Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to __________
COMMISSION FILE NO. 0-15291
ARLINGTON HOSPITALITY, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-3312434
-------- ----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2355 S. ARLINGTON HEIGHTS ROAD, SUITE 400,
ARLINGTON HEIGHTS, ILLINOIS 60005
--------------------------- -----
(Address of principal executive offices) (Zip Code)
(847) 228-5400
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
As of May 16, 2005, 4,956,123 shares of the registrant's common stock were
outstanding.
================================================================================
================================================================================
ARLINGTON HOSPITALITY, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED MARCH 31, 2005
INDEX
Page
----
PART I: Financial Information
Item 1 - Financial Statements
Consolidated Balance Sheets as of March 31, 2005
and December 31, 2004 4
Consolidated Statements of Operations for the Three Months
Ended March 31, 2005 and 2004 6
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2005 and 2004 7
Notes to Consolidated Financial Statements 9
Item 2 - Management's Discussion and Analysis of Financial Condition 23
and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures about Market Risk 50
Item 4 - Controls and Procedures 50
PART II: Other Information
Item 6 - Exhibits 51
Signatures 54
-2-
Part I: Financial Information
Item 1: Financial Statements
-3-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
March 31,
2005 December 31,
(Unaudited) 2004
------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,817,089 $ 2,558,384
Accounts receivable, less an allowance of $76,500
at March 31, 2005 and December 31, 2004 (including
approximately $806,000 and $372,000 from related parties) 2,137,851 1,365,454
Notes receivable, current portion 126,042 76,042
Prepaid expenses and other current assets 684,584 808,478
Refundable income taxes 91,099 67,538
Costs and estimated earnings in excess of billings on
uncompleted contracts 228,327 467,144
Assets held for sale - AmeriHost Inn hotels (Note 11) 19,771,036 19,214,269
Assets held for sale - other brands (Note 11) 4,596,684 6,525,844
Capital lease assets held for sale - AmeriHost Inn hotels (Note 13) 15,078,787 15,379,638
------------ ------------
Total current assets 46,531,499 46,462,791
------------ ------------
Investments in and advances to unconsolidated
hotel joint ventures (Note 6) 1,798,449 1,970,095
Property and equipment:
Land 3,926,886 5,138,978
Buildings 25,262,838 26,579,543
Furniture, fixtures and equipment 8,890,200 9,172,897
Construction in progress -- 313,458
Leasehold improvements 96,735 96,735
Capital lease assets 11,525,669 13,088,840
------------ ------------
49,702,329 54,390,451
Less accumulated depreciation and amortization 11,499,879 11,423,246
------------ ------------
38,202,450 42,967,205
------------ ------------
Notes receivable, less current portion 375,000 450,000
Deferred income taxes 10,046,846 9,210,846
Other assets, net of accumulated amortization of
approximately $765,000 and $673,000 (Note 5)
at March 31, 2005 and December 31, 2004, respectively 2,113,964 2,300,704
------------ ------------
Total long term assets 52,536,709 56,898,850
------------ ------------
Total assets $ 99,068,208 $103,361,641
============ ============
The accompanying footnotes are an integral part of these financial statements.
-4-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
================================================================================
March 31,
2005 December 31,
(Unaudited) 2004
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,873,925 $ 2,321,786
Bank line-of-credit 4,000,000 2,225,000
Accrued payroll and related expenses 691,142 566,889
Accrued real estate and other taxes 1,679,879 1,860,480
Other accrued expenses and current liabilities 1,723,361 1,181,677
Current portion of long-term debt 906,120 1,130,701
Liabilities of assets held for sale - AmeriHost Inn hotels (Note 8) 18,139,489 18,491,277
Liabilities of assets held for sale - other brands (Note 8) 4,804,078 6,939,989
Capital lease obligations of assets held for sale - AmeriHost Inn hotels 17,842,178 18,077,035
------------- -------------
Total current liabilities 52,660,172 52,794,834
------------- -------------
Long-term debt, net of current portion (Note 8) 20,849,449 22,046,112
Capital lease obligation (Note 8) 13,979,739 15,641,463
------------- -------------
Total long term liabilities 34,829,188 37,687,575
------------- -------------
Deferred income 6,331,182 6,125,788
Commitments and contingencies (Note 13)
Minority interests 224,885 246,063
Shareholders' equity:
Preferred stock, no par value; authorized 100,000 shares;
none issued -- --
Common stock, $.005 par value; authorized at 25,000,000 shares;
4,956,123 and 4,956,098 were issued and outstanding at
March 31, 2005 and December 31, 2004 respectively 24,781 24,781
Additional paid-in capital 13,140,324 13,140,256
Retained deficit (8,142,324) (6,657,656)
------------- -------------
Total shareholders' equity 5,022,781 6,507,381
------------- -------------
Total liabilities and shareholders' equity $ 99,068,208 $ 103,361,641
============= =============
The accompanying footnotes are an integral part of these financial statements.
-5-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
================================================================================
2005 2004
------------ ------------
Revenue
Hotel operations $ 6,354,302 $ 7,819,524
Development and construction 1,017,224 1,200,654
Hotel sales and commissions 4,188,600 6,839,249
Management services 43,599 100,622
Employee leasing 324,591 562,276
Incentive and royalty sharing 364,761 283,408
Office building rental 162,156 173,907
------------ ------------
12,455,233 16,979,639
------------ ------------
Operating costs and expenses:
Hotel operations 5,936,270 7,028,727
Development and construction 1,479,703 1,480,392
Hotel sales and commissions 3,524,337 5,403,085
Management services 28,030 90,381
Employee leasing 300,712 545,130
Office building rental 134,290 41,112
------------ ------------
11,403,342 14,588,527
------------ ------------
Depreciation and amortization 731,991 552,331
Leasehold rents - hotels 172,856 1,196,545
Corporate general and administrative 593,505 867,227
Impairment provision -- 320,133
Lease termination expense 95,376 --
------------ ------------
Operating loss (541,837) (545,424)
Other income (expense):
Interest expense (2,229,904) (974,874)
Interest income 4,917 125,938
Other income (expense) 980 (120,381)
Equity in net income (losses) from unconsolidated joint ventures 413,141 (6,166)
------------ ------------
Loss before minority interests and income taxes (2,352,703) (1,520,907)
Minority interests in operations of consolidated joint ventures (23,950) (33,812)
------------ ------------
Loss before income tax (2,376,653) (1,554,719)
Income tax benefit 856,000 621,979
------------ ------------
Net loss from continuing operations (1,520,653) (932,740)
Discontinued operations, net of tax 35,985 (642,666)
------------ ------------
Net Loss $ (1,484,668) $ (1,575,406)
============ ============
Net loss per share from continuing operations:
Basic $ (0.31) $ (0.18)
Diluted $ (0.31) $ (0.18)
Net loss per share:
Basic $ (0.30) $ (0.31)
Diluted $ (0.30) $ (0.31)
The accompanying footnotes are an integral part of these financial statements.
-6-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
================================================================================
2005 2004
------------ ------------
Cash flows from operating activities:
Cash received from customers $ 12,500,802 $ 17,441,267
Cash paid to suppliers and employees (11,161,400) (11,414,074)
Interest received 4,604 158,539
Interest paid (686,128) (1,028,032)
Income taxes received -- 893,222
Income taxes paid (23,561) (146,103)
------------ ------------
Net cash provided by operating activities 634,317 5,904,819
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment (410,210) (264,707)
Distributions, and collections on advances,
from unconsolidated joint ventures 596,900 244,148
Purchase of investments in, and advances
to, unconsolidated joint ventures (103,154) (121,054)
Collections of notes receivable 25,000 47,458
Proceeds from sale of assets 2,733,346 --
------------ ------------
Net cash provided by (used in) investing activities 2,841,882 (94,155)
------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt (3,947,367) (4,430,899)
Net borrowings on the line of credit 1,775,000 150,000
Distributions to minority interest (45,127) (180,510)
------------ ------------
Net cash used in financing activities (2,217,494) (4,461,409)
------------ ------------
Net increase in cash 1,258,705 1,349,255
Cash and cash equivalents, beginning of period 2,558,384 3,623,550
------------ ------------
Cash and cash equivalents, end of period $ 3,817,089 $ 4,972,805
============ ============
(continued)
-7-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31,
(UNAUDITED)
================================================================================
2005 2004
----------- -----------
Reconciliation of net loss to net cash provided
by operating activities:
Net loss $(1,484,668) $(1,575,406)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 742,877 863,610
Equity in net income and interest income from
unconsolidated joint ventures and amortization of deferred income (375,647) (37,824)
Minority interests in net income of subsidiaries 23,950 33,813
Issuance of common stock and common stock options 68 171,145
Gain on sale of assets 11,878 --
Deferred income taxes (836,000) (1,050,423)
Amortization of deferred gain (325,017) (375,580)
Amortization of capital lease obligation 403,419 --
Proceeds from sale of hotels 2,176,733 6,839,249
Income from sale of hotels (664,517) (1,365,906)
Provision for impairment -- 731,719
Amortization of deferred loan costs on sold hotels 7,301 70,258
Changes in assets and liabilities, net of effects of acquisition:
Increase in accounts receivable (776,964) (1,055,528)
Decrease in prepaid expenses and
other current assets 160,913 507,696
(Increase) decrease in refundable income taxes (23,561) 747,119
Decrease in costs and estimated earnings
in excess of billings 238,817 1,089,715
(Increase) decrease in other assets (17,244) 94,558
Increase (decrease) in accounts payable 445,240 (356,597)
Increase in accrued payroll and other accrued
expenses and current liabilities 87,523 145,759
Increase in accrued interest 255,755 --
Increase in deferred income 583,461 427,442
----------- -----------
Net cash provided by operating activities $ 634,317 $ 5,904,819
=========== ===========
The accompanying footnotes are an integral part of these financial statements
-8-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
================================================================================
1. ORGANIZATION AND BUSINESS:
Arlington Hospitality, Inc. was incorporated under the laws of Delaware on
September 19, 1984. Arlington Hospitality, Inc. also acts through its
wholly-owned subsidiaries which have been formed since 1984 under the laws
of several states (Arlington Hospitality, Inc. and its subsidiaries,
collectively, where appropriate, referred to as the "Company"). The
Company is engaged in the development and construction of limited service
hotels, without food and beverage facilities, as well as the ownership,
operation, management and sale of these hotels. During the past several
years, the Company has focused almost exclusively on AmeriHost Inn hotels,
with limited ownership and operation of other branded hotels. The
AmeriHost Inn brand is used by the Company to provide for the consistent,
cost-effective development and operation of mid-price hotels in various
markets. To date, all of the Company's AmeriHost Inn hotels have been
developed and constructed using a two- or three-story prototype, featuring
60 to 120 rooms, interior corridors and an indoor pool area 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 in larger, secondary markets and has designed a three-story
AmeriHost Inn & Suites prototype with more public space and certain other
enhancements for this purpose.
The Company's operations are seasonal by nature. The Company's hotel
operations and sales revenues are generally greater in the second and
third calendar quarters than in the first and fourth calendar quarters,
due to weather conditions in the markets in which the Company's hotels are
located, as well as general business and leisure travel trends.
2. BASIS OF PRESENTATION:
The interim financial statements included herein have been prepared by the
Company without audit. In the opinion of the Company, the accompanying
unaudited consolidated financial statements contain all adjustments, which
consist only of recurring adjustments necessary to present fairly the
financial position of Arlington Hospitality, Inc. and subsidiaries as of
March 31, 2005, and the results of its operations and cash flows for the
three months ended March 31, 2005 and 2004. The results of operations for
the three months ended March 31, 2005, are not necessarily indicative of
the results to be expected for the full year. It is suggested that the
accompanying consolidated financial statements be read in conjunction with
the consolidated financial statements and the notes thereto included in
the Company's 2004 Annual Report on Form 10-K. Certain prior period
amounts have been reclassified to conform to current period presentation.
These reclassifications had no effect on previously reported operations or
total shareholders' equity.
