-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SFtDHkNJ/JYY++uOMNEhKy81e2+NihPnMJ4no+GBcOF3Bax20h7aUa0ExQ1IUEcT xF8LuFYBkGLOaOGLjrwKWg== 0000914760-98-000077.txt : 19980401 0000914760-98-000077.hdr.sgml : 19980401 ACCESSION NUMBER: 0000914760-98-000077 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERIHOST PROPERTIES INC CENTRAL INDEX KEY: 0000778423 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 363312434 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-15291 FILM NUMBER: 98581349 BUSINESS ADDRESS: STREET 1: 2400 E DEVON AVE STE 280 CITY: DES PLAINES STATE: IL ZIP: 60018 BUSINESS PHONE: 7082984500 MAIL ADDRESS: STREET 1: 2400 E DEVON AVE STREET 2: SUITE 280 CITY: DES PLAINES STATE: IL ZIP: 60018 FORMER COMPANY: FORMER CONFORMED NAME: AMERICA POP INC DATE OF NAME CHANGE: 19871111 10-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1997 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-15291 AMERIHOST PROPERTIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-3312434 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2400 EAST DEVON AVE., SUITE 280, DES PLAINES, ILLINOIS 60018 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 298-4500 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.005 per share (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X While it is difficult to determine the number of shares owned by non-affiliates (within the meaning of the term under the applicable regulations of the Securities and Exchange Commission), the registrant estimates that the aggregate market value of the registrant's Common Stock held by non-affiliates on March 27, 1998 (based upon an estimate that 83.8% of the shares are so owned by non- affiliates and upon the closing price for the Common Stock of $4.38) was $22,789,887. As of March 27, 1998, 6,212,925 shares of the Registrant's Common Stock were outstanding. The following documents are incorporated into this Form 10-K by reference: None PART I ITEM 1. BUSINESS. GENERAL Amerihost Properties, Inc. and its subsidiaries (collectively, where appropriate, "Amerihost," or the "Company") is engaged in the development and construction of AmeriHost Inn hotels, its proprietary hotel brand, and the ownership, operation and management of both AmeriHost Inn hotels and other hotels. The AmeriHost Inn brand was created by the Company to provide for the consistent, cost-effective development and operation of mid-price hotels in various markets. All AmeriHost Inn hotels are designed and developed using the Company's 60 to 120 room, interior corridor and indoor pool prototype design and are located in tertiary and secondary markets. As of December 31, 1997, the Company owned, operated or managed 88 hotels located in 17 states. Of these hotels, 63 hotels are operated or managed under the Company's proprietary brand, the AmeriHost Inn. Of the 88 hotels, the Company owns a 100% or majority ownership interest in 39 hotels and a minority equity interest, ranging from 10% to 50%, in 40 hotels. Of the 79 hotels in which the Company has an ownership interest, 60 are AmeriHost Inn hotels and 19 are other brands, which in most cases were acquired, renovated and repositioned in their respective marketplaces between 1987 and 1993. The majority of the other brand hotels are franchised through Days Inn, Hampton Inn, Holiday Inn and Ramada Inn. The Company also managed nine hotels at December 31, 1997 for unaffiliated third parties whereby the Company has no ownership interest. Three of the nine managed hotels operate as AmeriHost Inn hotels. As of December 31, 1997, an additional eight AmeriHost Inn hotels were under construction. The Company has 100% ownership in four of these hotels, and a minority ownership interest in the remainder. The table below sets forth information regarding the hotels at December 31, 1997.
