Corporation,
Remington Hotel Corporation, La Quinta Motor Inns, Inc., Registry Resort and
Marriot Corporation.
AUDIT COMMITTEE
Among other committees, our Board of Directors has a standing Audit Committee.
The committee consists of three directors: Messrs. LaFlamme, who is the
chairman, Fell, and Romano, each of whom are "independent" as defined in our
by-laws and the listing standards of the NASDAQ Stock Market. Messrs. LaFlamme
and Romano have been designated as the committee's financial experts pursuant to
the rules promulgated under Section 401 of Regulation S-K.
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 2004.
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. Also, each of our Board
committees (Audit, Compensation and Nominating committees) have written
charters. These charters are 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 and 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.
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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, 2004, 2003 and 2002, of those persons who were, at
December 31, 2004: The chief executive officer and the other executive officers
of the Company (the "Named Officers"). See "Compensation of Directors" under
Item 11.
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
----------------------
Annual Compensation Restricted Securities
Name and Principal -------------------------- Stock Underlying All Other
Position Year Salary Bonus(1) Awards(6) Options(2) Compensation(3)
- ----------------------------------- ---- ---------- -------- ---------- ---------- ---------------
Steven K. Miller (8) 2004 175,000 - - - -
Senior Vice President Real Estate
and Business Development,
Interim President &
Chief Executive Officer
Jerry Herman (7) 2004 300,000 - - - 2,732
Former President & 2003 287,308 - - - 2,732
Chief Executive Officer
James B. Dale 2004 159,569 6,000 2,265 - 1,901
Senior Vice President Finance, 2003 160,442(5) 7,200 - - 1,871
Secretary, Treasurer, and 2002 145,000 17,850 - 21,000 2,036
Chief Financial Officer
Richard A. Gerhart (4) 2004 143,237 4,000 1,880 - 2,226
Senior Vice President Hotel 2003 132,500 9,700 - - 2,329
Operations
(1) Mr. Dale and Mr. Gerhart received cash bonuses of $6,000 and $4,000,
respectively in 2004, including $5,000 and $3,000 received in connection
with supplemental retention and performance agreements.
(2) Includes 21,000 options issued in 2002 to Mr. Dale, of which 14,000 did
not vest and were forfeited.
(3) Includes life insurance premiums paid by the Company on behalf of the
Named Officers. Also includes the Company's 401(k) matching contributions
of $153 and $256 for Mr. Gerhart in 2004 and 2003 and $1,676, $1,646, and
$1,586 for Mr. Dale in 2004, 2003 and 2002, 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 was issued in 2004. In
addition, Mr. Dale and Mr. Gerhart were awarded 1,515 and 909 shares of
restricted stock in 2004, respectively, valued at $5,151 and $3,091, in
connection with supplemental retention and performance agreements.
(7) Mr. Herman served as the Company's President and Chief Executive Officer
from January 2003 until December 31, 2004, at which time his resignation
was effective.
(8) Mr. Miller was hired as our Senior Vice President of Real Estate and
Business Development in August 2003. He began serving as our Interim CEO
and President as of January 1, 2005. The compensation included in the
table is that which Mr. Miller was paid for service during 2004 as Senior
Vice President of Real Estate and Business Development.
No options were exercised by any Named Officers in 2004.
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EMPLOYMENT AGREEMENTS
Our President and Chief Executive Officer, Jerry H. Herman, resigned effective
December 31, 2004. Mr. Herman provided services to us under the terms of an
employment agreement originally dated December 19, 2002. Pursuant to the
agreement, Mr. Herman received a base salary of $300,000 per year, and was
eligible to earn a bonus consisting of a cash portion and restricted stock
portion, subject to certain performance criteria. In 2004, the performance
criteria were not met, and Mr. Herman did not receive a bonus in 2004.
We entered into a settlement agreement with Mr. Herman, designed to result in a
smooth transition of our leadership, and a mutually beneficial severance
settlement. The settlement agreement provided for the payment to Mr. Herman of
his regular salary through March 31, 2005, plus certain fringe benefits
including health insurance, disability insurance, and life insurance. Mr. Herman
agreed to reasonably assist us through June 30, 2005 with our transition to a
new President and Chief Executive Officer. Mr. Herman resigned as a director
effective November 29, 2004, the day his resignation was tendered.
Stephen K. Miller, our senior vice president of real estate and business
development, entered into an employment agreement with us on July 25, 2003. Mr.
Miller's agreement was amended to provide that beginning January 1, 2005, he
shall serve as our interim Chief Executive Officer until the earlier of April
30, 2005 or a successor is duly appointed by our board of directors. The
amendment extended the expiration of the agreement from December 31, 2005 to
April 30, 2006. Under the terms of the agreement, as amended, we pay Mr. Miller
a base salary of $185,000 per year, however the base pay was increased to the
annual rate of $200,000 for the period during which Mr. Miller serves as the
interim Chief Executive Officer. Mr. Miller was eligible to earn a bonus in 2004
consisting of a cash portion and restricted stock portion, subject to certain
performance criteria. These criteria relate to the sale of hotels, acquisition
of land and/or existing hotels, commencement of construction on new
developments, and the raising of equity capital from new partners or other
sources. The Compensation Committee of the board of directors has not yet
determined the final amount of Mr. Miller's 2004 bonus, if any. In addition, the
2005 amendment provides for a $20,000 bonus to Mr. Miller if he is employed by
us on December 31, 2005 (or if he is terminated prior to such date other than
for cause), and he successfully secures for us or a joint venture project all
debt and equity funding necessary to develop five hotels having at least seventy
rooms on or before June 30, 2005. Mr. Miller's employment agreement entitles him
to receive severance payments equal to six months salary if his employment it
terminated by us "without cause" at an effective date greater than three months
prior to the end of the employment term. He is entitled to receive severance
payments equal to three months salary if his employment is terminated "without
cause" at an effective date less than three months prior to the end of the
employment term. However, the 2005 amendment also provides that if Mr. Miller is
terminated within twelve months of our hiring a full-time Chief Executive
Officer, he shall receive severance equal to six month's base salary (at the
$185,000 annual rate).
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, however was
extended to June 30, 2006 pursuant to an amendment in January 2005. Under the
agreement, as amended we paid Mr. Dale a base salary of approximately $160,000
in 2004, increasing to approximately $168,000 for 2005. In addition, Mr. Dale
was eligible to earn a bonus in 2004 consisting of a cash portion and restricted
stock portion, subject to certain performance criteria. These criteria relate to
the attainment of corporate and hotel capital, the reduction in financing costs,
expedited financial reports, cost savings, and the disposition of hotels. The
Compensation Committee of the board of directors has not yet determined the
final amount of Mr. Dale's 2004 bonus, if any. In addition, Mr. Dale was paid
$5,000 and received 1,515 shares of restricted stock in 2004, in connection with
a supplemental retention and performance agreement as described below. The
January 2005 amendment also provided for a $10,000 bonus to Mr. Dale if he is
employed by us on December 31, 2005 (or if he is terminated prior to such date
other than for cause), and he successfully facilitates a replacement operating
line-of-credit for us on terms deemed more favorable to the existing
line-of-credit on or before March 31, 2005. 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 originally expired July 1, 2005, however was extended to December
31, 2005 pursuant to an amendment in January 2005. Under the agreement, as
amended, 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 annually for the
remaining term. In addition, Mr. Gerhart was eligible to earn a bonus in 2004
consisting of a cash portion and restricted stock portion, subject to certain
performance criteria. 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
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compared with budgeted and prior year amounts, local market revenue penetration,
cost control, and the disposition of hotels. The Compensation Committee of the
board of directors has not yet determined the final amount of Mr. Gerhart's 2004
bonus, if any. In addition, Mr. Gerhart was paid $3,000 and received 909 shares
of restricted stock in 2004, in connection with a supplemental retention and
performance agreement as described below. If we terminate Mr. Gerhart "without
cause," he is entitled to receive his salary and bonus for six months from the
date of termination. The January 2005 amendment provides that if we outsource
our hotel management functions to a third party and such third party manager
does not offer employment to Mr. Gerhart at compensation levels no less
favorable than those contained in the 2005 amendment, then Mr. Gerhart's
severance shall be extended to nine months.
We entered into supplemental retention and performance agreements with Mr. Dale
and Mr. Gerhart which expired as of December 31, 2003. Under these 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 related 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 related primarily
to hotel revenue and profitability results. The amount paid in 2004 under these
supplemental agreements was approximately $16,500 in the aggregate, including
both cash and restricted stock.
NEW PRESIDENT AND CEO
Jerry H. Herman resigned as our President and Chief Executive Officer effective
December 31, 2004. A committee of the board of directors is currently conducting
a national search for a replacement President and Chief Executive Officer. This
search includes candidates from outside the Company, as well as within the
Company.
COMPENSATION OF DIRECTORS
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 nonemployee director received an annual cash retainer of $9,000 paid in
equal monthly installments, except that 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 September 2004, 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. 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
- 72 -
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 and less than 4.0 hours $300 $1,000
Meetings over 4.0 hours $500 $1,500
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.
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 30, 2005, by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) each of the Company's Directors, (iii) each of the Named
Officers and (iv) all Directors and executive officers as a group.
Shares Beneficially Owned As of March 30, 2005
----------------------------------------------
Name Number Percent
---- ------- -------
Wellington Management Company LLP 565,000 (1) 11.4%
Kenneth M. Fell, Director 516,200 (2) 10.4
Andrew E. Shapiro, Director 503,700 (3) 10.2
Lawndale Capital Management LLC 488,700 (3) 9.9
Michael P. Holtz 410,000 (4) 8.3
H. Andrew Torchia 396,032 (5) 8.0
Salomon J. Dayan 316,812 (7) 6.4
Richard A. D'Onofrio 308,519 (6) 6.2
Dimensional Fund Advisors, Inc. 307,000 (8) 6.2
Raymond and Liliane R. Dayan 269,314 (9) 5.4
James B. Dale, CFO 84,040 (10) 1.7
Richard A. Gerhart, Senior Vice
President Hotel Operations 61,380 (11) 1.2
Thomas J. Romano, Director 32,500 (12) 0.7
Steven J. Belmonte, Director 27,968 (13) 0.6
Gerald T. LaFlamme, Director 14,480 (14) 0.3
Stephen K. Miller, Interim CEO
and President - -
ALL DIRECTORS AND EXECUTIVE
OFFICERS AS A GROUP (9 PERSONS) 1,557,080 31.4%
(1) Based upon information provided in its Form 13F dated December 31,
2004. Wellington Management Company LLP, in its capacity as
investment advisor, may be deemed the beneficial owner of 565,000
shares of our common stock that 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 September 2, 2004.