3. PRINCIPLES OF CONSOLIDATION:
The consolidated financial statements include the accounts of the Company,
its wholly-owned subsidiaries and entities in which the Company has a
majority or controlling ownership interest. All significant intercompany
accounts and transactions have been eliminated.
4. INCOME TAXES:
Deferred income taxes are provided on the differences in the bases of the
Company's assets and liabilities, as determined for tax and financial
reporting purposes, and relate principally to hotel impairment charges,
depreciation of property and equipment and deferred income. The deferred
income tax balance at March 31, 2005 also includes a net operating loss
carryforward of approximately $12.1 million expiring from 2022 to 2024.
-9-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
================================================================================
5. EARNINGS PER SHARE:
Basic earnings per share ("EPS") is calculated by dividing the net loss
available to common shareholders by the weighted average number of common
shares outstanding for the period, without consideration for common stock
equivalents. Diluted EPS gives effect to all dilutive common stock
equivalents outstanding for the period. The Company excluded stock
equivalents which had an anti-dilutive effect on the EPS computations.
The calculation of basic and diluted earnings per share for the three
months ended March 31, is as follows:
2005 2004
----------- -----------
Net loss before discontinued operations $(1,520,653) $ (932,740)
Discontinued Operations, net of tax $ 35,985 $ (642,666)
----------- -----------
Net loss available to
common shareholders $(1,484,668) $(1,575,406)
=========== ===========
Weighted average common
shares outstanding 4,956,110 5,005,395
Dilutive effect of stock options -- --
Dilutive common shares outstanding 4,956,110 5,005,395
=========== ===========
Net loss per share - Basic:
From continuing operations $ (0.30) $ (0.18)
From discontinued operations -- (0.13)
----------- -----------
$ (0.30) $ (0.31)
=========== ===========
Net loss per share - Diluted:
From continuing operations $ (0.30) $ (0.18)
From discontinued operations -- (0.13)
----------- -----------
$ (0.30) $ (0.31)
=========== ===========
-10-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
================================================================================
6. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES:
The Company has non-controlling ownership interests, ranging from 1.0% to
50.0%, in general partnerships, limited partnerships and limited liability
companies formed for the purpose of owning and operating hotels. These
investments are accounted for using the equity method, under which method
the original investment is increased (decreased) for the Company's share
of the joint venture's net income (loss), increased by contributions made
and reduced by distributions received. The Company had investments in 12
hotel joint ventures, with a total investment balance of approximately
$1,773,000 and $1,965,000 at March 31, 2005 and December 31, 2004,
respectively. The Company is secondarily liable for the obligations and
liabilities of the limited partnerships in which it holds a general
partnership interest.
The Company advances funds to hotels in which the Company has a minority
ownership interest for working capital and construction purposes. The
advances bear interest ranging from the prime rate to 10% per annum and
are due on demand. The Company expects the partnerships to repay these
advances through cash flow generated from hotel operations, the sale of
the properties, and mortgage financing. The advances were approximately
$25,000 and $5,000 at March 31, 2005 and December 31, 2004, respectively,
and are included in investments in and advances to unconsolidated hotel
joint ventures in the accompanying consolidated balance sheets.
Mortgage balances of approximately $15.8 million for the unconsolidated
joint ventures have not been included in the Company's consolidated
balance sheets. The Company has provided approximately $12.8 million in
guarantees as of March 31, 2005, 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 $1.8 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 required the approval of both partners.
The agreement provided 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,
resulting in the joint venture partner receiving the minimum amount and
the Company receiving the remaining net proceeds. The agreement also
provided that upon the sale of this hotel the joint venture partner's
approval on the sale of the remaining two hotels was no longer required.
One of these hotels was sold in April 2005 (Note 16), and the other hotel
is currently being actively marketed for sale. However, the realized and
anticipated net proceeds from the sale of these hotels is being utilized
to repay the Company a portion of its operating advances to the joint
ventures 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 and March 31,
2005. The value of the guarantee computed was nominal.
-11-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
================================================================================
7. BANK LINE-OF-CREDIT:
The Company had $4,000,000 and $2,225,000 outstanding on its bank
operating line-of-credit at March 31, 2005 and December 31, 2004,
respectively. In March 2005, the Company executed a renewal with the same
lender of its line-of-credit through April 30, 2006, at an initial maximum
availability of $4.0 million. In accordance with the terms of the renewal,
the Company paid down $500,000 subsequent to March 31, 2005 to meet the
required step down of the maximum loan availability to $3.5 million as of
May 1, 2005. The maximum availability will be reduced further to $3.0
million on July 31, 2005 and to $2.5 million on October 31, 2005. The
operating line-of-credit is collateralized by substantially all the assets
of the Company, subject to first mortgages from other lenders on hotel
assets, and bears interest at the rate of 10% per annum. The
line-of-credit provides for the maintenance of certain financial
covenants, including minimum net income, minimum tangible net worth, total
liabilities, and minimum debt service coverage ratio. The covenants will
not be measured until June 30, 2005. In connection with the Company's
desire to further restructure the leases for 18 hotels, it has not made
the May 2005 lease payment for these hotels, which may be declared a
default by the lender under the line-of-credit agreement (Note 16).
8. 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. As a result, these
mortgage balances have been classified in current liabilities, as
liabilities of assets held for sale, in the accompanying consolidated
balance sheet as of March 31, 2005. The table below presents the total
mortgage debt outstanding, including the amounts contractually due during
the next twelve months regardless of the "Held For Sale" classification.
Mortgage Debt at March 31, 2005
-------------------------------------------
Current Long-term
Total Portion Portion
----------- ----------- -----------
Held for Sale - AmeriHost Inn hotels $18,037,967 $ 2,296,233 $15,741,734
Held for Sale - Other brand hotels 4,411,519 142,000 4,269,519
Operating hotels 16,051,845 660,883 15,390,962
Office building 4,699,494 85,600 4,613,894
----------- ----------- -----------
$43,200,825 $ 3,184,716 $40,016,109
=========== =========== ===========
The hotel mortgage loans bear interest at the floating rates of prime
minus 0.25% to prime plus 2.5% per annum. The office-building loan matures
January 1, 2007, and bears interest at the floating rate of either prime
minus 0.25% or LIBOR plus 2.25%, as chosen by the Company. Certain of the
Company's hotel mortgage notes and the office building note contain
financial covenants, principally minimum net worth requirements, debt to
equity ratios, and minimum debt service coverage ratios. These financial
covenants are typically measured annually, based on the Company's fiscal
year end. The Company was in compliance with all covenants as of March 31,
2005.
-12-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
================================================================================
8. LONG-TERM DEBT (CONTINUED):
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. The total capital lease obligation recorded upon the effective date of
the lease modification was approximately $37.8 million. Each of the
capital leases were recorded at estimated fair values as of October 1,
2004, which was lower than the net present value of the minimum lease
payments including the Assigned Value guarantee (Note 13). 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
lease termination expense. For the first three months of 2005, the Company
recognized $95,376 in such lease termination expense. Minimum future rent
payment under these capital leases are as follows, assuming all leases are
held until September 30, 2008:
Minimum
Future Lease
Payments
-----------
Remainder of 2005 $ 2,422,500
2006 3,230,000
2007 3,230,000
2008 2,422,500
-----------
$11,345,000
===========
Pursuant to a lease modification with PMC Commercial Trust ("PMC")
effective October 1, 2004 (Note 13), 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 lease 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. The Proceeds
Deficit Note Payable bears interest at the rate of 8.5% per annum, payable
monthly. As of March 31, 2005, the outstanding balance was $1.0 million,
of which approximately $845,000 is classified as long-term. The Company is
currently pursuing further lease modifications with PMC (Note 16).
9. SHAREHOLDERS' EQUITY:
Authorized shares:
The Company's corporate charter authorizes 25,000,000 shares of Common
Stock with a par value of $0.005 per share and 100,000 shares of Preferred
Stock with no par value. The Preferred Stock may be issued in series and
the Board of Directors shall determine the voting powers, designations,
preferences and relative participation, optional or other special rights
and the qualifications, limitations or restrictions thereof.
-13-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
================================================================================
9. SHAREHOLDERS' EQUITY (CONTINUED):
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 $128,000 in
cash. Through March 31, 2005, the Company has paid approximately $69,000
for the redemption of 17,894 shares in connection with the reverse-forward
stock split. All shares that were converted into the right to receive cash
have been retired.
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. 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.
10. BUSINESS SEGMENTS:
The Company's business is primarily involved in seven segments: (1) hotel
operations, consisting of the operations of all hotels in which the
Company has a 100% or controlling ownership or leasehold interest, (2)
hotel development, consisting of development, construction and renovation
of hotels for unconsolidated joint ventures and unrelated third parties,
(3) hotel sales and commissions, resulting from the sale of AmeriHost Inn
hotels, (4) hotel management, (5) employee leasing consisting of the
leasing of various employees to hotels, (6) incentive and royalty sharing
fees due from Cendant, the owner of the AmeriHost Inn brand, and (7)
office building rental activities.
-14-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
10. 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, identifiable assets, capital
expenditures and depreciation and amortization for each business segment
for three month periods ended March 31, which is the information utilized
by the Company's decision makers in managing the business:
Revenues 2005 2004
------------- --------------
Hotel operations $ 6,354,302 $ 7,819,524
Hotel development and construction 1,017,224 1,200,654
Hotel sales and commissions 4,188,600 6,839,249
Hotel management 43,599 100,622
Employee leasing 324,591 562,276
Incentive and royalty sharing fees 364,761 283,408
Office building rental and other 162,156 173,907
------------- --------------
$ 12,455,233 $ 16,979,639
-============ ==============
Operating costs and expenses
Hotel operations $ 5,936,270 $ 7,028,727
Hotel development and construction 1,479,703 1,480,392
Hotel sales and commissions 3,524,337 5,403,084
Hotel management 28,030 90,381
Employee leasing 300,712 545,130
Office building rental and other 134,290 41,112
------------- --------------
$ 11,403,342 $ 14,588,527
============= ==============
Identifiable assets
Hotel operations $ 77,953,167 $ 74,533,319
Hotel development and construction 2,012,965 1,653,591
Hotel management 1,790,450 975,530
Employee leasing 196,156 309,859
Office building rental 6,246,198 6,381,730
Corporate, including deferred tax asset 10,869,272 9,859,719
-------------- ----------------
$ 99,068,208 $ 93,713,748
============== ================
Capital Expenditures
Hotel operations $ 401,154 $ 259,923
Hotel development and construction 7,980 -
Hotel management - 1,955
Office building rental and other - 1,354
Corporate 1,076 1,475
------------- --------------
$ 410,210 $ 264,707
============= ==============
Depreciation/Amortization
Hotel operations $ 638,986 $ 492,132
Hotel development and construction 3,480 700
Hotel management 9,193 10,167
Employee leasing 381 347
Office building rental and other 39,893 39,767
Corporate 40,058 9,218
------------- --------------
$ 731,991 $ 552,331
============= ==============
-15-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
11. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS:
Sale of hotels
In July 2003, the Company implemented a formal plan to sell approximately
25-30 hotel properties over a period of two years. The properties to be
sold included 20-25 AmeriHost Inns and six non-AmeriHost hotels that are
wholly owned or in which the Company has an ownership interest. The Company
has hired several regional and national hotel brokerage firms to market
most of the properties and manage the sales process. The Company expects
this plan to reduce debt and generate cash to fund operations and to pursue
development and other strategic objectives, which will accelerate the
economic benefits of the Company's transaction with Cendant Corporation,
the owner of the AmeriHost Inn franchise system. Through March 31, 2005, 16
AmeriHost Inns and 5 non-AmeriHost hotels were sold as part of this plan.
However, there can be no assurances under the plan as to timing, terms of
sale, or that any additional sales will be consummated. In addition to the
specific hotels targeted for this plan, the Company has sold and will
continue to sell properties in the ordinary course of business.