Open Under Hotels Construction Total Hotels Rooms Hotels Rooms Hotels Rooms 100% or majority ownership: AmeriHost Inn hotels 30 1,871 4 244 34 2,115 Other brands 9 1,253 - - 9 1,253 39 3,124 4 244 43 3,368 Minority ownership interest: AmeriHost Inn hotels 30 1,930 4 252 34 2,182 Other brands 10 872 - - 10 872 40 2,802 4 252 44 3,054 Managed only hotels: AmeriHost Inn hotels 3 182 - - 3 182 Other brands 6 973 - - 6 973 91,155- - 91,155 Totals: AmeriHost Inn hotels 63 3,983 8 496 71 4,479 Other brands 25 3,098 - - 25 3,098 88 7,081 8 496 96 7,577
Since 1993, the Company's growth strategy has focused on the expansion and increased ownership of the AmeriHost Inn hotel brand through new development and construction. During 1996 and 1997, 41 newly constructed AmeriHost Inn hotels were opened, 18 of which are 100% or majority owned by the Company, and 23 are owned by joint ventures in which the Company has a minority ownership interest. Historically, the AmeriHost Inn hotels achieved a revenue per available room ("RevPAR") higher than that realized by the Company's other owned hotels, including those operated under national franchise affiliations. These favorable operating results experienced by the AmeriHost Inn hotels led to the Company's decision to focus on expanding this brand rather than acquiring or developing hotels under other brand affiliations. The Company intends to continue expanding the development of AmeriHost Inn hotels. The Company believes it has reached a point where it may realize significant value by entering into a sale/leaseback transaction(s) for certain of its hotels. Such a transaction or transactions would allow the Company to simplify its corporate structure by eliminating its real estate ownership, allow the Company to continue to realize the benefits of its hotel operations, and provide capital for additional expansion of the AmeriHost Inn brand and other fee based revenue sources. Therefore, the Company is currently evaluating the sale/leaseback of certain hotels to various real estate investment trusts ("REIT"). Further, if the Company's joint venture partners participate by selling their hotels to a REIT, the Company would further simplify its structure by eliminating its minority-owned hotels. The Company would then be able to lease these hotels from the REIT and include 100% of their operations in the Company's consolidated financial statements. The Company would continue to build AmeriHost Inn hotels, generate cash from the sale of the hotels to a REIT where appropriate and then enter into leases to operate the hotels. There can be no assurances that any transactions will be consummated. While the primary focus is on the expansion of the AmeriHost Inn brand, part of the Company's growth strategy, is to aggressively pursue the development and management of hotels, including non-AmeriHost Inn hotels, for others. The Company currently manages nine hotels for unaffiliated entities and intends to utilize its expertise in expanding this area. For new construction projects, the Company offers "turn-key" development services, having the in-house expertise to manage a project from inception through completion, including market research, site selection, architectural services, the securing of financing and construction management. The construction contracts entered into between the Company and the entities owning the hotels have generally been one of two types, providing either for the Company to receive costs plus developer's and construction overhead fees or a fixed fee. The Company has used its development and construction expertise for its own account, for joint ventures in which the Company has an ownership interest, and for unaffiliated parties. The Company offers complete operational and financial management services, including sales, marketing, quality control, training, purchasing and accounting. This expertise is used for the Company's own account, as well as for joint ventures and unaffiliated entities pursuant to written management contracts. However, under certain management contracts, the Company's joint venture partners are responsible for the day-to-day operational management, while the Company provides full financial management and operational consulting and assistance. The Company is currently managing or co-managing all of the hotels in which it has a minority ownership interest, and is also managing nine hotels for unaffiliated third parties. These hotels are managed under contracts ranging from 1 to 10 years, with optional renewal periods of equal length, and contain provisions under which the Company is paid fees equal to a percentage of total gross revenues for its services and, in some instances, additional incentive fees based upon hotel performance. The Company has developed centralized systems and procedures which it believes allow it to manage the hotels effectively and efficiently. The Company intends to actively pursue management contracts with additional third parties, while continuing to manage hotels for current as well as future joint ventures. The Company also provides employee leasing services to hotels in which the Company has a minority ownership interest and to hotels owned by unaffiliated third parties which are managed by the Company. Under its employee leasing program, the Company employs all of the personnel working at the participating hotels and leases them to the hotels pursuant to written agreements. Employee leasing affords the Company greater control over payroll costs and allows the participating hotels to benefit from economies of scale on personnel-related costs. The Company's employee leasing agreements typically provide for one year terms, with automatic one year renewals. The Company generally receives fees from each participating hotel in an amount equal to the gross payroll costs for the leased employees, including all related taxes and benefits, plus a percentage of the gross payroll. All revenues attributable to development, construction, management and employee leasing services with respect to hotels in which the Company