Includes 18,000 restricted shares held directly, 199,430 shares held
by Kenneth M. Fell Trust; 295,270 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 S. Wacker Drive, Suite 350, Chicago, IL 60606.
(3) Based upon information filed on Form 3 dated December 27, 2004.
Includes 15,000 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.
- 73 -
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.
- 74 -
(4) Based on information filed on Form 4 dated December 11, 2002.
Includes 410,000 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 120,000 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 120,000 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 September 2, 2004.
Includes 12,000 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 72,000 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 December
31, 2004, Dimensional Fund Advisors, Inc. ("DFA"), in its capacity
as investment advisor, may be deemed beneficial owner of 307,000
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 307,000 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, 2,265 shares of restricted
stock, and 80,500 shares issuable upon the exercise of options. All
of the options are exercisable, however none are "in-the-money" as
of December 31, 2004, having a weighted average exercise price of
$4.07 per share.
(11) Includes 2,500 shares held directly, 1,880 shares of restricted
stock, and 57,000 shares issuable upon the exercise of options. All
of the options are exercisable, however none are "in-the-money" as
of December 31, 2004, having a weighted average exercise price of
$3.40 per share.
(12) Based upon information filed on Form 4 dated September 2, 2004.
Includes 12,000 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.
(13) Based upon information filed on Form 4 dated September 2, 2004.
Includes 12,000 restricted shares directly held; 14,968 shares held
directly and 1,000 shares issuable upon the exercise of options.
(14) Based upon information filed on Form 4 dated September 2, 2004.
Includes 12,000 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.
Urban 2000 Corp., ("Urban") and its principals H. Andrew Torchia and Richard A.
D'Onofrio, own more than 5% of outstanding shares of common stock of the
Company. During 2004, Urban entered into an agreement with the Company to
provide consulting services in connection with the financing of new hotel
development projects. This agreement was reviewed and approved by our board of
directors. Under the terms of the agreement, fees are due Urban only upon the
closing of a new hotel project financing commitment from an equity or debt
source introduced by Urban. Total fees paid to Urban were approximately $68,000
in 2004, related to the introduction of an equity investor to the Company for
the successful equity financing of one new hotel development project.
- 75 -
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following tables present the fees for professional audit services rendered
and fees billed for other services rendered by our independent registered public
accounting firms for the fiscal years ended December 31, 2004 and 2003,
respectively. KPMG LLP served as our independent registered public accounting
firm for the entire year ended December 31, 2003 and in 2004 from January 1,
2004 through November 10, 2004, when KPMG LLP resigned as our independent
registered public accounting firm. On November 16, 2004, Grant Thornton LLP was
appointed to serve as our independent registered public accounting firm.
FEES BILLED FOR SERVICES RENDERED BY KPMG LLP: 2004 2003
- ---------------------------------------------- -------- --------
Audit fees $115,000 $219,000
Audit-related fees - -
Tax fees 80,000 78,000
All other fees - -
-------- --------
$195,000 $297,000
======== ========
FEES BILLED FOR SERVICES RENDERED BY GRANT THORNTON LLP: 2004 2003
- -------------------------------------------------------- ------- --------
Audit fees $ 16,055 $ -
Audit-related fees - -
Tax fees - -
All other fees - -
-------- --------
$ 16,055 $ -
======== ========
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. Neither KPMG LLP nor Grant Thornton LLP performed any
services in this category for us in 2004 or 2003.
Tax Fees. This category consists of professional services rendered 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. Neither KPMG LLP nor Grant Thornton LLP performed any services
in this category for us in 2004 or 2003.
Our Audit Committee pre-approved all of the services provided by KPMG LLP and
Grant Thornton LLP.
- 76 -
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
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, 2004.
(a)(1) Financial Statements:
Independent Registered Public Accounting Firms' Reports... F-1
Consolidated Balance Sheets at December 31, 2004
and 2003 ................................................ F-3
Consolidated Statements of Operations for the years
ended December 31, 2004, 2003 and 2002 .................. F-5
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 2004, 2003 and 2002..... F-6
Consolidated Statements of Cash Flows for the years
ended December 31, 2004, 2003 and 2002 .................. F-7
Notes to Consolidated Financial Statements ............... F-9
(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.
(b) 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 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
- 77 -
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
10.17 Employment agreement between Arlington Hospitality, Inc. and
Stephen Miller dated July 25, 2003
10.18 Amendment to employment agreement between Arlington Hospitality,
Inc. and Stephen Miller dated September 10, 2003
10.19 Employment agreement between Arlington Hospitality, Inc. and James
B. Dale dated January 12, 2001 and Amendment No. 1 thereto dated
October 29, 2001.
10.20 Supplemental retention and performance agreement between Arlington
Hospitality, Inc. and James B. Dale dated December 1, 2002
10.21 Employment agreement between Arlington Hospitality, Inc. and
Richard A. Gerhart dated July 1, 2002
10.22 Supplemental retention and performance agreement between Arlington
Hospitality, Inc. and Richard A. Gerhart dated December 1, 2002
The following exhibits were included in the Registrant's Report on Form 10-K
filed March 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.
The following exhibits were included in the Registrant's Report on Form 10-Q
filed May 14, 2004.
Exhibit No. Description
- ----------- -----------
10.25 Second Amendment to Amended and Restated Loan and Security
Agreement dated April 30, 2004 between Arlington Hospitality,
Inc. and LaSalle Bank N.A.
The following exhibits were included in the Registrant's Report on Form 10-Q
filed August 13, 2004.
Exhibit No. Description
- ----------- -----------
10.26 Temporary sales letter agreement dated May 18, 2004 between
Arlington Hospitality, Inc. and PMC Commercial Trust.
- 78 -
The following exhibits were included in the Registrant's Report on Form 8-K
filed October 7, 2004:
Exhibit No. Description
- ----------- -----------
10.27 Third Amendment to Amended and Restated Master Agreement dated
October 4, 2004 between Arlington Hospitality, Inc. and PMC
Commercial Trust.
10.28 Proceeds Deficits Loan Agreement dated October 4, 2004 between
Arlington Hospitality, Inc. and PMC Commercial Trust.
10.29 Deficit Note Agreement dated October 1, 2004 between Arlington
Hospitality, Inc. and PMC Commercial Trust.
The following exhibits are included in this Report on Form 10-K filed March 31,
2005:
Exhibit No. Description
- ----------- -----------
10.30 Third Amended and Restated Loan and Security Agreement dated March
21, 2005 between Arlington Hospitality, Inc. and LaSalle Bank N.A.
10.31 Amendment to employment agreement between Arlington Hospitality,
Inc. and Stephen K. Miller dated January 31, 2005
10.32 Amendment to employment agreement between Arlington Hospitality,
Inc. and James B. Dale dated January 31, 2005
10.33 Amendment to employment agreement between Arlington Hospitality,
Inc. and Richard A. Gerhart dated January 31, 2005
21.1 Subsidiaries of Registrant.
23.1 Consent of Grant Thornton LLP.
23.2 Consent of KPMG LLP.
31.1 Certification of Chief Executive Officer Pursuant toSEC 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.
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/ Stephen K. Miller
--------------------------------
Stephen K. Miller
Interim 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, 2005
- 79 -
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/ Andrew E. Shapiro /s/ Kenneth M. Fell
- --------------------------------------- ---------------------------------
Andrew E. Shapiro, Vice-Chairman Kenneth M. Fell, Chairman
March 30, 2005 March 30, 2005
/s/ Steven J. Belmonte /s/ Gerald T. LaFlamme
- --------------------------------------- ---------------------------------
Steven J. Belmonte, Director Gerald T. LaFlamme, Director
March 30, 2005 March 30, 2005
/s/ Salomon J. Dayan /s/ Thomas J. Romano
- --------------------------------------- ---------------------------------
Salomon J. Dayan, Director Thomas J. Romano, Director
March 30, 2005 March 30, 2005
- 80 -
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
Arlington Hospitality, Inc.
We have audited the accompanying consolidated balance sheet of Arlington
Hospitality, Inc. and subsidiaries ("the Company") as of December 31, 2004, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the year then ended. 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 audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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, 2004, and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Chicago, Illinois
March 29, 2005
See notes to consolidated financial statements.
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Arlington Hospitality, Inc.:
We have audited the accompanying consolidated balance sheet of Arlington
Hospitality, Inc. and subsidiaries (the Company) as of December 31, 2003, and
the related consolidated statements of operations, shareholders' equity, and
cash flows for the years ended December 31, 2003 and 2002. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards of the Public
Company Oversight Board (United States). 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 as of December 31, 2003 and the results of
their operations and their cash flows for the years ended December 31, 2003 and
2002 in conformity with U.S. generally accepted accounting principles.
KPMG LLP
March 26, 2004
See notes to consolidated financial statements.
F-2
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2004 2003
------------ ------------
Current assets:
Cash and cash equivalents $ 2,558,384 $ 3,623,550
Accounts receivable, less an allowance of $76,500 at
December 31, 2004 and 2003 (including approximately
$372,000 and $382,000 from related parties) 1,365,454 1,289,492
Notes receivable, current portion (Note 2) 76,042 146,000
Prepaid expenses and other current assets 808,478 1,142,032
Refundable income taxes 67,538 975,316
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 3) 467,144 1,232,481
Assets held for sale - other brands (Note 11) 6,525,844 10,603,160
Assets held for sale - AmeriHost Inn hotels (Note 11) 19,214,269 28,162,442
Capital lease assets held for sale - AmeriHost Inn hotels (Note 14) 15,379,638 -
------------ ------------
Total current assets 46,462,791 47,174,473
------------ ------------
Investments in and advances to unconsolidated
hotel joint ventures (Note 4) 1,970,095 3,309,344
------------ ------------
Property and equipment (Notes 6 and 7):
Land 5,138,978 5,735,489
Buildings 26,579,543 31,174,776
Furniture, fixtures and equipment 9,172,897 13,176,842
Construction in progress 313,458 312,925
Leasehold improvements 96,735 2,396,689
Capital lease assets 13,088,840 -
------------ ------------
54,390,451 52,796,721
Less accumulated depreciation and amortization 11,423,246 13,242,842
------------ ------------
42,967,205 39,553,879
------------ ------------
Notes receivable, less current portion (Note 2) 450,000 867,500
Deferred income taxes (Note 9) 9,210,846 6,071,000
Other assets, net of accumulated amortization of
approximately $1,259,000 and $1,035,000 (Note 5) 2,300,704 2,737,217
------------ ------------
11,961,550 9,675,717
------------ ------------
$103,361,641 $ 99,713,413
============ ============
See notes to consolidated financial statements.