Net proceeds from the sale of AmeriHost Inn hotels were approximately $4.2
million during the three months ended March 31, 2005, which has been
included in hotel sales and commission revenue in the accompanying
consolidated financial statements. This represents the sale of one wholly
owned hotel and one PMC capital lease hotel. The net book value of these
hotels at the time of their sales was approximately $3.5 million, resulting
in operating income from the sale of these hotels of approximately $0.7
million before income tax. In addition, approximately $1.5 million in
mortgage debt was paid off with proceeds from the sale of one of these
hotels, and the Company terminated the lease for the other hotel upon the
sale by the landlord.
In addition, one joint venture in which the Company had a minority
ownership interest sold its hotel asset during the first three months of
2005. The Company accounted for this joint venture by the equity method and
included its share of the gain from this sale in equity in net income and
(losses) of unconsolidated joint ventures in the accompanying consolidated
financial statements.
Impairment
On January 1, 2002, the Company adopted SFAS 144, "Statement of Financial
Accounting Standard (SFAS) No. 144, Accounting for Long-Lived assets (SFAS
144)". SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 requires a long-lived
asset to be sold to be classified as "held for sale" in the period in which
certain criteria are met, including that the sale of the asset within one
year is probable. In addition, the debt that is expected to be paid off as
a result of these hotel sales has been classified as current liabilities in
the accompanying consolidated financial statements. Certain hotels may be
marketed for sale for more than one year, if not sold, since market
conditions and contemplated sale terms have changed for these hotels,
including asking price adjustments in certain cases. The Company continues
to actively market these hotels for sale with the expectation that these
properties will be sold within the next 9 - 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.
-16-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
11. SALE OF HOTELS AND PLAN FOR FUTURE HOTEL DISPOSITIONS (CONTINUED):
If impairment exists, the Company would determine the fair value by using
quoted market prices, if available for such assets, or if quoted market
prices are not available, the Company would discount the expected future
cash flows of such assets.
During the three months ended March 31, 2004, in connection with the
implementation of the plan to sell hotels, the Company recorded non-cash
impairment charges of approximately $320,000 related to consolidated
AmeriHost Inn hotels. In addition, approximately $411,000 of non-cash
impairment charges related to consolidated non-AmeriHost Inn hotels
anticipated to be sold, have been included in "discontinued operations"
during the three months ended March 31, 2004. The non-cash impairment
charges represent adjustments to reduce the carrying value of certain hotel
assets to the estimated sales prices, net of estimated costs to sell, based
on current market conditions and the change in holding periods of the
properties. The Company did not record any impairment charges during the
three months ended March 31, 2005.
12. DISCONTINUED OPERATIONS:
The Company has reclassified its consolidated statements of operations for
the three months ended March 31, 2004, to reflect discontinued operations
of consolidated non-AmeriHost Inn hotels sold during this period, or to be
sold pursuant to the plan for hotel dispositions within the next twelve
months and hotels operated under a lease to be terminated. This
reclassification has no impact on the Company's net income (loss) or net
income (loss) per common share. Non-AmeriHost Inn hotels sold or held for
sale, which are owned by joint ventures and accounted for using the equity
method of accounting, are not presented as "discontinued operations," nor
are the sales of the AmeriHost Inn hotels due to the Company's long-term
royalty sharing agreement for all non-Company owned AmeriHost Inn hotels.
Condensed financial information of the results of operations for the hotels
presented as discontinued operations is as follows:
Three Months Ended
March 31,
-----------------------------
2005 2004
----------- -----------
Hotel Operations:
Revenue $ 437,996 1,256,106
Operating expenses 628,760 1,406,587
----------- -----------
(190,764) (150,481)
Depreciation and amortization 10,886 311,279
Leasehold rents 2,647 60,000
Hotel impairment provision -- 411,586
----------- -----------
Operating Loss (204,297) (933,346)
Other income (expense):
Interest expense (95,124) (155,712)
Debt extinguishment 367,605 17,948
Loss on sale of assets (12,199) --
----------- -----------
Income (loss) from discontinued
operations, before income taxes 55,985 (1,071,110)
Income (tax) benefit (20,000) 428,444
----------- -----------
Net income (loss) from
discontinued operations $ 35,985 $ (642,666)
=========== ===========
-17-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
12. DISCONTINUED OPERATIONS (CONTINUED):
One consolidated non-AmeriHost Inn hotel remains to be sold pursuant to the
plan for hotel disposition. The operations of this hotel are included in
discontinued operations and classified as held for sale in the accompanying
consolidated balance sheet as of March 31, 2005. Condensed balance sheet
information for this hotel is as follows:
March 31,
2005
---------------
ASSETS
Current assets:
Cash and cash equivalents $ 155,497
Accounts receivable 61,988
Prepaid expenses and other current assets 5,870
---------------
Total current assets 223,355
---------------
Property and equipment 5,195,533
Less accumulated depreciation and amortization 741,151
--------------
4,454,382
Other assets, net of accumulated amortization 74,444
--------------
$ 4,752,181
LIABILITIES
Current liabilities:
Accounts payable $ 120,610
Accrued payroll and other expenses 266,949
Current portion of long-term debt 142,000
---------------
Total current liabilities 529,559
Long-term debt, net of current portion 4,269,519
Other long-term liabilities 5,000
Deficit (51,897)
---------------
$ 4,752,181
===============
13. 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. Through September 2004, 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 in October 2004 (the "Third
Amendment") reducing and fixing the rate to 8.5% of Assigned Values, as of
October 2004. All of these leases were triple net and provided for monthly
base rent payments ranging from $14,000 to $27,000.
-18-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
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 was reclassified as a reduction in the basis
of the capital lease hotel assets. At March 31, 2005, the balance of this
deferred income was approximately $396,000.
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 a hotel 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, discussed below).
Due to the modified terms of the Temporary Sales 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 the Third Amendment,
which became effective as of October 1, 2004. The Third Amendment provides
that the accrued rent balance of approximately $425,000 be 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:
- 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:
o A minimum of five (5) hotels on or before October 1, 2005;
o A minimum of ten (10) hotels (cumulative) on or before October 1,
2006;
o A minimum of fifteen (15) hotels (cumulative) on or before
October 1, 2007; and
o A minimum of twenty (20) hotels (cumulative) on or before October
1, 2008.
-19-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED M ARCH 31, 2005 AND 2004
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
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.
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 have been accounted for as capital leases pursuant to SFAS No.
13, as of October 1, 2004. The Company recorded approximately $33.0 million
in capital lease property and equipment, and approximately $38.0 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 the annual 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. The Company is currently pursuing further
lease modifications with PMC (Note 16).
Hotel operating leases:
The Company leases three AmeriHost Inn hotels from PMC that have been
classified as operating leases. The remaining leases with PMC have been
classified as capital leases (Note 8). 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. It
is anticipated that these hotels will be sold to unrelated third parties by
September 30, 2008 in accordance with the terms of the PMC Third Amendment.
-20-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
A joint venture in which the Company had a controlling ownership interest
leased one non-AmeriHost Inn hotel through February 2005 at which time the
landlord consummated the sale of the property to a third party and the
lease was terminated. The operations of this hotel have been presented as
"discontinued operations" in the accompanying consolidated financial
statements due to this lease modification.
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.
14. SUPPLEMENTAL CASH FLOW DATA:
The following represents the supplemental schedule of noncash investing and
financing activities for the three months ended March 31:
2005 2004
------------- --------------
Notes received in connection with the
sale of hotels $ - $ 100,000
============= ==============
Interest paid, net of interest capitalized $ 2,008,948 $ 1,013,175
============= ==============
15. NEW ACCOUNTING STANDARDS:
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," which addresses how a
business enterprise should evaluate whether or not it has a controlling
financial interest in an entity through means other than voting rights and
accordingly should consolidate the entity. FIN 46R replaces FIN 46,
"Consolidation of Variable Interest Entities", which was issued in January
2003. The Company was required to adopt the requirements of FIN 46R for
interim periods ending after December 15, 2004. This Interpretation
requires that the Company present any variable interest entities in which
it has a majority variable interest on a consolidated basis in its
financial statements. 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 statement 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 presents all of its other
unconsolidated investments under the equity method.
-21-
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2005 AND 2004
15. NEW ACCOUNTING STANDARDS (CONTINUED):
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.
16. SUBSEQUENT EVENTS:
In April 2005, a consolidated joint venture in which the Company owns a
minority ownership interest sold its AmeriHost Inn hotel, generating a
repayment of the Company's operating advances of approximately $420,000,
after the related mortgage debt was paid off. The joint venture partner did
not receive a distribution from the net sale proceeds, in accordance with
the terms of the joint venture agreement, since the net proceeds were
approximately $500,000 less than the Company's outstanding operating
advances.
The Company has not made the May 2005 lease payment to PMC as required
under the PMC lease agreement. As a result of the Company's failure to make
this payment, on May 13, 2005, the Company was in default of the lease
agreement. Additionally, the Company has only made partial payments on its
currently due real estate taxes for the hotels subject to the PMC lease.
The nonpayment of real estate taxes on a current basis is also an event of
default under the lease. Under a default, PMC may pursue all of their
rights and remedies under the PMC lease agreement against the Company's
subsidiary, as well as, under the lease guarantee provided by the Company.
The Company has requested PMC to amend the terms of the lease agreement to
provide for, among other things, a further restructuring of the lease
payments and the elimination of any hotel value guarantee/obligation upon
the sale of the hotels subject to the lease. As a result of the default
under the PMC lease, an event of default has also occurred under the
Proceeds Deficit Note (Note 8) payable to PMC, and, as a result, PMC may
elect to exercise its right to accelerate payment of the amounts due under
the note.
Additionally, the default under the PMC lease constitutes an event of
default under the Company's line of credit agreement with LaSalle Bank NA.
The Company has advised LaSalle of the event of default under the PMC
lease. Based on the Company's conversations with LaSalle, the Company does
not believe that LaSalle will elect to declare an event of default and
accelerate payment of the amounts due under the line of credit; however,
there can be no assurance that LaSalle will not exercise its rights.
-22-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
Information both included and incorporated by reference in this Quarterly Report
on Form 10-Q may contain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, and as such may involve known and unknown risks,
uncertainties and other factors which may cause our actual results, performance
or achievements to be materially different from future results, performance or
achievements expressed or implied by such forward-looking statements.
Forward-looking statements, which are based on various assumptions and describe
our future plans, strategies and expectations, are generally identified by our
use of words such as "intent," "plan," "may," "should," "will," "project,"
"estimate," "anticipate," "believe," "expect," "continue," "potential,"
"opportunity," and similar expressions, whether in the negative or affirmative.
We cannot guarantee that we actually will achieve these plans, intentions or
expectations. All statements regarding our expected financial position, business
and financing plans are forward-looking statements.
Factors that could have a material adverse effect on our operations and future
prospects include, but are not limited to:
- 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 hotel debt and corporate and/or joint venture equity
capital for new development/acquisition growth;
- ability to refinance debt;
- our ability to negotiate a settlement with PMC regarding the events of
default under the modified lease agreement with PMC;
- rising interest rates;
- the rising costs associated with being a publicly held company;
- competition;
- supply and demand for hotel rooms in our current and proposed market
areas, including the existing and continuing weakness in business
travel and lower-than-expected daily room rates; and
- other factors that may influence the travel industry, including
health, safety and economic factors.
These risks and uncertainties, along with the risk factors discussed under "Risk
Factors" in our Annual Report on Form 10-K for the year ended December 31, 2004,
and those risk factors discussed under "Risk Factors" herein, should be
considered in evaluating any forward-looking statements contained in this report
or incorporated by reference herein. All forward-looking statements speak only
as of the date of this report or, in the case of any document incorporated by
reference, the date of that document. All subsequent written and oral
forward-looking statements attributable to us or any person acting on our behalf
are qualified by the cautionary statements in this section. We undertake no
obligation to update or publicly release any revisions to forward-looking
statements to reflect events, circumstances or changes in expectations after the
date of this report.