F-3
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, December 31,
2004 2003
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,321,786 $ 2,768,402
Bank line-of-credit (Note 6) 2,225,000 3,850,000
Accrued payroll and related expenses 566,889 393,815
Accrued real estate and other taxes 1,860,480 1,980,015
Other accrued expenses and current liabilities 1,181,677 1,407,511
Current portion of long-term debt (Note 7) 1,130,701 1,195,050
Liabilities of assets held for sale - other brands 6,939,989 9,585,492
Liabilities of assets held for sale - AmeriHost Inn hotels 18,491,277 28,540,561
Capital lease obligations of capital lease assets
held for sale - AmeriHost Inn hotels 18,077,035 -
------------- -------------
Total current liabilities 52,794,834 49,720,846
------------- -------------
Long-term debt, net of current portion (Note 7) 22,046,112 26,513,398
Capital lease obligations (Note 7) 15,641,463 -
------------- -------------
Total long term liabilities 37,687,575 26,513,398
------------- -------------
Deferred income (Note 14) 6,125,788 11,361,927
------------- -------------
Commitments and contingencies (Notes 4, 6, 7, 8 and 14)
Minority interests 246,063 329,819
------------- -------------
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 4,956,098 shares at December 31,
2004 and 4,994,956 shares at December 31, 2003 24,781 24,975
Additional paid-in capital 13,140,256 13,220,302
Retained earnings (deficit) (6,657,656) (1,020,979)
------------- -------------
6,507,381 12,224,298
Less:
Stock subscriptions receivable (Note 8) - (436,875)
------------- -------------
6,507,381 11,787,423
------------- -------------
$ 103,361,641 $ 99,713,413
============= =============
See notes to consolidated financial statements.
F-4
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------- ------------- -------------
Revenue (Note 10):
Hotel operations $ 33,948,640 $ 39,861,661 $ 43,962,250
Development and construction 3,579,978 4,196,878 7,180,222
Hotel sales and commissions 21,535,227 22,831,102 10,017,080
Management services 379,159 445,862 957,801
Employee leasing 1,943,369 1,858,103 3,267,491
Incentive and royalty sharing (Note 16) 1,353,576 972,219 588,938
Office building rental and other 701,915 749,782 669,769
------------ ------------ ------------
63,441,864 70,915,607 66,643,551
------------ ------------ ------------
Operating costs and expenses:
Hotel operations 27,047,828 30,711,104 32,253,242
Development and construction 4,968,662 4,739,296 7,205,328
Hotel sales and commissions 18,719,752 19,187,177 8,159,459
Management services 209,655 280,383 714,648
Employee leasing 1,840,417 1,798,714 3,208,708
Office building rental and other 170,779 214,232 56,757
------------ ------------ ------------
52,957,093 56,930,906 51,598,142
------------ ------------ ------------
10,484,771 13,984,701 15,045,409
Depreciation and amortization 2,334,033 3,281,626 4,028,589
Leasehold rents - hotels (Note 14) 3,717,730 4,823,210 4,908,019
Leasehold termination (Note 7) 370,266 - -
Corporate general and administrative 3,498,057 2,419,485 2,198,640
Impairment provision (Note 1) 1,291,667 5,069,780 542,019
------------ ------------ ------------
Operating income (loss) (726,982) (1,609,400) 3,368,142
Other income (expense):
Interest expense (4,567,967) (4,087,120) (4,762,527)
Interest income 360,166 467,538 489,747
Other income (loss) (11,492) (7,930) 329,959
Extinguishment of debt (146,428) (141,227) -
Gain on sale of fixed and other assets (Notes 16) 283,688 400,000 727,076
Equity in net income and (losses) from
unconsolidated joint ventures (95,141) (724,575) (412,093)
------------ ------------ ------------
Loss before minority interests and income taxes (4,904,156) (5,702,714) (259,696)
Minority interests in operations of
consolidated subsidiaries and partnerships (164,444) (162,304) (121,088)
------------ ------------ ------------
Loss before income taxes (5,068,600) (5,865,018) (380,784)
Income tax benefit (Note 9) 1,614,677 2,155,000 5,000
------------ ------------ ------------
Net loss from continuing operations (3,453,923) (3,710,018) (375,784)
Discontinued operations, net of tax (Note 13) (2,182,754) (1,908,562) (1,334,148)
------------ ------------ ------------
Net loss $ (5,636,677) $ (5,618,580) $ (1,709,932)
============ ============ ============
Net loss from continuing operations per share:
Basic $ (0.69) $ (0.74) $ (0.08)
Diluted $ (0.69) $ (0.74) $ (0.08)
Net loss per share:
Basic $ (1.12) $ (1.12) $ (0.34)
Diluted $ (1.12) $ (1.12) $ (0.34)
See notes to consolidated financial statements.
F-5
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
Stock
subscrip-
Common stock Additional Retained tions Total
------------------------- paid-in earnings and notes shareholders'
Shares Amount capital (deficit) receivable equity
----------- ------------ ------------- ------------- ------------ -------------
BALANCE AT JANUARY 1, 2002 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
Shares and options issued for compensation 86,142 431 306,829 - - 307,260
Cancellation of notes receivable and common
stock retirement (125,000) (625) (386,875) - 436,875 49,375
Net loss for the year ended December 31, 2004 - - - (5,636,677) - (5,636,677)
---------- ----------- ------------ ------------ ----------- ------------
BALANCE AT DECEMBER 31, 2004 4,956,098 $ 24,781 $ 13,140,256 $ (6,657,656) $ - $ 6,507,381
========== =========== ============ ============ =========== ============
See notes to consolidated financial statements.
F-6
\
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002
------------- ------------- -------------
Cash flows from operating activities:
Cash received from customers $ 65,954,442 $ 75,726,970 $ 77,501,677
Cash paid to suppliers and employees (44,460,415) (51,339,097) (57,969,651)
Interest received 360,038 425,241 551,838
Interest paid (4,531,865) (4,830,621) (5,516,449)
Income taxes received (paid) 837,778 383,460 (236,446)
------------ ------------ ------------
Net cash provided by operating activities 18,159,978 20,365,953 14,330,969
------------ ------------ ------------
Cash flows from investing activities:
Distributions, and collections on advances,
from affiliates 1,267,434 570,219 3,020,396
Purchase of property and equipment (992,074) (7,087,994) (18,582,826)
Purchase of investments in, and advances
to, minority-owned affiliates (1,371,385) (1,391,407) (2,142,492)
Acquisitions of partnership interests,
net of cash acquired 46,684 (777,237) (796,786)
Sale of partnership interest 1,275,000 - -
Collection (issuance) of notes receivable 487,458 (131,417) (15,362)
Proceeds from sale of assets and franchising rights 3,484,001 2,804,497 1,443,701
------------ ------------ ------------
Cash provided by (used in) investing activities 4,197,118 (6,013,339) (17,073,369)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt - 6,888,098 13,016,749
Principal payments on long-term debt (21,549,061) (19,095,114) (10,440,190)
Net repayments on bank line-of-credit (1,625,000) (2,534,287) (409,415)
Distributions to minority interests (248,201) (90,255) (203,075)
Common stock repurchases - (144,346) (310)
Issuance of Common Stock - 277,325 -
------------ ------------ ------------
Net cash provided by (used in) financing activities (23,422,262) (14,698,579) 1,963,759
------------ ------------ ----------
Net decrease in cash and cash equivalents (1,065,166) (345,965) (778,641)
Cash and cash equivalents, beginning of year 3,623,550 3,969,515 4,748,156
------------ ------------ ------------
Cash and cash equivalents, end of year $ 2,558,384 $ 3,623,550 $ 3,969,
============ ============ ============
See notes to consolidated financial statements.
F-7
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2002 2002
------------- ------------- -------------
Reconciliation of net loss to net cash
provided by operating activities:
Net loss $ (5,636,677) $ (5,618,580) $ (1,709,932)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 4,582,120 4,412,112 5,516,302
Equity in net (income) loss and interest income from
unconsolidated joint ventures and amortization
of deferred income (1,041) 553,602 230,402
Minority interests in operations of consolidated
subsidiaries and partnerships 164,444 86,186 80,331
Bad debt expense - (73,500) 15,000
Issuance of common stock and common stock options 307,256 8,675 13,747
Gain on sale of assets and franchising rights (386,333) (337,856) (727,076)
Deferred income taxes (3,139,846) (3,644,000) 235,000
Amortization of deferred gain (1,479,840) (1,358,105) (1,079,047)
Amortization of capital lease obligation 680,243 - -
Proceeds from sale of hotels 19,840,486 22,831,102 9,865,111
Income from sale of hotels (2,808,718) (3,479,500) (1,705,651)
Provision for impairment 2,327,178 5,963,218 642,019
Amortization of deferred loan costs on sold hotels 257,209 - -
Other - - (298,022)
Changes in assets and liabilities, net of effects
of acquisitions:
(Increase) decrease in accounts receivable (139,430) 819,033 68,101
Decrease (increase) in prepaid expenses
and other current assets 333,353 (242,985) 88,369
Decrease (increase) in refundable income taxes 907,778 599,460 (1,276,446)
Decrease (increase) in costs and estimated
earnings in excess of billings 765,337 246,620 (399,964)
Decrease (increase) in other assets 525,164 (807,854) (331,689)
(Decrease) increase in accounts payable (524,400) (982,699) 1,473,684
(Decrease) increase in accrued payroll and other
accrued expenses and current liabilities (497,715) (732,493) 1,552,416
Increase (decrease) in accrued interest 196,740 (21,026) (1,684)
Increase in deferred income 1,886,670 2,144,543 2,079,998
------------ ------------ ------------
Net cash provided by operating activities $ 18,159,978 $ 20,365,953 $ 14,330,969
============ ============ ============
See notes to consolidated financial statements.
F-8
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, almost all of
the Company's AmeriHost Inn hotels have been developed and constructed
using a two- or three-story prototype, averaging 60-65 rooms, with interior
corridors and an indoor pool area, that 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
non-controlling, 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
non-controlling, 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 as revenue the net sale price of a Consolidated
AmeriHost Inn hotel, and the related operating expense as the net cost
basis of the AmeriHost Inn hotel asset, when the sale is consummated, as
part of the ongoing operational activity of the Company.
The Company recognizes management fee revenue as it performs hotel
management services for unrelated third parties and unconsolidated joint
ventures. The management fees are computed based upon a percentage of total
hotel revenues, plus incentive fees in certain instances, in accordance
with the terms of the individual written management agreements. The Company
recognizes the management fee revenue in the hotel management segment as
the related hotel revenue is earned.
The Company recognizes employee-leasing revenue as 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.