-23-
EXECUTIVE OVERVIEW
We are engaged primarily in developing, selling, owning, operating and managing
limited service hotels, without food and beverage facilities, primarily
AmeriHost Inn hotels. Our hotels are concentrated primarily in the Midwestern
U.S., however we have developed a number of hotel properties in California and
the South Central U.S. over the past several years. Our portfolio, as well as
the changes in 2005, is summarized as follows:
Hotels at Hotels Hotels Hotels at
12/31/04 Sold/Disposed Opened/Acquired 03/31/05
---------------- ------------------ ----------------- -----------------
Hotels Rooms Hotels Rooms Hotels Rooms Hotels Rooms
------ ----- ------ ----- ------ ----- ------ -----
Consolidated (1):
AmeriHost Inn hotel 40 2,575 (2) (122) -- -- 38 2,453
Other brands 3 504 (2) (354) -- -- 1 150
---- ----- --- ----- -- -- -- -----
43 3,079 (4) (476) -- -- 39 2,603
---- ----- --- ----- -- -- -- -----
Unconsolidated:
AmeriHost Inn hotel 7 533 (1) (60) -- -- 6 473
---- ----- --- ----- -- -- -- -----
7 533 (1) (60) -- -- 6 473
---- ----- --- ----- -- -- -- -----
Totals:
AmeriHost Inn hotels 47 3,108 (3) (182) 44 2,926
Other brands 3 504 (2) (354) -- -- 1 150
---- ----- --- ----- -- -- -- -----
50 3,612 (5) (536) -- -- 45 3,076
==== ===== === ===== == == == =====
(1) Consolidated hotels are those in which we have a 100% or controlling
ownership interest or a leasehold interest.
Our AmeriHost Inn hotels operate under franchise agreements with Cendant. Our
remaining non-AmeriHost Inn hotel operates under a Days Inn franchise agreement,
which franchise brand is 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 interest, and which
are accounted for by the equity method.
- Development and construction revenues consisting of fees for new
development, construction and renovation activities.
- Revenue from selling our consolidated AmeriHost Inn hotels.
- Incentive and royalty sharing fees consisting of the amortization of
one-time development incentive fees received from Cendant, and our
portion of the AmeriHost Inn franchise royalty fees Cendant receives
from all other AmeriHost Inn franchisees and pays to us.
We generate revenue from the following secondary sources:
- Management and employee leasing revenues consisting of fees for hotel
management and employee leasing services.
- Rental revenue from the third-party tenants in our office building.
-24-
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 AmeriHost Inn 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.
- Other operating expenses including corporate general & administrative
expenses, depreciation, amortization and lease payments.
Hotel and corporate level financing
Our company-owned and operated hotels have been financed historically through
either a combination of debt and equity, or lease financing. Our lenders are
typically local or regional banks, or other financial institutions, that provide
mortgage debt based on a percentage of cost or value, as determined by each
individual lender. The loan to value ratios have typically ranged from 60%-75%.
The equity requirement has been funded through our operating cash flow or other
corporate financing resources, such as our operating line-of-credit with LaSalle
Bank NA.
Our joint ventures have also historically been financed through a combination of
debt and equity, similar to the terms discussed above, and in one case, through
a lease. We have also typically made an equity contribution of up to 30% of the
total equity as a minority partner. In addition, we have guaranteed the mortgage
debt of the joint venture in most instances. Our business plan currently
emphasizes that the majority of new development will be through joint ventures
where our partners will fund the majority of the equity contributions. We 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 were 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 $30,000.
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.
We paid off approximately $2.9 million in mortgage debt and eliminated $2.0
million in capital lease obligation in the first quarter of 2005, in connection
with the sale of three consolidated hotels. We expect to decrease our mortgage
debt further as we sell additional hotels. Total annual hotel mortgage debt
service for the hotels currently
-25-
in our portfolio, excluding debt service on mortgages that mature in the next 12
months, is approximately $4.1 million for all of our consolidated hotels. Total
annual hotel mortgage debt service for our current portfolio of unconsolidated
joint ventures, excluding debt service on mortgages that mature in the next
twelve months, is approximately $1.5 million. However, if certain anticipated
hotel sales occur, these obligations would decrease, as the related mortgage
debt would be paid off with the sale proceeds. These debt service amounts are
exclusive of the debt service on our corporate line of credit and the mortgage
on our office building.
During the first quarter of 2005, one joint venture terminated the lease
pursuant to which it operated a non-AmeriHost Inn hotel as a result of the sale
of the hotel by the landlord, as contemplated by a lease modification executed
in 2004.
In 1998 and 1999, our subsidiary completed a sale and lease back transaction
with PMC Commercial Trust ("PMC"), a real estate investment trust ("REIT"), for
30 AmeriHost Inn hotels. Since then, PMC has sold, or we have repurchased, 12
hotels, leaving 18 hotels currently leased from PMC. We have guaranteed our
subsidiary's obligation under the leases.
Due to numerous economic and market-driven factors relating to these leased
hotels, we have had to fund, on behalf of our subsidiary, from other operating
sources such as the sale of our hotels, a significant portion of the approximate
$5.1 to $7.3 million annual lease obligation, depending on the hotels in the
leased portfolio, as the aggregate operating cash flow from these hotels for the
past several years has been insufficient to meet the lease obligation.
As a result, we entered into a third amendment (the "Third Amendment") to the
lease with PMC, which became effective as of October 1, 2004, and provided for
the following:
- Funded a portion of the 2004 accrued rent with existing lease security
deposits;
- Reduced the lease rate from approximately 10.5% of the original
specified values, subject to CPI increases, to the fixed lease rate of
8.5% of the original specified values, as long as we are not in
default of the agreement; and
- Required us to cause all remaining leased hotels to be sold over the
next four years.
As a result of the modification, the annual rent payment was reduced by
approximately 19%, and the lease term was reduced assuming the hotels were sold
over the four-year period. The Third Amendment also provided for a promissory
note payable by us to PMC in certain cases (the "Proceeds Deficit Note"). The
Proceeds Deficit Note will increase (or decrease), on a cumulative basis as the
hotels are sold, for a shortfall (or excess) computed as the difference between
a leased hotel's net sale price and its original assigned value. A portion of
the Proceeds Deficit Note is to be repaid to PMC within 45 days of each hotel
sale (the "Arlington fee"), based on the hotel's most recent annual revenues,
with the remaining amount to be repaid to PMC over a term of up to seven years.
Based on our current estimates of fair market value of the leased hotels, we
estimate the aggregate net shortfall payable to PMC will be in the range of $8.0
to $9.5 million which we expect will be partially offset by fees we expect to
receive from Cendant as described below. Under the Third Amendment, we must
facilitate the sale of the hotels generally at a pace of five hotels per year
measured on a cumulative basis, and at prices approved by PMC. If the sales
schedule is not met, the lease rate will revert to the original lease
contractual rate, or a higher lease default rate in certain circumstances, until
the number of hotels sold becomes compliant with the sale schedule.
As these hotels are sold to buyers who maintain their AmeriHost Inn franchise
affiliation, as required under the Third Amendment, we expect to receive the
one-time development incentive fees from Cendant. Total development incentive
fees from the sale of the leased hotels is estimated to be approximately $3.0 to
$4.0 million. We anticipate that these fees will be utilized to fund the
required cash payment due PMC under the Proceeds Deficit Note. As a result,
after applying this $3.0 to $4.0 million, we expect the Proceeds Deficit Note
balance through the sale of all leased hotels and the application of these
payments, is anticipated to be approximately $4.0 to $6.5 million, subject to
mandatory principal payments as discussed below. In addition to the development
incentive fees, the sale of these hotels would be expected to generate future
annual royalty fee sharing payments to us through the Cendant agreement.
The Deficit Proceeds Note bears interest at the rate of 8.5 percent per annum,
payable on a monthly basis, with a maximum outstanding principal balance of $4.0
million. If at any time the principal balance exceeds $4.0 million, such excess
is payable immediately to PMC. In addition, if our net worth exceeds a certain
stipulated amount, as adjusted, we may be obligated to make a principal payment
on the Proceeds Deficit Note, or be subject to a greater interest rate on the
outstanding principal balance. Otherwise, scheduled principal payments on the
promissory note
-26-
begin the earlier of the date the last hotel is sold or October 1, 2008, with
the total principal balance outstanding at that time to be repaid ratably over
the following three years.
Through March 31, 2005, two leased hotels have been sold pursuant to the Third
Amendment, and two additional leased hotels are under contract for sale. The
Proceeds Deficit Note has a current balance of approximately $850,000, including
the shortfall obligation incurred in connection with the sale of a leased hotel
in 2004. The termination of the leases early, through the sale of the hotels
over the next four years, will assist us in limiting the anticipated net
negative cash flow from these hotels. However, even with the reduced lease rate,
the historical operational cash flow from most of the leased hotels is
insufficient to cover their respective reduced lease payments, and we have had
to fund the lease obligations from other sources, primarily proceeds from the
sale of owned hotels. Since the inception of the hotel leases, we have funded to
our subsidiary in excess of $15.0 million in the aggregate to cover the amount
in which the lease obligations have exceeded the operating cash flow from the
leased hotels. Due to the significant deficit in operating cash flow from
these hotels compared to the lease obligation, as modified in 2004, we have
again been in discussions with PMC requesting further modification to the lease
agreement.
We believe the operating cash flow from the leased hotels will continue to be
insufficient to cover the lease payments due to the economic conditions
affecting the hotel industry and the individual markets in which the PMC hotels
are located, which have changed substantially since the date on which we entered
into the original lease. We believe that it is in the best interests of the
Company to no longer continue payments pursuant to the current lease terms. We
have, therefore, advised PMC that without further lease modifications to
provide, among other things, a restructuring of the lease payments for the
remaining lease term, we will make no further payments pursuant to the leases.
As such, our monthly lease payment for the month of May 2005 (approximately
$310,000) has not been made and it, together with our future monthly payments,
will not be made without a restructuring of the lease payments and the
elimination of any hotel value guarantee/obligation upon the sale. As a result
of our failure to make the May payment, we are in default of the leases as of
May 13, 2005. The event of default entitles PMC to pursue all remedies under the
leases including terminating the leases, taking possession of the hotels and
seeking recovery against us, as guarantor of the leases, for payments due under
the leases. Additionally, as a result of the default under the PMC leases, PMC
may determine to accelerate payment of the amounts due under the Proceeds
Deficit Note. If PMC should institute litigation seeking damages and remedies
under the leases, we would consider all of our alternatives including rejecting
the leases in a reorganization filed pursuant to Chapter 11 of the U.S.
Bankruptcy Code. We have discussed with our counsel and bankruptcy counsel the
extent of our potential liability under the PMC leases and been advised that in
a Chapter 11 filing, the estimated liability under the PMC leases would be
substantially less than the payments under the PMC leases. For this reason,
among others, we believe that an amicable resolution should be achieved with
PMC; however, there can be no assurance of such resolution.
Additionally, in an effort to better preserve our cash position, we have made
only partial payments on our currently due real estate taxes for those hotels
subject to the PMC leases, leaving a balance due of approximately $250,000 in
currently due, unpaid real estate taxes. Pursuant to the terms of the PMC
leases, non-payment of real estate taxes is also an event of default under the
lease agreement. See also the section entitled, "Liquidity and Capital Resources
- - General".
Due to the terms of the Third Amendment, 17 of the leased hotels were accounted
for as capital leases in accordance with Financial Accounting Standards Board
Statement Number 13, "Accounting for Leases," effective October 1, 2004. The
remaining three hotels will continue to be accounted for as operating leases.
Rather than the off-balance sheet reporting required by operating lease
treatment, capital lease accounting requires that the company report on its
balance sheet, the hotel assets and a capital lease obligation. The company
recorded approximately $33.0 million in capitalized lease assets, net of the
existing unamortized deferred gain remaining from the original 1998 and 1999
sales of the hotels to PMC, and a capital lease obligation of approximately
$38.0 million. The capitalized hotel assets are being depreciated in accordance
with the company's existing depreciation policy, with consideration for the new
lease term. However, for those capitalized hotels which are being actively
marketed to be sold, and are expected to be sold within the next 12 months,
depreciation will not be taken since they will be classified as "held for sale"
in accordance with Statement of Financial Accounting Standard No. 144,
"Accounting for Long Lived Assets." The capital lease obligation, for the
remaining 15 of the original 17 leases capitalized, will be amortized, as the
monthly lease payment is made, in order to produce a constant periodic rate of
interest on the lease obligation.
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, however none of the
covenants applied for the three months ended March 31, 2005. LaSalle Bank NA 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. We paid down $500,000 after the
date of these financial statements to meet the required step down of the maximum
loan availability to $3.5 million on May 1, 2005. The maximum availability will
reduce 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. As of the date of this report, $3.5 million is
outstanding on this line of credit.
-27-
The event of default under the PMC lease (described above) also constitutes an
event of default under the line of credit agreement with LaSalle Bank NA. We
have advised LaSalle of the event of default under the PMC lease. Based on our
conversations with LaSalle, we do not believe that LaSalle will elect to declare
an event of default and accelerate payment of the amounts due under the line of
credit; however, there can be no assurance that LaSalle will not exercise its
rights.
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. 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. While our hotel revenues have
increased in 2004 and thus far in 2005, they have not increased to the same
extent as the overall U.S. lodging industry, as reported by industry analysts.
Nevertheless, our industry outlook for the remainder of 2005 is optimistic with
respect to hotel revenue growth, however there is no assurance that our hotel
revenues will increase as expected.
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.
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.
-28-
RevPAR Growth
2000 2001 2002 2003 2004 2005 (3)
---- ---- ---- ---- ---- --------
AmeriHost Inn Hotels (1) 5.9% (2.1%) 3.7% (0.3%) 1.8% (1.3%)
Limited service segment,
without food and
beverage (2) 3.1% (4.2%) (1.2%) (0.3%) 3.8% 4.1%
(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.
(3) Through March 31, 2005
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 97.3%
as of March 31, 2005. 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.
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.
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;
- Negotiate a settlement agreement with PMC regarding our default under the
PMC lease and restructure the PMC lease payments and facilitate the sale
of the PMC hotels without any hotel value guarantee/obligation;
- 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 to 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
-29-
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 FIRST QUARTER 2005 RESULTS
Total revenues decreased $4.5 million during the first quarter of 2005 compared
to the first quarter of 2004, due primarily to the sale of two Consolidated
AmeriHost Inn hotels in the first quarter of 2004 at an aggregate price that was
greater than the aggregate sale price of one Consolidated AmeriHost Inn hotel
and one capital lease AmeriHost Inn hotel during the first quarter of 2005, as
well as a decrease in hotel operations revenue due to the nine fewer
Consolidated AmeriHost Inn hotels operated during the first quarter of 2005
versus the first quarter of 2004. As a result of the capital lease accounting
treatment for 17 leased hotels in connection with the Third Amendment to the PMC
lease, leasehold hotel rents decreased significantly and interest expense
increased significantly during the first quarter of 2005 compared to 2004. These
results include non-cash hotel impairment provisions recorded in the first
quarter of 2004, and discontinued operations related to non-AmeriHost Inn hotels
which have been recorded in connection with the implementation of the plan for
hotel disposition as discussed below. The results for the three months ended
March 31, 2005 and 2004 are summarized as follows:
Three Months Ended March 31,
-----------------------------
2005 2004
------------- -------------
Net loss from continuing
operations, before impairment $ (1,520,653) $ (740,660)
Impairment provision, net of tax - (192,080)
----------- -----------
Net loss from continuing operations (1,520,653) (932,740)
Discontinued operations, net of tax (a) 35,985 (642,666)
----------- -----------
Net Loss (1,484,668) (1,575,406)
Net loss per share - Diluted:
From continuing operations $ (0.30) $ (0.18)
From discontinued operations - (0.13)
-------------- --------------
$ (0.30) $ (0.31)
=============== ===============
(a) Includes hotel impairment provision related to non-AmeriHost Inn hotels
to be sold of approximately $247,000, net of tax, for the three months
ended March 31, 2004 (Note 11).
-30-
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 certain accounting
policies that we consider critical in that they may require complex judgment in
their application or require estimates about matters that are inherently
uncertain. A complete discussion of the accounting policies we consider critical
are contained in our Annual Report on Form 10-K for the year ended December 31,
2004, under the heading "Management's Discussion and Analysis - Critical
Accounting Policies," and should be read in conjunction with this report on Form
10-Q.
Consolidation Policy
The consolidated financial statements include the accounts of the Company, its
wholly owned subsidiaries and entities in which we have a majority or
controlling interest. All significant intercompany accounts and transactions
have been eliminated.
Minority-owned joint ventures in which we maintain a non-controlling ownership
interest are accounted for by the equity method. Our share of each joint
venture's income or loss, including gains and losses from capital transactions,
is reflected on our consolidated statement of operations as "Equity in income
and (losses) from unconsolidated joint ventures."
Revenue Recognition
Hotel operations
The revenue from the operation of a Consolidated hotel is recognized as part of
the hotel operations segment when earned.
Hotel sales 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 has sold its hotels. For those
leased hotels accounted for as capital leases, we record the sale as if we owned
the hotel. In addition, pursuant to a modification of the lease agreements, we
will record a shortfall obligation or surplus upon the sale of a PMC owned
hotel.
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 construction period, and all development and
construction costs as operating expenses in the hotel development segment.
-31-
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. 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. We
recognize the employee leasing revenue in the employee leasing segment as the
related payroll cost is incurred.
Incentive and royalty sharing
Cendant has agreed to pay us a development incentive fee, under certain
conditions, every time we sell one of our existing or newly developed AmeriHost
Inn hotels to a buyer who executes an AmeriHost Inn franchise agreement with
Cendant. 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 month 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.
Sale and Leaseback of Hotels
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, a subsidiary of ours 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 us to extend the leases
for a five-year period, through 2013. Through September 2004, the lease payments
were 10.51% of the original sale price of the hotels subject to the lease (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
2004. All of these leases are triple net and provide for monthly base rent
payments ranging from $14,000 to $27,000.
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
-32-
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 non-cash
impairment charges during 2004 and 2003, related to the hotels targeted for
sale. The non-cash impairment charges relating to consolidated non-AmeriHost Inn
hotels anticipated to be sold, have been included in "discontinued operations."
The non-cash impairment charge represents an adjustment to reduce the carrying
value of certain hotel assets to the estimated sales prices, net of estimated
costs to sell.
Based on the implementation of this plan for hotel dispositions, the hotel
assets identified for sale, which are being actively marketed and expected to be
sold within a twelve month period, have been classified as "held for sale" on
the accompanying consolidated balance sheet as of March 31, 2005. 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 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 we determine 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." Certain hotels which have not sold, have been
marketed for sale for more than one year as of the first quarter of 2005.
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.
-33-
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 three hotels during the first quarter
of 2005, 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 (1)
-----------------------------------------------------------
Consolidated hotels:
AmeriHost Inn hotels 20 $ 12,895 $ 31,886 $ 3,731
Other brand hotels 5 1,501 6,002 -
----- ---------- --------- ---------
25 14,396 37,888 3,731
----- ---------- --------- ---------
Unconsolidated hotels:
AmeriHost Inn hotels 2 1,512 1,111 485
-
Other brand hotels 2 1,886 3,579 -
----- ---------- --------- ---------
4 3,398 4,690 485
----- ---------- --------- ---------
Total, since the implementation of the
strategic plan to sell hotels 29 $ 17,794 $ 42,578 $ 4,216
===== ========== ========== =========
Total, for the three months ended
March 31, 2005 (2) 3 $ 2,637 $ 4,041 $ 420
===== ========== ========== =========
(1) These fees are deferred for financial statement reporting purposes, and
amortized as revenue over a 76-month period.
(2) Of the three hotels sold in 2005, two were AmeriHost Inn hotels, one
consolidated and one unconsolidated, and one was a non-AmeriHost
consolidated hotel.
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.
-34-
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2005, COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2004
The following tables set forth our selected operations data for the three months
ended March 31, 2005 and 2004. This data should be read in conjunction with our
financial statements in Item 1 of this Form 10-Q.
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------------- ------------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- ---------- ----------- ----------- ----------
Revenue:
AmeriHost Inn hotel operations $ 6,354 51.0% $ 7,820 46.1% (18.7%)
Development and construction 1,017 8.2% 1,201 7.1% (15.3%)
Hotel sales and commissions 4,189 33.6% 6,839 40.3% (38.8%)
Management services 44 0.4% 101 0.6% (56.7%)
Employee leasing 325 2.6% 562 3.3% (42.3%)
Incentive and royalty sharing 365 2.9% 283 1.7% 28.7%
Office building rental 162 1.3% 174 1.0% (6.8%)
----------- --------- ----------- ---------- -------
12,456 100% 16,980 100% (26.6%)
----------- --------- ----------- ---------- -------
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------------- ------------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- ----------- ----------- ----------- ----------
Operating costs and expenses:
AmeriHost Inn hotel operations 5,937 93.4% 7,029 89.9% (15.5%)
Development and construction 1,480 145.5% 1,481 123.3% 0.0%
Hotel sales and commissions 3,524 84.1% 5,403 79.0% (34.8%)
Management services 28 64.3% 90 89.8% (69.0%)
Employee leasing 301 92.6% 545 97.0% (44.8%)
Office building rental 134 82.8% 41 23.6% 226.6%
----------- ---------- ----------- ---------- ----------
11,404 91.6% 14,589 85.9% 21.8%
----------- ---------- ----------- ---------- ----------
Depreciation and amortization 732 5.9% 552 3.3% 32.5%
Leasehold rents - hotels 173 1.4% 1,197 7.0% (85.6%)
Corporate general & administrative 594 4.8% 867 5.1% (31.6%)
Impairment provision - 0.0% 320 1.9% (100.0%)
Lease Termination 95 0.8% - - -
----------- ---- ----------- ---------- ----------
Operating income (loss) $ (542) (4.4%) $ (545) (3.2%) (0.7%)
============ ========= =========== ========== ==========
Segment Data:
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------------- ------------------------- %
Amount % of Amount % of Increase
(thousands) Revenues (thousands) Revenues (Decrease)
----------- ----------- ----------- ----------- ----------
Operating Income (Loss) by Segment:
AmeriHost Inn hotel operations $ (489) (3.9%) $ (1,217) (7.2%) (59.8%)
Development and construction (466) (3.7%) (280) (1.6%) 66.2%
Hotel sales 665 5.3% 1,436 8.5% (53.7%)
Management services 6 0.1% - 0.0% 8577.0%
Employee leasing 23 0.2% 17 0.1% 39.9%
Incentive and royalty sharing 365 2.9% 283 1.7% 28.7%
Office building rental (12) (0.1%) 93 0.5% (112.9%)
Corporate general & administrative (634) (5.1%) (876) (5.2%) (27.7%)
------------ ---------- ----------- --------- ---------
Operating income (loss) $ (542) (4.4%) $ (545) (3.2%) (0.7%)
============ ========== =========== ========= =========
-35-
Three Months Ended Three Months Ended
March 31, 2005 March 31, 2004
------------------------- -------------------------
Operating Income (Loss) as a
percentage of segment revenue:
AmeriHost Inn hotel operations (7.7%) (15.6%)
Development and construction (45.8%) (23.4%)
Hotel sales 15.9% 21.0%
Management services 14.6% 0.1%
Employee leasing 7.2% 3.0%
Incentive and royalty sharing 100.0% 100.0%
Office building rental (7.4%) 53.5%
Corporate general & administrative N/A N/A
-------- ---------
Total operating income (loss) (4.4%) (3.2%)
-------- =========
REVENUES Since the Company is engaged in, among other things, the sale of hotel
properties, revenues for our AmeriHost Inn Hotel Operations business segment are
analyzed on a Same Room Revenue ("SRR") basis. Comparative discussions on a SRR
basis include only those full months for hotels that were included in the
operating results during the periods being compared.