F-9
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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 subsequently sells, to a buyer who executes an AmeriHost Inn franchise
agreement with the franchisor (see "Deferred income" below). In addition,
the franchisor of the AmeriHost Inn brand has agreed to pay the Company a
portion of all royalty fees received from all of the AmeriHost Inn hotels
in the franchise system, 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" 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 2005 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, 2004 and 2003, 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, 2004, approximates the carrying value
considering the property specific nature of the notes. In making such
assessments, the Company considered the current rate at which the Company
could borrow funds with similar remaining maturities.
Investments:
Investments in entities in which the Company has a non-majority,
non-controlling ownership interest are accounted for using the equity
method, under which method the original investment is increased (decreased)
for the Company's share of the joint venture's net income (loss), increased
by contributions made and reduced by distributions received.
Property and equipment:
Property and equipment are stated at cost. Repairs and maintenance are
charged to expense as incurred, and renewals and betterments are
capitalized. Depreciation is being provided for assets placed in service,
principally by use of the straight-line method over their estimated useful
lives. Leasehold improvements are being amortized by use of the
straight-line method over the term of the lease. Approximately $57,000 in
construction period interest was capitalized in 2003 and was included in
property and equipment.
F-10
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 4-5 years
Other assets:
Deferred lease costs:
Deferred lease costs represent the amounts paid for the acquisition of
leasehold interests for certain hotels and obligations incurred by the
Company to maintain certain lease payment rates. 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 at December 31, 2004 and 2003 includes the gain from the
sale of hotels in 1998 and 1999, which were simultaneously leased-back
(Note 14). This gain was recognized on a straight-line basis over the
15-year term of the lease, as amended, as an adjustment to leasehold rent
expense. In connection with the capital lease accounting for 17 hotels
pursuant to a lease modification effective October 1, 2004, approximately
$5.2 million in unamortized deferred gain related to these hotels was
reclassified as a reduction in the basis of the capital lease assets and
was no longer amortized. For the hotels that remained classified as
operating leases, the amortization continued, however beginning October 1,
2004, the deferred gains are being amortized on a straight-line basis over
the anticipated four-year remaining term of the lease, as modified.
Deferred income also includes incentive fees received in connection with
the sale of AmeriHost Inn hotels. These fees are recognized on a
straight-line basis over a 76-month period in which the unamortized portion
of the fees may be considered refundable under certain conditions.
Deferred income also includes that portion of development, construction and
renovation fees earned from entities in which the Company holds an
ownership interest. The portion of fees deferred is equal to the Company's
proportional ownership interest in the entity and is being recognized in
income over the life of the operating assets. The balance of the fees is
recorded in income as earned.
Income taxes:
Deferred income taxes are provided on the differences in the bases of the
Company's assets and liabilities, as determined for tax and financial
reporting purposes, and relate principally to hotel impairment charges,
depreciation of property and equipment, capital lease accounting, and
deferred income. The deferred income tax balance at December 31, 2004 also
includes a net operating loss carry forward of approximately $12.1 million
expiring from 2022 through 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.
F-11
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The calculation of basic and diluted earnings per share for each of the three
years ended December 31, is as follows:
2004 2003 2002
------------- ------------- --------------
Net loss before discontinued operations $ (3,453,923) $ (3,710,018) $ (375,784)
Discontinued operations, net of tax (2,182,754) (1,908,562) (1,334,148)
-------------- ------------- --------------
Net loss available to common
shareholders - diluted $ (5,636,677) $ (5,618,580) $ (1,709,932)
============= ============= ==============
Weighted average common shares outstanding 5,013,620 5,011,572 4,958,438
Dilutive effect of stock options - - -
------------- ------------- --------------
Dilutive common shares outstanding 5,013,620 5,011,572 4,958,438
============= ============= ==============
Net loss per share - Basic:
From continuing operations $ (0.69) $ (0.74) $ (0.08)
From discontinued operations (0.43) (0.38) (0.26)
------------- ------------- --------------
$ (1.12) $ (1.12) $ (0.34)
============= ============= ==============
Net loss per share - Diluted:
From continuing operations $ (0.69) $ (0.74) $ (0.08)
From discontinued operations (0.43) (0.38) (0.26)
------------- ------------- --------------
$ (1.12) $ (1.12) $ (0.34)
============= ============== ==============
Advertising:
The costs of advertising, promotion and marketing programs are charged to
operations in the year incurred. These costs were approximately $1,078,000,
$1,117,000 and $1,411,000 for the years ended December 31, 2004, 2003 and 2002,
respectively.
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:
The Company applies the provisions of Statement of Financial Accounting Standard
No. 144, "Accounting for Long-Lived assets" ("SFAS 144"). SFAS 144 addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS 144 requires a long-lived asset to be sold to be classified as
"held for sale" in the period in which certain criteria are met, including that
the sale of the asset within one year is probable. 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 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
F-12
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,
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
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 and
execution of this plan, the Company recorded non-cash impairment charges in
accordance with SFAS No. 144. The non-cash impairment charges represent
adjustments to reduce the carrying value of certain hotel assets to the
estimated sales prices, net of estimated costs to sell, based on current market
conditions and the change in holding periods of the properties. During 2003, the
Company recorded approximately $6.0 million in non-cash impairment charges
related to 18 of the hotels targeted for sale, including $909,000 that is
associated with non-AmeriHost Inn hotels anticipated to be sold, which has been
included in "discontinued operations". During 2004, the Company recorded
approximately $2.3 million in non-cash impairment charges related to
consolidated hotels targeted for sale, one unconsolidated non-AmeriHost Inn
hotel, and a vacant land parcel, including approximately $986,000 in non-cash
impairment charges related to consolidated non-AmeriHost Inn hotels anticipated
to be sold, which has been included in "discontinued operations". The 2004
charges represent additional adjustments for certain hotels based on more recent
analysis and market conditions. In addition, the impairment recorded in
"discontinued operations" in 2004 relates primarily to one exterior corridor
hotel, which is over 25 years old. As a result of a change in brand affiliation
and the addition of newer hotels in its local market, the operating performance
of this hotel has declined, resulting in the impairment charge. In March 2005,
this hotel was sold (Note 20).
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, 2004.
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. In addition, during the fourth quarter of
2004, in conjunction with the lease modification with PMC (Note 14), the Company
began actively marketing 11 hotels on behalf of PMC, which had been classified
as capital lease assets, and accordingly were also classified as "held for sale"
at December 31, 2004. 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.
The Company does not depreciate 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,
F-13
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.
F-14
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
On August 13, 2003, the 1996 Non-Employee Director Stock Option Plan was
terminated. At December 31, 2004, 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. In 2003, the Company granted 40,500
shares of restricted common stock to the directors pursuant to the plan, all of
which were vested as of December 31, 2004. In September 2004, 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 2004, and 25% vested on October 1,
2004. The Company expensed approximately $263,000 and $27,000 during the twelve
months ended December 31, 2004 and 2003, respectively, in connection with these
restricted stock grants.
On October 29, 2003, the Company's 1996 Omnibus Incentive Stock Plan was
terminated. At December 31, 2004, options to purchase 281,500 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, a total of 5,142 restricted shares of common stock have
been granted pursuant to this plan.
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, 2004, options to
purchase 891,833 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, the
Senior Vice President of Real Estate and Business Development 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.
F-15
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The following table summarizes the employee stock options granted, exercised and
outstanding:
Weighted Average
Shares Exercise Price
------ --------------
Options outstanding January 1, 2002 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 (546,100) 4.52
Exercised (85,500) 3.24
Options granted 125,000 3.33
--------- -------------
Options outstanding December 31, 2003 1,415,958 4.24
Forfeitures (150,000) 4.13
Exercised - -
Options granted - -
--------- -------------
Options outstanding and exercisable as of
December 31, 2004 1,265,958 $ 4.25
========= =============
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:
2004 2003 2002
-------------- ------------- --------------
Grant-date fair value per share:
Options issued at market $ - $ - $ 1.16
Weighted average exercise prices:
Options issued at market $ - $ - $ 2.85
Significant assumptions (weighted-average):
Risk-free interest rate at grant date n/a n/a 3.39%
Expected stock price volatility n/a n/a 0.43
Expected dividend payout n/a n/a n/a
Expected option life (years)(a) n/a n/a 4.62
Net loss:
As reported $ (5,636,677) $ (5,618,580) $ (1,709,932)
Stock-based employee compensation,
expense, net of tax - 59,963 (126,182)
-------------- ------------- --------------
Pro forma $ (5,636,677) $ (5,558,617) $ (1,836,114)
============== ============= ==============
Net loss per share - Basic:
As reported $ (1.12) $ (1.12) $ (0.34)
Pro forma $ (1.12) $ (1.11) $ (0.37)
Net loss per share - Diluted:
As reported $ (1.12) $ (1.12) $ (0.34)
Pro forma $ (1.12) $ (1.11) $ (0.37)
(a) The expected option life considers historical option exercise patterns and
future changes to those exercise patterns anticipated at the date of grant.
F-16
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The following table summarizes information about employee stock options
outstanding at December 31, 2004:
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 2.00 Years $3.35 842,625 $3.35
$3.74 to 4.38 60,000 6.12 3.77 60,000 3.77
$6.31 to 7.81 363,333 2.18 6.43 363,333 6.43
------------- ----------- ------------ ----- --------- -----
$1.53 to 7.81 1,265,958 2.25 $4.25 1,265,958 $4.25
============= =========== ============ ===== ========= =====
2. NOTES RECEIVABLE:
Notes receivable consist of:
2004 2003
------------- --------------
Hotel sale related notes $ 510,000 $ 996,000
Other notes 16,042 17,500
------------- --------------
526,042 1,103,500
Less current portion 76,042 146,000
------------- --------------
Notes receivable, less current portion $ 450,000 $ 867,500
============= ==============
Notes receivable at December 31, 2004, 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, 2004
and 2003:
2004 2003
------------- --------------
Costs incurred on uncompleted contracts $ 1,922,030 $ 2,159,650
Estimated earnings 377,611 487,808
------------- --------------
2,299,641 2,647,458
Less billings to date 1,832,497 1,414,977
------------- --------------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 467,144 $ 1,232,481
============= ==============
Costs and estimated earnings in excess of billings on uncompleted contracts
includes $389,316 and $1,175,567 as of December 31, 2004 and 2003, 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, under which the original investment is
increased (decreased) for the Company's share of the joint venture's net income
(loss), increased by contributions made and reduced by distributions received.
The Company had investments in 12 hotel joint ventures at December 31, 2004,
with a total investment balance of approximately $1,965,000, and 14 hotel joint
ventures at December 31, 2003, with a total investment balance of approximately
$859,000. The Company is secondarily liable for the obligations and liabilities
of the limited partnerships in which it holds a general partnership interest.
F-17
F-18
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES
(CONTINUED):
The Company advances funds to hotels in which the Company has a minority
ownership interest for working capital and construction purposes. The advances
bear interest ranging from the prime rate to 10% per annum and are due on
demand. The Company expects the partnerships to repay these advances through the
sale of the properties, cash flow generated from hotel operations and mortgage
financing. The advances were approximately $5,000 and $2,451,000 at December 31,
2004 and 2003, respectively, and are included in investments in and advances to
unconsolidated hotel joint ventures in the accompanying consolidated balance
sheets.
During the first quarter of 2004, a joint venture owning a non-AmeriHost Inn
hotel, in which the Company has a 50% ownership interest, amended its
partnership agreement. The amendment (i) provided for all future capital calls
to be funded by the other partner, with no funding obligation by the Company and
without dilution of ownership interest to the Company, (ii) clarified the
Company's first priority distributions upon the sale of the hotel, (iii)
mandated that the hotel be marketed for sale, and (iv) transferred the hotel
management responsibilities to an affiliate of the joint venture partner. In
November 2004, the Company sold its ownership interest in this joint venture for
approximately $1.3 million. The Company accounted for this investment by the
equity method, and recorded approximately $11,000 in impairment charges during
the third quarter of 2004 in connection with this sale, reducing the carrying
value of this investment to the net sale price. The Company also had
subscription notes receivable from the same joint venture partners secured by
125,000 shares of the Company's common stock (Note 9). In November 2004, the
Company agreed to accept the 125,000 shares of common stock in full satisfaction
of the notes. In connection therewith, the Company recorded a charge of
approximately $49,000 in the third quarter of 2004, reducing the carrying value
of the notes to reflect the value expected to be received. The Company has taken
possession of the stock certificates and retired the shares. This charge has
been included in corporate general and administrative expense in the
accompanying consolidated financial statements.
Mortgage balances of approximately $17.0 million for the unconsolidated joint
ventures have not been included in the Company's consolidated balance sheets.
The Company has provided approximately $14.0 million in guarantees as of
December 31, 2004, on mortgage loan obligations for six joint ventures in which
the Company holds a minority, non-controlling equity interest, which expire at
various dates through March 2024. Other partners also have guaranteed portions
of the same obligations. The partners of one of the partnerships have entered
into a cross indemnity agreement whereby each partner has agreed to indemnify
the others for any payments made by any partner in relation to the guarantee in
excess of their ownership interest. Approximately $1.1 million of the mortgage
debt with unconsolidated joint ventures relates to one hotel that has been
identified to be sold as part of the Company's strategic hotel disposition plan.
During 2004, the Company and a partner in three hotel joint ventures entered
into an agreement to pursue the sale of the hotels. The joint ventures are owned
25% by the Company and 75% by the joint venture partner. The sale of the hotels
requires the approval of both partners. The agreement provides that upon the
sale of one of the hotels, the joint venture partner would receive a minimum
amount from the net proceeds, with any deficiency funded by the Company. This
hotel was sold in March 2005 (Note 20), resulting in the joint venture partner
receiving the minimum amount, and the Company receiving the remaining net
proceeds. The agreement also provides that upon the sale of this hotel, the
joint venture partner's approval on the sale of the two remaining hotels is no
longer required. These two hotels are currently being actively marketed for
sale, however the anticipated net proceeds from the sale of these hotels will be
utilized to repay the Company a portion of its operating advances to the joint
venture, with no excess funds available for partner distributions. Upon the sale
of all three hotels, total distributions to the Company and to the joint venture
partner are expected to be substantially the same as under the original joint
venture agreements. The Company's analysis has concluded that two of these joint
ventures are considered to be variable interest entities in accordance with FIN
46R, and have been consolidated in the Company's financial statements at
December 31, 2004. The value of the guarantee computed was nominal.
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. 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.
F-19
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES
(CONTINUED):
As a result of these transactions, the assets, liabilities, and results of
operations of the hotels owned by these joint ventures were consolidated in the
Company's financial statements. 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, 2004 and 2003:
2004 2003
------------- -------------
Property and equipment acquired $ 3,206,704 $ 2,006,246
Other assets acquired 47,781 15,358
Long-term debt assumed (3,112,289) (1,142,941)
Other liabilities assumed (188,880) (101,426)
------------- -------------
Cash paid, net of cash acquired $ (46,684) $ 777,237
============= =============
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, 2004, 2003 and 2002.
2004 2003 2002
-------------- ------------- --------------
Current assets $ 426,139 $ 1,987,939 $ 677,290
Noncurrent assets 18,031,463 26,502,009 26,732,517
Current liabilities 1,172,403 3,781,468 3,667,191
Long-term debt 14,447,896 23,429,037 23,591,779
Equity 2,837,302 1,279,443 150,837
Gross revenue 5,922,662 8,906,962 9,641,145
Gross operating profit 1,986,385 2,533,023 3,036,726
Depreciation and amortization 953,972 1,228,750 1,315,745
Net loss (183,879) (892,323) (478,350)
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. The Company has provided guarantees related
to the mortgage debt of certain joint ventures, some of which it shares the
responsibility of the guarantee on a joint and several basis with its joint
venture partners. The guarantees are effective for the term of the respective
mortgage loan and are being amortized over this period on a straight-line basis.
The Company has recorded as an additional investment in these joint ventures,
and a liability for its share of these guarantees at the time of issuance, based
on its estimated fair value. The net book value of these guarantees, and
offsetting liabilities was approximately $37,000 as of December 31, 2004.
F-20
5. OTHER ASSETS:
Other assets, net of accumulated amortization, at December 31, 2004 and 2003,
are comprised of the following:
2004 2003
------------- --------------
Deposits, franchise fees and other assets $ 546,687 $ 1,149,209
Deferred loan costs 713,250 935,366
Deferred lease costs 1,040,767 652,642
------------- --------------
Total $ 2,300,704 $ 2,737,217
============= ==============
F-21
6. BANK LINE-OF-CREDIT:
The Company had $2,225,000 and $3,850,000 outstanding on its bank operating
line-of-credit at December 31, 2004 and 2003, respectively. The operating
line-of-credit has a maximum availability of $4.0 million, is collateralized by
substantially all the assets of the Company, subject to first mortgages from
other lenders on hotel assets, bears interest at the fixed rate of 10% per
annum, and was scheduled to mature April 30, 2005. The line-of-credit provides
for the maintenance of certain financial covenants, including minimum net
income, minimum tangible net worth, total liabilities to net worth, and minimum
debt service coverage ratio. The Company was not in compliance with the minimum
net income, minimum tangible net worth requirement and the minimum debt service
coverage requirement as of December 31, 2004. The lender has waived these
covenant violations however, in connection with the renewal of the
line-of-credit set forth below.
In March 2005, the Company executed a renewal of its $4.0 million line-of-credit
with the same lender through April 30, 2006. The maximum availability reduces to
$3.5 million at May 1, 2005, and reduces further to $3.0 million on July 31,
2005, and to $2.5 million on October 31, 2005. The terms of the renewal also
provide for interest at the rate of 10%, and the maintenance of certain
financial covenants, similar to the previous line-of-credit.
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
$18.5 million, which has been classified in current liabilities in the
accompanying consolidated balance sheet as of December 31, 2004. This amount
includes approximately $2.3 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 $6.3 million,
which has been classified in current liabilities in the accompanying
consolidated balance sheet as of December 31, 2004. This amount includes
approximately $2.0 million, which is contractually due within the next twelve
months regardless of the plan for hotel disposition.
Approximately $1.1 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 in March 2005, the lender extended the maturity date to January 1, 2007. 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.
Pursuant to a lease modification with PMC Commercial Trust ("PMC") effective
October 1, 2004 (Note 14), the Company must, upon the sale of each PMC hotel,
provide a Proceeds Deficit Note payable to PMC in the amount of the shortfall,
if any, between the net sale proceeds and the original Assigned Value (the
original sale price in a sale and leaseback transaction). The payment of a lease
termination fee to PMC, as a result of the sale of the hotel, will reduce the
outstanding balance of the Proceeds Deficit Note, if any. If the net sale
proceeds is greater than the original Assigned Value, including the termination
fee, the excess will be (i) first, applied to any outstanding Proceeds Deficit
Note balance from prior sales, (ii) second, applied to reduce the original
Assigned Values of the remaining hotels at PMC's discretion, and (iii) third,
kept by PMC if it is from the sale of the last hotel, or if the total original
Assigned Value has been reduced to zero. As of December 31, 2004, the balance of
the Proceeds Deficit Note, as a result of the sale of two PMC hotels in 2004,
was approximately $850,000.
Interest on the Proceeds Deficit Note is payable monthly at a fixed rate of 8.5%
per annum until principal payments begin, at which time interest will be payable
at the greater of the U.S. Treasury rate plus 4.5%, or 8.5%. Principal payments
will commence on the earlier of October 1, 2008 or the closing date of the sale
of the last hotel, with aggregate annual principal payments in an amount equal
to one-third of the principal balance of the Proceeds Deficit Note as of the
principal payment commencement date. The full amount of the principal balance,
and any accrued interest thereon, must be paid on or before the third
anniversary of the principal payment commencement date. If at any time during
the term of the Proceeds Deficit Loan Agreement, the principal balance of the
Proceeds Deficit Note exceeds $4.0 million, the Company must immediately make a
principal payment to PMC in an amount necessary to reduce the balance of the
Proceeds Deficit Note to $4.0 million or less. In addition, the Deficit Loan
Agreement contains various covenants whereby a default under the covenants would
require principal pay-downs as specified in the agreement, or the Proceeds
Deficit Note would thereafter
F-22
bear interest at the greater of the original contractual rate in the lease
agreements, or the U.S. Treasury rate plus 4.5% per annum, until such amount is
paid.
F-23
7. LONG-TERM DEBT (CONTINUED):
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
- ------------------------ ----------------
2005 $ 1,130,700
2006 4,031,000
2007 4,865,900
2008 714,500
2009 767,900
Thereafter 11,666,800
----------------
$ 23,176,800
================
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, 2004, the Company was in compliance with all applicable financial
covenants.
Capital lease obligations:
Effective October 1, 2004, upon the execution of a lease modification, 17 hotel
leases were accounted for as capital leases in accordance with SFAS 13. Each of
the capital leases were recorded at estimated fair market value as of October 1,
2004, which was lower than the net present value of minimum lease payments,
including the Assigned Value guarantee (Note 14). The total capital lease
obligation recorded upon the effective date of the lease modification was
approximately $37.8 million. The difference between the capital lease obligation
recorded upon the effective date of the modification and the Assigned Value
guarantee is being amortized as interest expense over the four-year anticipated
lease term, as modified, using the interest method. The lease modification
provides for the termination of the leases upon the sale of the hotels over a
four-year period ending September 30, 2008. Upon the termination of a lease
pursuant to the sale of a hotel, the Company recognizes the difference, if any,
between the capital lease obligation and the Assigned Value guarantee as
leasehold termination expense. During 2004, the Company recognized $370,000 in
such lease termination expense associated with the termination of one hotel
lease upon the sale of the hotel. Minimum future rent payment under these
capital leases are as follows, assuming all leases are held until September 30,
2008:
2005 3,230,000
2006 3,230,000
2007 3,230,000
2008 2,423,000
-------------
$ 12,113,000
=============
8. SHAREHOLDERS' EQUITY:
Authorized shares:
The Company's corporate charter authorizes 25,000,000 shares of Common Stock
with a par value of $0.005 per share and 100,000 shares of Preferred Stock with
no par value. The Preferred Stock may be issued in series and the Board of
Directors shall determine the voting powers, designations, preferences and
relative participation, optional or other special rights and the qualifications,
limitations or restrictions thereof.