Same Room Revenues for consolidated AmeriHost Inn hotels the first three months
of 2005 were 1.2% lower as compared to the same period last year, primarily due
to 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. On an absolute
basis, for the first three months of 2005, consolidated AmeriHost Inn revenues
were 18.7% lower than the same period last year and includes the impact of 13
fewer hotels for all or part of the first quarter 2005 as compared to 2004.
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 were
constructing one hotel for a minority-owned joint venture during the first
quarter of 2005, and one (other) minority-owned hotel during the first quarter
of 2004. The revenue recognized was based on the construction progress achieved
on each project during the quarter.
Hotel Sales revenue decreased as a result of the sales of one wholly owned
AmeriHost Inn hotel and one capital lease AmeriHost Inn hotel during the first
quarter of 2005, at an aggregate price that was less than the aggregate sale
price of the two wholly owned AmeriHost Inn hotels sold during the first quarter
of 2004. The 2004 hotel sales included the sale of the 84-room Redding,
California AmeriHost Inn hotel at a sales price of approximately $5.1 million,
net of closing costs. We intend to continue to build and sell AmeriHost Inn
hotels in order to generate increased fees under the agreement with Cendant and
fund operations.
Management Services revenue decreased during the first quarter of 2005 primarily
as the result of a lesser number of hotels under management service contracts in
2005 versus 2004.
Employee Leasing revenue decreased during the first quarter of 2005 as compared
to the same period last year primarily as the result of a lesser number of
hotels under leasing contracts in 2005 versus 2004. An increase in the number of
joint venture relationships is part of our growth strategy and will directly
affect our ability to generate revenues in this segment.
Incentive and Royalty Sharing revenue increased as a result of the sale of
additional AmeriHost Inn hotels and the increase in the number of non-Company
owned AmeriHost Inn hotels franchised with Cendant. Approximately $281,000 and
$209,000 was recognized during the first quarter of 2005 and 2004, respectively,
from the amortization of development incentive fees. We also recorded
approximately $83,000 and $75,000 in royalty sharing revenue during the three
months ended March 31, 2005 and 2004, respectively. We received approximately
$572,000 and $417,000 in development incentive fees related to AmeriHost Inn
hotels sold during the three months ended March 31, 2005 and 2004, respectively.
Incentive and Royalty Sharing revenue is expected to increase if the owned
AmeriHost Inns targeted in our strategic hotel disposition plan and those leased
hotels required to be sold pursuant to the Third Amendment of the lease with
PMC, are sold to operators who become Cendant AmeriHost Inn franchisees.
-36-
Office Building Rental revenue, consisting of leasing activities from our owned
office building, decreased slightly due to the termination of the lease with one
tenant. We occupy approximately 25% of the available square footage.
Approximately 50% of the space is leased to unrelated third parties pursuant to
long-term lease agreements. Tenants are being sought for the remaining vacant
space and once leased, we expect improvement in these revenues. 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. During the three months ended March 31, 2005, we did not
lease any of the additional available space.
OPERATING COSTS AND EXPENSES. Operating costs and expenses for the Hotel
Operations decreased 15.5% due to the fewer number of AmeriHost Inn hotels
included in this segment -- 38 hotels at March 31, 2005, as compared to 47
hotels at March 31, 2004. This decrease was offset by increases in certain
expenses including marketing, maintenance, and energy costs.
Operating costs and expenses for the Hotel Development and Construction segment
were basically flat, even though revenues had decreased by approximately 15%.
During the first quarter of 2005, in addition to the costs incurred in
connection with the construction of a hotel for an unconsolidated joint venture,
we incurred approximately $200,000 in site due diligence and evaluation expenses
relating to land parcels being considered for future hotel development.
Hotel Sales operating expenses decreased as a result of the lower aggregate net
depreciated cost basis of the two wholly owned AmeriHost Inn hotels during the
first quarter of 2005, versus the net depreciated cost basis of the two wholly
owned AmeriHost Inn hotel sold during the first quarter of 2004. The net
depreciated cost basis is expensed upon consummation of the sale.
Management Services segment operating costs and expenses decreased primarily due
to a lower number of hotels under management service contracts in the first
quarter of 2005, versus the same period in 2004.
Employee Leasing operating costs and expenses decreased during the first quarter
of 2005 primarily as the result of a lesser number of hotels under leasing
contracts in 2005 versus 2004.
Office Building Rental operating costs and expenses consisted primarily of
expenses related to the management and operation of our office building. These
expenses increased by approximately $90,000 during the first quarter of 2005, as
compared to 2004 primarily as a result of a change in the allocation of certain
office building costs among the other operating segments. The new allocation
methodology allocates more of the estimated costs of the vacant space to the
office building segment as opposed to the other operating segments. As new
tenants are located to fill the vacant space this business segment is expected
to have lower unabsorbed costs.
Depreciation and amortization expense increased, primarily due to the capital
lease accounting treatment on several leased hotels pursuant to the Third
Amendment to the PMC leases and the resulting depreciation thereon, partially
offset by lower depreciation due to the classification of certain assets as
"held for sale," in accordance with the relevant accounting literature, and the
sale of consolidated AmeriHost Inn hotels from April 2004 through March 31,
2005. The capital lease assets were initially recorded in the fourth quarter of
2004 in conjunction with the Third Amendment to the PMC leases.
Leasehold rents - hotels decreased during the first quarter of 2005, as compared
to the first quarter of 2004, primarily as a result of the capital lease
accounting pursuant to the PMC lease modification, which was effective October
1, 2004.
Corporate general and administrative expense decreased primarily due to lower
salaries and wages, contract services expense, legal costs, and board of
director expense. The decrease in salaries and wages related expense is
primarily due to the vacant CEO position during the first quarter of 2005.
Severance payments made during the first quarter of 2005 to the former CEO,
whose resignation was effective December 31, 2004, were accrued at December 31,
2004. Services of an outside contractor were utilized for special projects in
the first quarter of 2004, including our discussions with PMC and related lease
restructuring efforts.
The $320,000 of impairment charges recorded in the first quarter of 2004 was in
direct 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. This
impairment 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 analysis and market information at
that time.
-37-
The lease termination expense recorded in the first quarter of 2005 of
approximately $95,000 is a result of the termination of one PMC lease pursuant
to the sale of the hotel during the quarter. The lease termination expense
represents the difference between the original Assigned Value of the leased
hotels and the remaining unamortized capital lease obligation at the time of
sale.
OPERATING INCOME BY SEGMENT The following discussion of operating income by
segment excludes any corporate general and administrative expense and the
non-cash hotel impairment charges.
Operating income from consolidated AmeriHost Inn hotels increased, due primarily
to:
- Lower leasehold rent expense in 2005 as a result of the lease modification
with PMC resulting from the Third Amendment, which was effective October
1, 2004, and the sale of three PMC leased hotels during the period April
1, 2004 through March 31, 2005;
- Impairment expense of $320,000 recorded in the first quarter of 2004
related to AmeriHost Inn hotels held for sale. There was no impairment
expense recorded during the three months ended March 31, 2005; and
- The sale of consolidated AmeriHost Inn hotels during the past 12 months
which operated with an operating loss.
These factors were partially offset by:
- Higher energy costs and maintenance related expenses during the three
months ended March 31, 2005; and
- The sale of consolidated AmeriHost Inn hotels during the past 12 months
which operated with operating income.
We believe that aggregate hotel revenue growth is critical to improving the
results of our hotel operations. As such, if the economic recovery now underway
is not sustained, or if the recovery does not have a corresponding improvement
in the lodging industry and our hotels, it could have a significant, negative
impact on our results of operation and financial condition.
The hotel development and construction segment incurred an operating loss of
approximately $466,000 during the first quarter of 2005, versus a loss of
approximately $280,000 in 2004, due primarily to initial site due diligence and
evaluation expenses incurred during the first quarter of 2005 totaling
approximately $200,000, related to land parcels being considered for future
hotel development.
Operating income from hotel sales decreased due to the sale of two AmeriHost Inn
hotels at a lesser total profit during the first quarter of 2005, versus the
sale of the two AmeriHost Inn hotels during the first quarter of 2004.
The increase in hotel management services segment operating income and employee
leasing operating income during the first quarter of 2005 was due primarily to
decreased operating expenses. The decreased operating expenses are due in part
to a change in the allocation of certain office building costs among the other
operating segments. The new allocation methodology in 2005 allocates more of the
estimated costs of the vacant office building space to the office building
segment instead of the other operating segments.
Office building rental operating income decreased primarily as a result of the
change in the allocation of certain office building costs among the other
operating segments. The new allocation methodology in 2005 allocates more of the
estimated costs of the vacant space to the office building segment instead of
the other operating segments.
INTEREST EXPENSE The increase in interest expense during the three months ended
March 31, 2005 compared to the three months ended March 31, 2004 is primarily
due to the incremental non-cash interest expense resulting from the capital
lease treatment of most of the PMC leased hotels as of October 1, 2004, pursuant
to the Third Amendment to the PMC Agreement, partially offset by the reduction
in our overall level of debt between January 1, 2004 and March 31, 2005
primarily as a result of the sale of consolidated AmeriHost Inn hotels.
CHANGE IN EQUITY OF AFFILIATES. The increase in equity of affiliates income of
approximately $419,000 during the three months ended March 31, 2005, as compared
to the three months ended March 31, 2004, was primarily attributable to the
first quarter 2005 sale of one hotel by an unconsolidated joint venture. Our
share of the gain recognized by the joint venture was approximately $235,000,
based upon our ownership interest. In addition we
-38-
received a cash distribution of approximately $500,000, representing our share
of the net cash proceeds from the sale of the hotel.
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.
During the first quarter of 2005 one non-AmeriHost Inn hotel was sold and the
lease for one other non-AmeriHost Inn hotel was terminated upon the sale of the
hotel. The remaining non-AmeriHost Inn hotel is under contract for sale and it
is expected to be sold within the next three months. Discontinued operations for
the three months ended March 31, 2005 includes the operations of three hotels,
compared to the operations of five hotels during the three months ended March
31, 2004. The net income from discontinued operations for the first quarter of
2005 was approximately $36,000 versus a net loss of approximately ($643,000) for
the first quarter of 2004. The primary components (net of tax) of the change are
impairment charges of $247,000 incurred during the first quarter of 2004
compared to no impairment charges in the first quarter of 2005, incremental
depreciation of $154,000 in the first quarter of 2004 related to the one leased
non-AmeriHost Inn hotel, and debt forgiveness of $220,000 recognized during the
first quarter of 2005 in conjunction with the March 2005 sale of a non-AmeriHost
Inn hotel. With respect to the incremental depreciation associated with the
leased non-AmeriHost Inn hotel, there was no depreciation recorded during the
first quarter of 2005 as the hotel assets were fully depreciated at December 31,
2004 based upon the status of the landlord's contract to sell the hotel and
terminate our lease. In the first quarter of 2004 accelerated depreciation was
recorded on the leased hotel's books as a result of a 2004 modification to the
lease that provided for an earlier termination of the lease.
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 $354,000,
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 $1.5 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 ($0.5 million was reduced in April
2005);
- negotiate a settlement with PMC regarding our default under the PMC leases
and restructure the PMC lease payments and any hotel value
guarantee/obligation; (See Item 1 - Business above, under the subheading
"Leased Hotel Properties"); and
- fund capital expenditures, primarily hotel and office building
improvements of approximately $1.2 - $1.8 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 to pay the hotel and corporate
operating expenses and obligations mentioned above. We also have a corporate
line-of-credit, however the availability under this facility is decreasing, from
its current maximum of $3.5 million at May 1, 2005 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 $3.5 million on this credit line.