Non-employee stock options and warrants:
The Company has issued options to acquire shares of the Company's common stock
to certain of its partners in various hotel joint ventures referred to in Note
4. At December 31, 2004, options to purchase 125,000 shares of common stock
continued to be outstanding with an exercise price of $3.794 per share and
exercisable through October 2005. The Company accounted for these options during
2001 at fair value, in accordance with FASB Statement No. 123.
F-24
8. SHAREHOLDERS' EQUITY (CONTINUED):
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 were collateralized by 125,000 shares of common stock of
the Company, which were issued upon the exercise of stock options in 1993. In
November 2004, we sold our ownership interest in a joint venture with the
Diversified principals that owns and operates a non-AmeriHost Inn hotel. In
conjunction with this sale, we agreed to accept the 125,000 shares of common
stock in full satisfaction of the notes and the shares have been retired as of
December 31, 2004. We also recorded a reserve of approximately $49,000 during
the third quarter of 2004, reducing the carrying value of the notes to reflect
the value received. These notes receivable were classified as a reduction of
shareholders' equity on the accompanying December 31, 2003 consolidated balance
sheet.
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, 2004, the
Company has paid $68,534 for the redemption of 17,894 of these 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 $1,455,169, $1,273,000, and $800,000 related to
discontinued operations in 2004, 2003, and 2002 respectively, is as follows:
2004 2003 2002
------------ ----------- -----------
Current $ 70,000 $ - $ (240,000)
Deferred (1,684,677) (2,155,000) 235,000
------------ ----------- ----------
Income tax benefit $ (1,614,677) $(2,155,000) $ (5,000)
============ =========== ==========
The following reconciles income tax expense for 2004 at the federal statutory
tax rate with the effective rate:
2004 2003 2002
---- ---- ----
Income taxes at the
Federal statutory rate (34.0%) (34.0%) (34.0%)
State taxes, net of federal tax benefit 1.4% (3.1%) 2.0%
Other 0.7% - -
----- ----- -----
Effective tax rate (31.9%) (37.1%) (32.0%)
===== ===== =====
F-25
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:
2004 2003
----------- ------------
Differences in deferred income recognized for tax
purposes and financial reporting purposes $ 272,000 $ 333,000
Gain on sale/leaseback transaction recognized
for tax purposes and deferred for financial
reporting purposes 2,051,000 2,644,000
Differences in the basis of investments, property and equipment
from partner acquisitions and from partnerships which are
consolidated for financial reporting purposes but not
for tax purposes 1,716,000 824,000
Interest expense on capital lease obligation recorded for
book purposes but not for tax purposes 194,000 -
Impairment provision recorded for financial reporting
purposes and deferred for tax purposes 1,344,000 1,802,000
Net operating loss carryforward 4,584,000 1,841,000
Other 132,846 189,000
------------ ------------
10,293,846 7,633,000
Cumulative depreciation differences (1,083,000) (1,562,000)
------------ ------------
Net deferred income tax asset $ 9,210,846 $ 6,071,000
============ ============
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 2004, 2003 and
2002 from various unconsolidated partnerships in which the Company has an
ownership interest:
2004 2003 2002
----------- ------------ -----------
Development and construction revenue $ 3,562,478 $ 4,175,878 $ 5,253,226
Hotel management revenue 199,998 371,142 808,598
Employee leasing revenue 1,775,210 2,097,646 2,895,295
Interest income 32,166 110,450 212,346
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.
F-26
11. BUSINESS SEGMENTS (CONTINUED):
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:
2004 2003 2002
-------------- ------------- --------------
Revenues
Hotel operations $ 33,948,640 $ 39,861,661 $ 43,962,250
Hotel development and construction 3,579,978 4,196,878 7,180,222
Hotel sales and commissions 21,535,227 22,831,102 10,017,080
Hotel management 379,159 445,862 957,801
Employee leasing 1,943,369 1,858,103 3,267,491
Incentive and royalty sharing fees 1,353,576 972,219 588,938
Office building rental and other 701,915 749,782 669,769
-------------- ------------- --------------
$ 63,441,864 $ 70,915,607 $ 66,643,551
============== ============= ==============
Operating costs and expenses
Hotel operations $ 27,047,828 $ 30,711,104 $ 32,253,242
Hotel development and construction 4,968,662 4,739,296 7,205,328
Hotel sales and commissions 18,719,752 19,187,177 8,159,459
Hotel management 209,655 280,383 714,648
Employee leasing 1,840,417 1,798,714 3,208,708
Incentive and royalty sharing fees - - -
Office building rental and other 170,779 214,232 56,757
-------------- ------------- --------------
$ 52,957,093 $ 56,930,906 $ 51,598,142
============== ============= ==============
Identifiable assets
Hotel operations $ 85,143,117 $ 82,215,916 $ 104,644,225
Hotel development and construction 1,648,595 1,860,323 2,445,882
Hotel sales and commissions - - -
Hotel management 214,661 1,005,159 1,513,640
Employee leasing 137,139 134,974 256,787
Incentive and royalty sharing fees - - -
Office building rental and other 6,380,697 6,479,267 6,672,294
Corporate 9,907,432 7,417,774 4,400,886
-------------- ------------- --------------
$ 103,431,641 $ 99,713,413 $ 119,933,714
============== ============= ==============
Capital Expenditures
Hotel operations $ 3,516,783 $ 6,994,136 $ 18,222,595
Hotel development and construction 56,392 503 53,673
Hotel sales and commissions - - -
Hotel management 22,886 28,208 16,574
Employee leasing - - -
Incentive and royalty sharing fees - - -
Office building rental and other 14,171 62,511 273,605
Corporate 12,993 2,636 16,378
-------------- ------------- --------------
$ 3,623,225 $ 7,087,994 $ 18,582,825
============== ============= ==============
Depreciation/Amortization
Hotel operations $ 2,043,276 $ 3,006,713 $ 3,647,699
Hotel development and construction 8,911 3,393 5,679
Hotel sales and commissions - - -
Hotel management 38,327 44,919 52,056
Employee leasing 1,389 2,100 2,321
Incentive and royalty sharing fees - - -
Office building rental and other 159,606 161,634 158,615
F-27
Corporate 82,524 62,867 162,219
-------------- ------------- --------------
$ 2,334,033 $ 3,281,626 $ 4,028,589
============== ============= ==============
F-28
12. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS:
In July 2003, the Company implemented a plan to sell approximately 25-30 hotel
properties over a period of two years. The properties to be sold included 20-25
AmeriHost Inns and six non-AmeriHost hotels that are wholly owned or in which
the Company has an ownership interest. The Company has hired several regional
and national hotel brokerage firms to market most of the properties and manage
the sales process. The Company expects this plan to reduce debt and generate
cash (Notes 6 and 7) 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.
Net sale proceeds from the sale of AmeriHost Inn hotels was approximately $21.5
million during the twelve months ended December 31, 2004, which has been
included in hotel sales and commission revenue in the accompanying consolidated
financial statements. This represents the sale of nine wholly-owned hotels and
one PMC capital lease hotel. The net book value of these hotels at the time of
their sales was approximately $18.7 million, resulting in operating income from
the sale of these hotels of approximately $2.8 million before income tax. In
addition, approximately $16.2 million in mortgage debt was paid off with
proceeds from the sale of these hotels. The Company incurred a mortgage
prepayment fee of approximately $97,000 in conjunction with the sale of one
AmeriHost Inn hotel in June 2004, which has been included in "extinguishment of
debt" in the accompanying consolidated financial statements.
The Company sold two wholly-owned Non-AmeriHost Inn hotels during the twelve
months ended December 31, 2004, resulting in a pre-tax gain of approximately
$105,000, which has been included in "discontinued operations" in the
accompanying consolidated financial statements. The net proceeds from the sale
of these two hotels was approximately $3.2 million, of which $2.3 million was
used to pay off the related mortgage debt.
In addition, one joint venture in which the Company had a minority ownership
interest sold its non-AmeriHost Inn hotel during the second quarter of 2004. The
Company accounted for this joint venture by the equity method and included its
share of the gain from the sale in equity in net income and (losses) of
unconsolidated joint ventures in the accompanying consolidated financial
statements.
Impairment
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standard No. 144, "Accounting for Long-Lived assets" ("SFAS 144"). SFAS 144
addresses financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 requires a long-lived asset to be sold to be
classified as "held for sale" in the period in which certain criteria are met,
including that the sale of the asset within one year is probable. In addition,
the debt that is expected to be paid off as a result of these hotel sales has
been classified as current liabilities in the accompanying consolidated
financial statements. Certain hotels may be marketed for sale for more than one
year, if not sold, since market conditions and contemplated sale terms have
changed for these hotels, including asking price adjustments in certain cases.
The Company continues to actively market these hotels for sale with the
expectation that these properties will be sold within the next 12 months.
Therefore, these hotels are expected to continue to be classified as "held for
sale," until sold. The disposition of AmeriHost Inn hotels, although classified
as "held for sale" on the accompanying consolidated balance sheets, have not
been treated as discontinued operations due to the ongoing royalty fees to be
earned by the Company after their disposition. In addition, in accordance with
this literature, depreciation ceased on the hotel assets that have been
classified as "held for sale".
The Company periodically reviews the carrying value of certain of its long-lived
assets in relation to historical results, current business conditions and trends
to identify potential situations in which the carrying value of assets may not
be recoverable. If such reviews indicate that the carrying value of such assets
may not be recoverable, the Company would estimate the undiscounted sum of the
expected cash flows of such assets to determine if such sum is less than the
carrying value of such assets to ascertain if an impairment exists. If an
impairment exists, the Company would determine the fair value by using quoted
market prices, if available for such assets, or if quoted market prices are not
available, the Company would discount the expected future cash flows of such
assets. The non-cash impairment charges represent adjustments to reduce the
carrying value of certain hotel assets to the
F-29
12. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS (CONTINUED):
estimated sales prices, net of estimated costs to sell, based on current market
conditions and the change in holding periods of the properties.
During 2003, in connection with the implementation of the plan to sell hotels,
the Company recorded approximately $6.0 million in non-cash impairment charges
related to 18 of the hotels targeted for sale, including $909,000 that is
associated with non-AmeriHost Inn hotels anticipated to be sold, which has been
included in "discontinued operations". During 2004, the Company recorded
approximately $2.1 million in non-cash impairment charges including $986,000
associated with non-AmeriHost Inn hotels which has been included in
"discontinued operations" (Note 13).
The 2004 charges represent additional adjustments for certain AmeriHost Inn
hotels based on more recent analysis and market conditions. The impairment
recorded in "discontinued operations" in 2004 relates primarily to one exterior
corridor hotel, which is over 25 years old. As a result of a change in brand
affiliation and the addition of newer hotels in its local market, the operating
performance of this hotel has declined, resulting in the impairment charge. This
hotel was sold in March of 2005 (Note 20).
13. DISCONTINUED OPERATIONS:
The Company has reclassified its consolidated statements of operations for the
twelve months ended December 31, 2004, 2003 and 2002 and its consolidated
balance sheet as of December 31, 2004, 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:
2004 2003 2002
------------- ------------- -------------
Hotel Operations:
Revenue $ 5,779,628 $ 7,806,724 $ 9,887,116
Costs and expenses 5,589,674 7,908,224 9,273,232
------------- ------------- -------------
189,954 (101,500) 613,884
Depreciation and amortization 2,248,086 1,130,486 1,487,714
Leasehold rents - hotels 127,310 382,933 502,777
Hotel impairment provision 986,136 909,523 -
------------- ------------- -------------
Operating loss (3,171,578) (2,524,442) (1,373,607)
Other income (expense):
Interest expense (514,112) (722,475) (752,238)
Other income (expense) 44,770 (107,023) (46,060)
Gain on sale of property 2,997 96,260 -
------------- ------------- -------------
Loss from discontinued operations, before
minority interests and income taxes (3,637,923) (3,257,680) (2,174,905)
Minority interests in income of
consolidated joint ventures - 76,118 40,757
------------- ------------- -------------
Loss from discontinued operations,
before income taxes (3,637,923) (3,181,562) (2,134,148)
Income tax benefit 1,455,169 1,273,000 800,000
------------- ------------- -------------
Net loss from discontinued operations $ (2,182,754) $ (1,908,562) $ (1,334,148)
============= ============= =============
F-30
13. DISCONTINUED OPERATIONS (CONTINUED):
The assets and liabilities of two non-AmeriHost Inn hotels sold in 2004 and
three consolidated non-AmeriHost Inn hotels to be sold or disposed of, pursuant
to the plan for hotel disposition, and which are included in discontinued
operations, have been classified as held for sale in the accompanying
consolidated balance sheet as of December 31, 2004. Condensed balance sheet
information for these hotels is as follows:
December 31,
2004
------------
ASSETS
Current assets:
Cash and cash equivalents $ (71,039)
Accounts receivable 57,108
Prepaid expenses and other current assets 43,202
-----------
Total current assets 29,271
-----------
Property and equipment 13,526,390
-----------
Less accumulated depreciation and amortization (7,204,415)
-----------
6,321,975
-----------
Other assets, net of accumulated amortization 103,559
-----------
$ 6,454,805
===========
LIABILITIES
Current liabilities:
Accounts payable $ 228,005
Accrued payroll and other expenses 409,008
Current portion of long-term debt 1,998,880
-----------
Total current liabilities 2,635,893
Long-term debt, net of current portion 4,304,096
Minority interests -
Other long term liabilities -
Equity (485,184)
-----------
$ 6,454,805
===========
F-31
14. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS:
Sale/leaseback of hotels:
Original Sale/leaseback transaction
In 1998 and 1999, the Company completed the sale of 30 AmeriHost Inn hotels to
PMC Commercial Trust ("PMC"), a real estate investment trust ("REIT") for $73.0
million. Upon the respective sales to PMC, a subsidiary of the Company entered
into agreements to lease back the hotels. The original leases had an initial
term of 10 years, and in January 2001, the master lease agreement with PMC was
amended (the "January 2001 Amendment") to allow either PMC or the Company to
extend the leases for a five-year period, through 2013. In 2004, through
September, the lease payments were 10.51% of the original sale price (the
"Assigned Values"), subject to annual CPI increases with a 2% annual maximum. As
discussed below, the Company and PMC entered into another amendment (the "Third
Amendment") reducing and fixing the rate to 8.5% of Assigned Values, as of
October 1, 2004. All of these leases were triple net and provided for monthly
base rent payments ranging from $14,000 to $27,000.
Deferred Income
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 had been amortized on a straight-line basis into
income as a reduction of leasehold rent expense based on the 15-year term,
including the five-year extension option. As a result of the Third Amendment, 17
of the hotels were treated as capital leases effective October 1, 2004, whereby
the remaining unamortized balance of the deferred gain relating to these hotels
in the amount of approximately $5.2 million was reclassified as a reduction in
the basis of the capital lease hotel assets. At December 31, 2004, the balance
of this deferred income related to hotels that continued to be treated as
operating leases was approximately $440,000, which was being amortized over the
anticipated remaining lease term, pursuant to the Third Amendment.
Temporary Letter and Sales Agreements
In 2004, the Company entered into discussions with PMC, on behalf of its
subsidiary, with the objective to modify the original leases, and to allow for
the sale of the hotels to third parties. The subsidiary entered into a series of
temporary letter agreements with PMC that provided for a reduced monthly rent
payment from March through July 2004, however the base rent continued to accrue
at the contractual rate as set forth in the lease agreements. In addition, the
temporary agreements allowed the subsidiary to utilize $200,000 of its security
deposit held with PMC to partially fund the rent payments.
The Company facilitated the sale of one of the leased hotels to a third party in
August 2004, based on the terms of a temporary sales letter agreement dated May
18, 2004 ("Temporary Sales Agreement"). Upon the sale of this hotel, PMC
received the sale proceeds, net of closing costs, plus a termination fee from
the Company. In accordance with the terms of the temporary sales agreement,
since the total proceeds to PMC were less than the Assigned Value for such
hotels, the shortfall of approximately $683,000 became the obligation of the
Company evidenced by a promissory note bearing interest at the rate of 8.5% on
an annual basis, due May 1, 2005. This obligation was reduced by the application
of security deposit funds, and the payment of a termination fee in October 2004
as discussed below. Furthermore, the terms of this note under the Temporary
Sales Agreement were superceded by the terms of the Third Amendment (Proceeds
Deficit Note). Due to the modified terms of the temporary sales letter
agreement, the lease relating to this hotel was treated as a capital lease
during the second quarter of 2004 in accordance with Statement of Financial
Accounting Standard ("SFAS") No. 13, "Accounting for Leases."
Third Amendment
On October 4, 2004, the Company and PMC entered into a third amendment, which
became effective as of October 1, 2004. The third amendment provided that the
accrued rent balance of approximately $425,000 was paid from the existing lease
security deposit held by PMC. The remaining balance of the security deposit of
approximately $173,000 was then utilized to reduce the shortfall obligation
incurred under the Temporary Sales Agreement to approximately $510,000. In
addition, the third amendment provides the following:
F-32
14. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
- - The lease rate is fixed at 8.5% of the original Assigned Values, as long
as the Company is not in default of the agreement.
- - The Company is required to cause all 20 hotels to be sold in accordance
with the following schedule:
- A minimum of five (5) hotels on or before October 1, 2005;
- A minimum of ten (10) hotels (cumulative) on or before October 1,
2006;
- A minimum of fifteen (15) hotels (cumulative) on or before October
1, 2007; and
- A minimum of twenty (20) hotels (cumulative) on or before October 1,
2008.
Upon the sale of each hotel, PMC is entitled to receive (i) net sales proceeds
upon closing, defined as total gross sales price less normal closing costs and
brokerage fee, and (ii) an "Arlington Fee," equal to 25.3% of the gross room
revenues for such hotel for the preceding 12-month period, due within 45 days of
the hotel sale closing. If the net sale proceeds is less than the original
Assigned Value, the Company must provide a note payable to PMC in the amount of
this difference ("Proceeds Deficit Note"). The payment of the Arlington Fee to
PMC will reduce the outstanding balance of the Proceeds Deficit Note, if any. If
the net sale proceeds is greater than the original Assigned Value, including the
Arlington Fee, the excess will be (i) first, applied to any outstanding Proceeds
Deficit Note balance from prior sales, (ii) second, applied to reduce the
original Assigned Values of the remaining hotels at PMC's discretion, and (iii)
third, kept by PMC if it is from the sale of the last hotel, or if the total
original Assigned Value has been reduced to zero. As of December 31, 2004, the
balance of the Proceeds Deficit Note, as a result of the sale of two PMC hotels
in 2004, was approximately $850,000.
Interest on the Proceeds Deficit Note is payable monthly at a fixed rate of 8.5%
per annum until principal payments begin, at which time interest will be payable
at the greater of the U.S. Treasury rate plus 4.5%, or 8.5%. Principal payments
will commence on the earlier of October 1, 2008 or the closing date of the sale
of the last hotel, with aggregate annual principal payments in an amount equal
to one-third of the principal balance of the Proceeds Deficit Note as of the
principal payment commencement date. The full amount of the principal balance,
and any accrued interest thereon, must be paid on or before the third
anniversary of the principal payment commencement date. If at any time during
the term of the Proceeds Deficit Loan Agreement, the principal balance of the
Proceeds Deficit Note exceeds $4.0 million, the Company must immediately make a
principal payment to PMC in an amount necessary to reduce the balance of the
Proceeds Deficit Note to $4.0 million or less. In addition, the Deficit Loan
Agreement contains various covenants whereby a default under the covenants would
require principal pay-downs as specified in the agreement, or the Proceeds
Deficit Note would thereafter bear interest at the greater of the original
contractual rate in the lease agreements, or the U.S. Treasury rate plus 4.5%
per annum, until such amount is paid.
As a result of the lease modifications in the third amendment, 17 of the 20
hotel leases were accounted for as capital leases pursuant to SFAS No. 13, as of
October 1, 2004. The Company recorded approximately $32.3 million in capital
lease property and equipment, and approximately $37.8 million in capital lease
obligation as a result of the third amendment. In addition, the reduced rental
rate of 8.5% is contingent upon the meeting of the sales targets as outlined
above. Therefore, the Company will continue to accrue the difference between the
reduced pay rate and the original contractual rate for all hotels as lease
expense, until all sales hurdles are achieved or the underlying property is
sold, at which time the accrual would be reversed.