-39-
The cash flow from the operations of many of our hotels has been negatively
impacted by many factors such as the downturn in the hotel industry from 2001
through 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 and 2005, 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
over the past several quarters, 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 will
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, and there can be no assurance that an upturn in the economy
will significantly improve our hotel operating results. 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 our Report on Form 10-K for the year ended
December 31, 2004 under the heading "Management's Discussion and Analysis - Risk
Factors".
The Third Amendment with PMC provides for the sale of the hotels over a four
year period, with a promissory note payable by us to PMC (the "Proceeds Deficit
Note") in certain circumstances. The Proceeds Deficit Note will increase (or
decrease), on a cumulative basis as the hotels are sold, for a shortfall (or
excess) computed as the difference between a leased hotel's net sale price and
its original assigned value. A portion of the Proceeds Deficit Note is to be
repaid to PMC within 45 days of each hotel sale, based on the hotel's most
recent annual revenues, with the remaining amount to be repaid to PMC over a
term of up to seven years. Based on our current estimates of fair market value
of the leased hotels, we estimate the aggregate net shortfall payable to PMC
will be in the range of $8.0 to $9.5 million which we expect to be partially
offset by fees we receive from Cendant as described below. We must facilitate
the sale of the hotels generally at a pace of five hotels per year measured on a
cumulative basis, and at prices approved by PMC. If the sales schedule is not
met, the lease rate will revert to the original lease contractual rate, or a
higher lease default rate in certain circumstances, until the number of hotels
sold becomes compliant with the sale schedule.
As these hotels are sold to buyers who maintain their AmeriHost Inn franchise
affiliation, as required under the modification, we expect to receive the
one-time development incentive fees from Cendant. Total development incentive
fees from the sale of the leased hotels is estimated to be approximately $3.0 to
$4.0 million. We anticipate that these fees will be utilized to fund the
required cash payment due PMC under the Proceeds Deficit Note. As a
-40-
result, the Proceeds Deficit Note balance through the sale of all the leased
hotels and the application of these payments, is anticipated to be approximately
$4.0 to $6.5 million, subject to mandatory principal payments as discussed
below. In addition to the development incentive fees, the sale of these hotels
would be expected to generate future annual royalty fee sharing payments to us
through the Cendant agreement. As of March 31, 2005, the Deficit Proceeds Note
had a balance of approximately $1 million.
The Deficit Proceeds Note bears interest at the rate of 8.5% per annum, payable
on a monthly basis, with a maximum outstanding principal balance of $4.0
million. If at any time the principal balance exceeds $4.0 million, such excess
is payable immediately to PMC. In addition, if our net worth exceeds a certain
stipulated amount, as adjusted, we may be obligated to make a principal payment
on the Proceeds Deficit Note, or be subject to a greater interest rate on the
outstanding principal balance. Otherwise, scheduled principal payments on the
promissory note begin the earlier of the date the last hotel is sold or October
1, 2008, with the total principal balance outstanding at that time to be repaid
ratably over the following three years.
As discussed above under the section entitled, "Executive Overview - Hotel and
Corporate Level Financing," we did not make the May 2005 lease payment to PMC
and are currently in default of the lease agreement. We do not intend to make
further lease payments without a restructuring of our lease obligations to PMC.
As a result of this default, we are also in default of the Proceeds Deficit Note
payable to PMC and, therefore, PMC may elect to accelerate payment of the
amounts due under the note. We are hopeful that our current discussions with PMC
will continue and lead to an amicable settlement of the default wherein the PMC
leases will be amended to provide for restructured lease payments. If PMC should
institute litigation seeking damages and remedies under the leases, we would
consider all of our alternatives including rejecting the leases in a
reorganization filed pursuant to Chapter 11 of the U.S. Bankruptcy Code. We have
discussed with our counsel and bankruptcy counsel the extent of our potential
liability under the PMC leases and been advised that in a Chapter 11 filing, the
estimated liability under the PMC leases would be substantially less than the
payments under the PMC leases. For this reason, among others, we believe that an
amicable resolution should be achieved with PMC; however, there can be no
assurance of such resolution.
The default under the PMC leases also constitutes an event of default under our
line of credit with LaSalle Bank NA. We have advised LaSalle of the PMC defaults
and, based on our conversations with LaSalle, we do not believe that LaSalle
will declare an event of default and accelerate payments of the amounts due
under the line of credit.
We believe that if we are successful in effectuating an amendment to the PMC
leases to significantly reduce the lease payments, our financial liquidity will
be substantially improved. To date, our revenues from hotel operations and hotel
development operations have been insufficient to satisfy the lease payments and
other operating expenses. We have been able to satisfy our operating expenses
through the sale of many of our owned hotels. Even if we are successful in
restructuring the PMC leases, we will have to increase the rate of our hotel
development activities in order to break even and ultimately, achieve positive
cash flow.
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 operations may affect the financial performance
covenants under our line of credit and certain mortgage notes.
Cash Flow Summary
The following summary discussion of our cash flows is based on the consolidated
statements of cash flows in "Item 1 - Financial Statements."
-41-
Cash and cash equivalents were approximately $3.8 million and $2.6 million at
March 31, 2005 and December 31, 2004, respectively, or an increase of
approximately $1.2 million. The increase was a result of the following increases
and decreases in cash flows:
Three months ended March 31, 2005
(in thousands)
-----------------------------------------
Increase
2005 2004 (Decrease)
---------- ------------ ------------
Net cash provided by operating activities $ 634 $ 5,905 (5,271)
Net cash provided by (used in) investing activities 2,842 (94) 2,936
Net cash used in financing activities (2,217) (4,462) 2,245
----------- ---------- --------
Increase in cash $ 1,259 $ 1,349 (90)
========== ========= =========
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 increase revenue at our hotels,
including Internet and local marketing programs. In addition, we have
implemented a number of initiatives to control costs at our hotels, especially
in the areas of labor, insurance, utilities, and maintenance. We have also
realized reductions in energy usage as a result of the installation of energy
control systems at the majority of our hotels.
Sale of hotels
We typically receive an earnest money deposit from the buyer of a hotel when a
sales contract is executed. The remaining proceeds from the sale of hotel assets
are received at the time of closing. However, in certain instances, we have
provided seller financing in the form of a note to the buyer with specified
interest and repayment terms.
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
-42-
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. During the first quarter of 2005, net proceeds from the sale
of one wholly-owned AmeriHost Inn hotel was $560,000, after the payoff of the
related mortgage debt. Also, a consolidated joint venture in which we own a
majority ownership interest sold its non-AmeriHost Inn hotel during the first
quarter of 2005, generating gross proceeds of $1.9 million and simultaneously
paid off the related mortgage loan of $1.5 million. We intend to continue to
sell hotels, as discussed above under "Hotel Disposition Plan and
Restructuring." However, there can be no assurance that we will be able to sell
hotel assets under terms acceptable to us, and the timing and estimated proceeds
from any such sales could differ materially from that anticipated.
Historically, we have experienced greater activity in hotels for sale from
prospective buyers during the second and third calendar quarters, versus the
first and fourth quarters, consistent with the seasonality of the hotel
operations. 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 $2.5
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. Nine hotels are currently under contract for sale, which are expected to
be consummated within the next six (6) months, including two leased PMC hotels.
Under the terms of the contracts, these anticipated sales are expected to
generate approximately $15.5 million in gross proceeds and the reduction of
mortgage debt of approximately $13.7 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. These amounts do not
include the sale of any other hotels that may be consummated, in addition to
those hotels that were specifically identified as part of the strategic plan for
hotel disposition.
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. Our business plan is focused on expanding hotel
development for joint ventures. We completed the construction of one AmeriHost
Inn hotel for a joint venture in May 2005, and we currently have one site under
construction for a joint venture, with several sites in the pre-construction
development phase, to be utilized for joint venture projects. The sites in the
pre-construction development phase are under contract to purchase, where we are
completing our due diligence prior to acquisition, and are negotiating purchase
contracts for additional sites, to be used for hotel development projects. We
anticipate that our joint venture partners will fund the majority of the equity
contribution required for these projects. Our goal is to significantly increase
the level of hotel development activity through joint ventures 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
-43-
received monthly, based on the actual royalty payments received by Cendant from
all AmeriHost Inn hotel franchisees, except those operated by us.
We received approximately $572,000 and $417,000 from AmeriHost Inn hotels sold
during the three months ended March 31, 2005 and 2004, respectively, in
development incentive fees. These fees may be refundable to Cendant if the buyer
of our AmeriHost Inn hotel defaults under their franchise agreement with Cendant
during the first 76 months. However, any such amounts due would be reduced by a
portion of any damages recovered by Cendant and would only be paid by us as an
offset against future fees earned. To date, there have been no defaults, and we
have not had to repay any incentive fees.
We recognized royalty sharing fees from Cendant in the amount of $83,000 and
$75,000 during the three months ended March 31, 2005 and 2004, 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 there 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 provided (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 (used) in investing activities for the three months ended March
31, 2005 and 2004, consisted of the following (in thousands):
2005 2004
-------- --------
Investments in unconsolidated joint ventures, net of
distributions and collections on advances from affiliates $ 494 $ 123
Purchase of property and equipment (410) (265)
Issuance of notes receivable, net of collections 25 48
Proceeds from sale of assets 2,733 --
------- -------
Total $ 2,842 $ (94)
======= =======
-44-
The purchase of property and equipment includes all ongoing capital
expenditures. We were not constructing any hotels for our own account during the
first three months of 2005. We expect these costs to be lower than historically,
as we focus on new development for joint ventures and others.
During the first three months of 2005, we invested approximately $80,000 in new
and existing joint ventures, and received approximately $597,000 in
distributions from joint ventures. The distributions were received primarily as
a result of the sale of one hotel by a joint venture during the first three
months of 2005.
From time to time, we advance funds to these joint ventures for working capital
and renovation projects. During the first three months of 2005, we advanced
$20,000 to joint ventures in which we are a partner, net of repayments. Advances
to joint ventures are initially made for working capital purposes. We expect the
joint ventures to repay the outstanding advances primarily through cash flow
generated from hotel operations, or the sale of the hotel, however in certain
cases, we may not realize the entire amounts advanced. We anticipate that these
advances will be repaid to us prior to any distributions to our partners. In
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.
Cash used in financing activities
Cash used in financing activities was $2.2 million during the three months ended
March 31, 2005, compared to $4.4 million during the three months ended March 31,
2004, summarized as follows:
(in thousands)
2005 2004
-------- --------
Principal payments on long-term debt $(3,947) $(4,431)
Net borrowings on operating line of credit 1,775 150
Distributions to minority interests (45) (180)
------- -------
Total $(2,217) $(4,461)
======= =======
Principal payments on long-term debt include the payoffs of mortgages upon the
sale of hotel properties of approximately $2.9 million during the first three
months of 2005, and $3.9 million during the first three months of 2004.
Future hotel development is dependent upon our ability, or our joint ventures'
ability, to attain mortgage debt financing. Lenders typically advance mortgage
debt at the rate of 60% - 75% of total project value. Assuming the total value
of a new hotel development is $5.0 million, the typical mortgage loan amount
would range from $3.0 million to $3.75 million. There can be no assurance that
we, or our joint ventures, will be able to obtain such mortgage financing on
acceptable terms, to support our growth objectives.
Our board of directors has authorized a common stock buy back, at any time and
without notice, of up to 1,000,000 shares under certain conditions, as
restricted by certain financing agreement covenant conditions, and consistent
with securities laws governing these buybacks. Under this authorization, no
shares were bought back in 2004 or 2005. 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 March
31, 2005. We consider the reverse-forward split a one-time transaction, and we
do not anticipate a similar transaction in the foreseeable future. All shares
that we have repurchased or redeemed have been retired.
Mortgage Debt
Historically, we have used local, regional, and national lenders to finance
hotel projects. Mortgage financing is a critical component of the hotel
development process and we are continually seeking financing sources for new
construction and long term permanent mortgage financing to assist us in the
development of AmeriHost Inn hotels.
-45-
The table below summarizes our mortgage notes payable as of March 31, 2005 and
December 31, 2004:
(in thousands)
March 31, December 31,
2005 2004
---------- ------------
Mortgage debt outstanding (in thousands):
Fixed rate $ 23,538 $ 19,031
Variable rate 19,663 27,969
---------- ----------
Total $ 43,201 $ 47,000
========== ==========
Percent of total debt:
Fixed rate 54.48% 40.49%
Variable rate 45.52% 59.51%
---------- ----------
Total 100.00% 100.00%
========== ==========
Weighted average interest rate:
Fixed rate 7.41% 7.60%
Variable rate 6.49% 5.58%
---------- ----------
Total 6.99% 6.39%
========== ==========
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 $22.4 million, which has been classified in
current liabilities in the accompanying consolidated balance sheet as of March
31, 2005. This amount includes (i) one hotel loan in the amount of $1.6 million
which matures in November 2005, and (ii) approximately $661,000 in principal
payments which are contractually due within the next twelve months regardless of
the plan for hotel disposition. The hotel with the mortgage loan maturing in
November 2005 is currently being actively marketed for sale as part of our plan
for hotel disposition, with the proceeds to be used to payoff the mortgage loan.
However, there can be no assurance that a sale will be consummated. If this
hotel is not sold by the mortgage debt maturity date, and the lender is
unwilling to extend the loan, and we are unable to refinance the mortgage with
another lender, we would be obligated for the mortgage loan balance pursuant to
a loan guarantee, or be in default of the guarantee agreement, absent any other
agreement with the lender. There can be no assurance that this hotel will be
sold by the loan maturity date or at a price in excess of the outstanding loan
amount, or that alternative financing will be available if needed. If this hotel
is not sold prior to the 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 our office building mortgage and mortgages on hotels that are
not held for sale, approximately $86,000 is classified in current liabilities,
which is the principal amortization due within the next twelve months. The
office building in which our headquarters is located, has a mortgage loan which
matures January 1, 2007, and bears interest at the fixed rate of 6.67% per
annum.
Certain of our hotel mortgage notes and our office building mortgage note
contain financial covenants, principally minimum net worth requirements, debt to
equity ratios, and minimum debt service coverage ratios. These financial
covenants are typically measured annually, based upon our fiscal year end. We
were in compliance with all covenants as of March 31, 2005.
Other Mortgage debt guaranteed by the Company
The following is a summary of the mortgage debt held by the various types of
joint ventures:
(in thousands)
No. of hotels Balance Outstanding Guarantee
------------- ------------------- ----------
Balance
Consolidated joint ventures
in which we have a majority
or controlling interest 3 $ 5,850 $ 1,567
-46-
Unconsolidated joint ventures
in which we are a managing
member of a limited liability company 6 15,745 12,833
---------- --------------- ---------------
9 $ 21,595 $ 14,400
========== =============== ===============
The mortgage balances for the three consolidated joint ventures have been
included in "liabilities of assets held for sale - other brands" in our
consolidated balance sheet as of March 31, 2005.
The mortgage balances for the unconsolidated joint ventures have not been
included in our consolidated balance sheet. Approximately $1.8 million of the
mortgage debt with unconsolidated joint ventures relates to one property that
has been identified to be sold as part of our strategic hotel disposition plan,
with the net proceeds to be used to pay off the mortgage. Other partners have
also guaranteed a portion of these unconsolidated joint venture financings,
which may ultimately reduce the exposure on our guarantees. However, if the
joint venture is unable to make its mortgage payments when due, it could create
a default on behalf of the joint venture whereby the lender would look to us for
repayment of the loan under our guarantee, possibly creating significant
liquidity issues for us (see also, "Off Balance Sheet Arrangements").
Operating line-of-credit
In March 2005, we executed a renewal of the line-of-credit with LaSalle Bank NA
through April 30, 2006. As of March 31, 2005, we had $4.0 million outstanding
under our operating line-of-credit, the maximum allowed upon the renewal. The
renewal provided that the maximum availability be reduced to $3.5 million on May
1, 2005, and reduced further to $3.0 million on July 31, 2005, and to $2.5
million on October 31, 2005. In addition, interest remained 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,
however the covenants are not applicable until June 30, 2005. The event of
default under the PMC leases (described elsewhere in this Form 10-Q) constitutes
an event of default under the line of credit. We have advised LaSalle of the PMC
defaults and, based on our conversations with LaSalle, we do not believe that
LaSalle will declare an event of default and accelerate payments of the amounts
due under the line of credit.
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.
Lease Purchase Obligation
On October 4, 2004, we entered into a third amendment with PMC, which became
effective as of October 1, 2004. The third amendment provides for a reduced
lease rate, and requires us to cause all remaining leased hotels to be sold over
a four-year period, generally at the pace of five hotels per year. If the sales
schedule is not met, the lease rate will revert to the original lease
contractual rate, or a higher lease default rate in certain circumstances, until
the number of hotels sold becomes compliant with the sale schedule. 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 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. As of
March 31, 2005, the balance of the shortfall obligation was approximately $1.0
million. For a more detailed discussion of the PMC lease transaction and
modification, see "Executive Overview - hotel and corporate level financing"
above.
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
-47-
and geopolitical concerns and other general factors affecting travel. In
addition, hotel construction is seasonal, depending upon the geographic location
of the construction projects. Construction activity in the Midwest may be slower
in the first and fourth calendar quarters due to weather conditions. Also, since
our management fees are based upon a percentage of the hotel's total gross
revenues, we are further susceptible to seasonal variations. We have also
experienced greater interest in hotel sales from prospective buyers during the
second and third calendar quarters, consistent with the seasonality of hotel
operations.
GOVERNMENT REGULATION
The impact of government regulations, and related risks, are discussed in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004, and
should be read in conjunction with this quarterly report on Form 10-Q.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2003, the FASB issued Interpretation No. 46R (FIN 46R),
"Consolidation of Variable Interest Entities," which addresses how a business
enterprise should evaluate whether or not it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. 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.
SUBSEQUENT EVENTS
In April 2005, a consolidated joint venture in which we own a minority ownership
interest sold its AmeriHost Inn hotel, generating a repayment of our operating
advances of approximately $420,000, after the related mortgage debt was paid
off. Our partner did not receive a distribution from the net sale proceeds, in
accordance with the terms of the joint venture agreement, since the net proceeds
were insufficient to repay the full amount of our operating advances.
-48-
On May 13, 2005, we were in default of the lease agreement with PMC. This event
of default is further described in this Form 10-Q under the sections entitled,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Executive Overview - Hotel and corporate level financing" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources - General."
RISK FACTORS
The following important factors, among others, have affected, and may in the
future continue to affect, our business, results of operations and financial
condition, and could cause our operating results to differ materially from those
expressed in any forward-looking statements made by us or on our behalf
elsewhere in this report. These risk factors should be read in conjunction with
the risk factors set forth in our Annual Report on Form 10-K for the year ended
December 31, 2004, under the heading "Management's Discussion and Analysis -
Risk Factors."
WE HAVE FAILED TO MAKE THE MONTHLY LEASE PAYMENTS TO PMC AND CERTAIN OTHER
REQUIRED PAYMENTS AND, THEREFORE, AN EVENT OF DEFAULT HAS OCCURRED UNDER THE PMC
LEASES. We have not made the required monthly lease payment to PMC for the month
of May 2005 and have not paid the full amount of currently due real estate taxes
on the leased hotels. As such, on May 13, 2005, we were in default of the PMC
leases as a result of our non-payment of the lease payment for May 2005 and the
nonpayment of real estate taxes. We have advised PMC that we do not intend to
make future lease payments without an agreement from PMC to restructure our
future lease obligations. As a result of our default in the PMC leases, an event
of default has also occurred under the Proceeds Deficit Note payable to PMC.
Although we are hopeful that we can reach an amicable settlement with PMC, if we
are unable to reach such settlement, PMC may pursue its rights and remedies
under the leases including, without limitation, terminating the leases, taking
possession of the hotels and bringing an action against us, as guarantor of the
leases, for damages under the leases. PMC may also elect to accelerate payment
of the amounts due and owing under the Proceeds Deficit Note. If such litigation
were instituted, we would be required to consider all of our legal options
including rejecting the PMC leases in a reorganization filed under Chapter 11 of
the U.S. Bankruptcy Code.
Additionally, the default under the PMC leases constitutes an event of default
under our line of credit with LaSalle Bank NA. We have advised LaSalle of the
PMC default and, based on our conversations with LaSalle, we do not believe that
LaSalle will elect to declare an event of default and accelerate payment of the
amounts due under the line of credit. There can be no assurance, however, that
LaSalle will not exercise its rights under the line of credit.
-49-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our long-term debt obligations. We have some cash flow exposure on our long-term
debt obligations to changes in market interest rates. We primarily enter into
long-term debt obligations in connection with the development and financing of
hotels. We maintain a mix of fixed and floating debt to mitigate our exposure to
interest rate fluctuations. We do not enter into any market risk sensitive
investments for trading or hedging 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 March 31, 2005. As the table incorporates only those
exposures that existed as of March 31, 2005, 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 would depend on the exposures that arise during future
periods, hedging strategies and prevailing interest rates at the time.
Average Nominal
Carrying Value Interest Rate
-------------- ---------------
Operating line of credit - variable rate $ 4,000,000 10.00%
Mortgage debt - fixed rate $ 18,838,160 7.41%
Mortgage debt - variable rate $ 24,362,665 6.49%
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 $128,000
annually.
ITEM 4. CONTROLS AND PROCEDURES
Based on management's evaluation as of March 31, 2005, 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.
-50-
PART II: Other Information
ITEM 6. EXHIBITS.
The following exhibits were included in the Registrant's Report on Form 10-K
filed on March 26, 1993, and are incorporated by reference herein:
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Certificate of Incorporation of Arlington
Hospitality, Inc. (formerly AmeriHost Properties, Inc.)
4.2 Specimen Common Stock Purchase Warrant for Employees
The following 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 exhibit was 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 exhibit was included in the Registrant's Report on Form 8-K filed
December 19, 2002:
Exhibit No. Description
- ----------- -----------
10.13 Employment agreement between Arlington Hospitality, Inc. and
Jerry H. Herman dated December 19, 2002
The following exhibit was included in the Registrant's Report on Form 10-K filed
March 31, 2003:
Exhibit No. Description
- ----------- -----------
10.14 Line of credit agreement with LaSalle Bank, NA
The following exhibits were included in the Registrant's Proxy Statement for
Annual Meeting of Shareholders filed on September 26, 2003, and are incorporated
by reference herein:
Exhibit No. Description
- ----------- -----------
3.2 Seventh Certificate of Amendment of Restated Certificate of
Incorporation of Arlington Hospitality, Inc., attached as
exhibit F
3.3 Eighth Certificate of Amendment of Restated Certificate of
Incorporation of Arlington Hospitality, Inc., attached as
exhibit G
-51-
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 exhibit was 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 exhibit was 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.
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.
-52-
The following exhibits were included in the 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
The following exhibit was included in the Registrant's Report on Form 8-K filed
May 4, 2005:
Exhibit No. Description
- ----------- -----------
10.34 Fourth Amendment to employment agreement between Arlington
Hospitality, Inc. and Stephen K. Miller dated May 3, 2005.
10.35 Third Amendment to employment agreement between Arlington
Hospitality, Inc. and Stephen K. Miller dated February 3,
2005.
The following exhibits are included in this Report on Form 10-Q filed May 16,
2005:
Exhibit No. Description
- ----------- -----------
31.1 Certification of Chief Executive Officer Pursuant to SEC Rules
13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer Pursuant to SEC Rules
13a-15(e) and 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.
-53-
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/ Steven K. Miller
-----------------------------------
Steven K. Miller
Interim Chief Executive Officer
By: /s/ James B. Dale
-----------------------------------
James B. Dale
Chief Financial Officer
By: /s/ Keith P. Morris
-----------------------------------
Keith P. Morris
Vice President Finance
May 16, 2005
-54-