The third amendment provides for events of default that, if not cured within any
applicable grace or cure periods, cause the lease rate to revert to the original
contractual rate or in certain cases, to 15% of the Assigned Values. Upon an
event of default, the Company must make monthly lease payments to PMC at the
higher rates, as indicated above, until the default is cured. When cured, the
lease rate will return to the lower rate, beginning in the month subsequent to
the month in which the default is cured. The third amendment also requires the
Company to adhere to certain covenants related to restrictions on common stock
dividends and buy-backs of the Company's common stock.
F-33
14. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
Hotel Operating Leases:
At December 31, 2004, the Company leased three AmeriHost Inn hotels from PMC
which have been classified as operating leases. The remaining leases with PMC
have been classified as capital leases (Note 4). The three leases are triple net
leases, and provide for fixed monthly lease payments of $12,000 to $15,000,
pursuant to the Third Amendment which became effective October 1, 2004. These
hotels are anticipated to be sold to unrelated third parties by September 30,
2008 in accordance with the terms of the PMC Third Amendment.
In addition, a joint venture in which the Company has a controlling ownership
interest leased one non-AmeriHost Inn hotel at December 31, 2004. This lease was
triple net, and prior to May 2004, provided for rent payments of $20,000 per
month. The lease was scheduled to expire May 31, 2010, however, in May 2004, the
terms of the lease were modified to (i) change the monthly lease payments from
$240,000 per year to an amount based on a percentage of hotel room revenue, with
a minimum of $90,000 on an annual basis, and (ii) to change the lease expiration
date to the earlier of November 1, 2005, or when and if, the landlord sells the
property, redevelops the property, or leases the property to a new tenant. In
addition, the Company will receive a portion of the residual value of the
furniture, fixtures, and equipment upon termination of the lease. The operations
of this hotel have been presented as "discontinued operations" in the
accompanying consolidated financial statements due to this lease modification.
Although modified, the Company determined that this hotel lease would continue
to be accounted for as an operating lease. In February 2005, the landlord
consummated the sale of the property to a third party at which time the joint
venture's lease was terminated. As a result of the lease acceleration and
termination, the Company reduced its basis in the furniture, fixtures, and
leasehold improvements by approximately $2.0 million during 2004, to their
estimated residual value upon sale.
Total rent expense for all operating leases was approximately $4,215,000,
$5,131,000, and $5,411,000 and in 2004, 2003 and 2002, respectively, including
approximately $39,000 in 2002 to an entity in which the Company has a minority
ownership interest. Minimum future rent payments under all operating leases are
as follows, assuming the PMC hotels are leased through September 30, 2008:
Year Ending December 31, Amount
------------------------ ------------
2005 $ 545,000
2006 539,000
2007 539,000
2008 421,000
2009 42,000
Thereafter 643,000
------------
$ 2,729,000
============
Construction in progress:
As of December 31, 2004, the Company had entered into non-cancelable
subcontracts for approximately $1,815,700 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 agreements:
On November 29, 2004, Jerry Herman, the Company's Chief Executive Officer
resigned. Mr. Herman's resignation from the Board of Directors was effective
immediately, and his resignation as the Company's President and Chief Executive
Officer was effective as of December 31, 2004. Pursuant to the terms of a
separation agreement, the Company agreed to pay Mr. Herman his base salary
through March 31, 2005 and Mr. Herman agreed to reasonably assist the Company
through June 30, 2005 with the transition to a new President and Chief Executive
Officer. The Company has engaged a national search firm to assist in its search
for a new President and Chief Executive Officer.
F-34
14. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
The Company has entered into employment agreements with its Chief Financial
Officer and three other executives. The agreements expire December 31, 2005
through June 30, 2006, and provide for total annual base compensation of
$607,000. 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.
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.
15. SUPPLEMENTAL CASH FLOW DATA:
The following represents the supplemental schedule of noncash investing and
financing activities for the years ended December 31:
2004 2003 2002
------------- ------------- --------------
Sale of assets and franchising rights:
Cost basis of assets sold $ 4,483,271 $ 6,392,462 $ 939,851
Accumulated depreciation at sale (1,387,703) (3,925,821) (168,742)
Deferred income - - (352,507)
Gain on sale 388,433 337,856 727,076
Income from insurance settlement - - 298,023
------------- ------------- --------------
Net cash proceeds $ 3,484,001 $ 2,804,497 $ 1,443,701
============= ============= ==============
Liabilities assumed in connection with
acquisition and consolidation of hotel
partnership interests $ - $ 1,244,367 $ 1,520,923
============= ============= ==============
Capital lease obligations $ 37,816,256 $ - $ -
============= ============= ==============
Notes received in connection with the
sale of hotels $ 100,000 $ 250,000 $ 450,000
============= ============= ==============
Reclassification of deferred gain against the
basis of acquired assets $ 5,503,617 $ 262,513 $ 347,989
============= ============= ==============
Exchange of note and interest receivable for
partnership interest $ - $ - $ 1,256,639
============= ============= ==============
Interest paid, net of interest capitalized $ 4,531,865 $ 4,830,621 $ 5,516,449
============= ============= ==============
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-35
17. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected quarterly financial data (in thousands, except per share amounts) for
2004 and 2003 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
-------- -------- -------- -------- ----------
2004:
Total revenue $ 16,980 $ 18,673 $ 14,819 $ 12,970 $ 63,442
Net income (loss) from continuing
operations, before impairment (740) 525 (107) (2,288) (2,610)
Impairment provision, net of tax (192) (75) (298) (279) (844)
Net income (loss) from continuing
operations (932) 450 (405) (2,567) (3,454)
Discontinued operations, net of tax (643) (395) (122) (1,023) (2,183)
Net income (loss) (1,576) 55 (526) (3,590) (5,637)
Net income (loss) per share:
Basic $ (.31) $ .01 $ (.10) $ (.72) $ (1.12)
Diluted $ (.31) $ .01 $ (.10) $ (.72) $ (1.12)
2003:
Total revenue $ 17,457 $ 15,314 $ 23,323 $ 14,822 $ 70,916
Net income (loss) from continuing
operations, before impairment (852) 207 1,358 (1,365) (652)
Impairment provision, net of tax (60) (2,739) (84) (175) (3,058)
Net income (loss) from continuing
operations (912) (2,532) 1,274 (1,540) (3,710)
Discontinued operations, net of tax (570) (826) (192) (321) (1,909)
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)
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,
2004 2003 2002
---- ---- ----
Total Revenue $ 64,885,978 $ 72,845,602 $ 71,094,266
Net income (loss) (5,600,557) (5,552,291) (1,708,449)
Net income (loss) per share:
Basic $ (1.12) $ (1.11) $ (0.34)
Diluted $ (1.12) $ (1.11) $ (0.34)
Weighted average number
of common shares
outstanding
Basic 5,013,620 5,011,572 4,958,438
Diluted 5,013,620 5,011,572 4,958,438
F-36
19. NEW ACCOUNTING STANDARDS:
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," which addresses how a business
enterprise should evaluate whether or not it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FIN 46, "Consolidation of
Variable Interest Entities", which was issued in January 2003. The Company is
required to adopt the requirements of FIN 46R for interim periods beginning
after December 15, 2004. This Interpretation requires that the Company present
any variable interest entities in which it has a majority variable interest on a
consolidated basis in its financial statements. Due to the adoption of this
Interpretation, the Company has presented its investments in two joint ventures
in which it has a majority variable interest, on a consolidated basis in its
financial statements beginning with the consolidated financial statements issued
for the quarterly period ended December 31, 2004. The consolidation of these
joint ventures added approximately $3.2 million in assets and $3.2 million in
liabilities to the Company's consolidated balance sheet as of December 31, 2004.
Prior to their consolidation, the Company had investments in, and advances to,
these joint ventures of approximately $221,000, which was presented as such
under the equity method of accounting in the accompanying consolidated financial
statements. The Company has presented all of its other unconsolidated
investments as of December 31, 2004 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.
In December 2004, the Financial Accounting Standards Board issued Statement No.
123R, "Share-Based Payment" ("SFAS 123R"). This Statement is a revision to
Statement 123, "Accounting for Stock-Based Compensation", and supersedes Opinion
No. 25, "Accounting for Stock Issued to Employees". SFAS 123R requires the
measurement of the cost of employee services received in exchange for an award
of equity instruments based on the grant-date fair value of the award. The cost
will be recognized over the period during which an employee is required to
provide service in exchange for the award. No compensation cost is recognized
for equity instruments for which employees do not render service. The Company
will adopt SFAS 123R on July 1, 2005, requiring compensation cost to be
recognized as expense for the portion of outstanding unvested awards, based on
the grant-date fair value of those awards calculated using the Black-Scholes
option pricing model under SFAS 123 for pro forma disclosures. The Company is
currently evaluating the impact SFAS 123R will have on its financial position,
results of operations, earnings per share and cash flows when the Statement is
adopted. The Company does not expect that the implementation of SFAS 123R will
result in a material financial statement impact.
20. SUBSEQUENT EVENTS:
In February 2005, the landlord for a non-AmeriHost Inn hotel consummated the
sale of the hotel, and the Company's lease was simultaneously terminated
pursuant to a lease modification executed in 2004 (Note 14).
In March 2005, the Company executed the renewal of its $4.0 million operating
line-of-credit with the existing lender, LaSalle Bank N.A., through April 30,
2006. The renewal terms require that the maximum availability under the facility
will be reduced to $3.5 million on May 1, 2005. The facility will be reduced
further to $3.0 million on July 31, 2005, and to $2.5 million on October 31,
2005. The terms of the agreement 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.
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20. SUBSEQUENT EVENTS (CONTINUED):
In March 2005, a consolidated joint venture in which the Company owns a majority
ownership interest sold its non-AmeriHost Inn hotel, generating gross proceeds
of approximately $1.9 million, and simultaneously paid off the related mortgage
loan of approximately $1.5 million. The excess funds from the sale were utilized
by the joint venture to partially repay the Company's outstanding operating
advances.
In March 2005, an unconsolidated joint venture in which we own a minority
ownership interest sold its AmeriHost Inn hotel, generating a distribution to us
of approximately $507,000, after the related mortgage debt was paid off. Our
partner received a $1.0 million distribution from the net sale proceeds, in
accordance with the terms of an amendment to the joint venture agreement
executed in 2004.
In March 2005, the Company sold a vacant land parcel generating net proceeds of
approximately $838,000.
In March 2005, the Company facilitated the sale of a PMC leased hotel on behalf
of the landlord which resulted in an increase to the Proceeds Deficit Note of
approximately $133,000, net of the Arlington Fee (Note 14).
In March 2005, the Company sold a wholly owned AmeriHost Inn hotel, generating
gross proceeds of approximately $2.2 million, and simultaneously paid off the
related mortgage loan of approximately $1.5 million.
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