has a 100% or majority ownership interest have been eliminated in consolidation. AMERIHOST INN HOTELS AmeriHost Inn hotels, the Company's proprietary brand, are designed and constructed using the Company's 60 to 120 room, interior corridor and indoor pool prototype design. The AmeriHost Inn hotel's amenities and services include 24-hour front desk and message service, facsimile machines, whirlpool, exercise room, meeting room, a covered entrance and extensive exterior lighting for added security. The standard AmeriHost Inn guest room features an electronic card-key lock, in-room safe, in-room coffee maker, telephone with data port for personal computer, a work area and a 25" color television with premium cable service or movies on demand. In addition, each Amerihost Inn hotel typically includes two to 12 whirlpool suites which, in addition to the standard amenities, include in- room whirlpools, microwave ovens, compact refrigerators and an expanded sitting area. AmeriHost Inn hotels do not contain food and beverage facilities normally associated with full-service hotels. Food service for hotel guests is generally available from adjacent or nearby free-standing restaurants which are independently owned and operated. All AmeriHost Inn hotels are operated or managed by the Company in accordance with strict guidelines designed to provide guests with a consistent lodging experience. The Company believes the quality and consistency of the amenities and services provided by its AmeriHost Inn hotels increase guest satisfaction and repeat business. The quality of the AmeriHost Inn product and the consistency of the amenities and services have assisted the chain in becoming the only hotel chain in the U.S. to have achieved an American Automobile Association ("AAA") Three Diamond rating at all of its hotels. The Company targets smaller communities in tertiary and secondary markets with established demand generators such as major traffic arteries, office complexes, industrial parks, shopping malls, colleges and universities or tourist attractions, as the principal location for the development and construction of AmeriHost Inn hotels. An AmeriHost Inn hotel is typically positioned to attract both business and leisure travelers seeking consistent amenities and quality rooms at reasonable rates, generally ranging from $45 to $70 per night. The Company's in-house design staff, centralized purchasing program, strict cost controls, and low average land costs all contribute to a favorable cost structure in developing and constructing new AmeriHost Inn hotels. Furthermore, due to the centralization of all accounting, purchasing, payroll and other administrative functions, each hotel is operated efficiently and effectively with a minimal on-site staff. These factors assist the Company in maximizing its return on invested capital, while offering an excellent value to its guests. OTHER OWNED HOTELS The Company's non-AmeriHost Inn hotels were primarily acquired by the Company through joint ventures prior to 1993, in most instances at prices below estimated replacement costs. The other hotels have been owned, operated and managed by the Company independently, or as part of a national franchise system such as Days Inn, Hampton Inn, Holiday Inn, and Ramada Inn. The Company believes that franchises in these locations are important in maintaining occupancy levels, which are supported by the Franchisor's national reservation systems and marketing efforts and brand name recognition. The Company's non-AmeriHost Inn hotels typically are also located in secondary and tertiary markets, with nearby demand generators such as airports, major traffic arteries, office complexes, industrial parks, shopping malls, colleges and universities or tourist attractions. The non-AmeriHost Inn hotels contain 60 to 209 rooms, generate average daily rates ranging from $35 to $65 per night and offer a variety of amenities and services. Approximately one-third of these hotels contain food and beverage facilities. As part of the Company's strategy to focus its ownership primarily on AmeriHost Inn hotels, the Company intends to pursue selective sales of certain of these other hotels, if and when attractive terms are available. During 1997, the Company sold one wholly-owned hotel and two hotel partnerships in which the Company was a general partner sold their hotels, resulting in cash distributions to the Company upon their sale. These proceeds were, and any proceeds from future sales, if and when completed, are expected to be used by the Company to develop additional AmeriHost Inn hotels or pursue other growth objectives of the Company. HOTEL PROPERTIES At December 31, 1997, the Company owned and/or managed 88 hotels in 17 states, concentrated in the midwestern and southern United States. The Company had an additional eight hotels under construction located generally in the same geographical areas. Because the hotel industry is seasonal, the revenues generated by the hotels managed by the Company will increase or decrease depending upon the time of year. Since the Company's management fees are based upon a percentage of the hotels' total gross revenues, the Company is further susceptible to these seasonal variations. Given the location of the properties the Company manages, the revenues are typically lower in the first and fourth quarters of each year. The following is a list of hotel properties under the Company's management at December 31, 1997 by state:
Date State Hotel Rooms Operations Began California AmeriHost Inn Anderson (1) 61 01/20/97 AmeriHost Inn Yreka (1) 61 08/04/97 122 Florida Hampton Inn Ft. Myers (1) 123 09/30/92 Georgia AmeriHost Inn Eagles Landing, Stockbridge (1) 60 08/08/95 AmeriHost Inn LaGrange (1) 59 03/01/95 AmeriHost Inn Smyrna (1) 60 12/21/95 Days Inn Northwest, Atlanta (2) 107 11/01/91 Days Inn Peachtree, Atlanta 142 11/01/91 Days Inn Jekyll Island (3) 162 11/01/91 590 Illinois AmeriHost Inn Effingham (1) 61 02/07/97 AmeriHost Inn Harvard (1) 60 07/01/96 AmeriHost Inn Jacksonville (1) 60 06/14/96 AmeriHost Inn Macomb (1) 60 05/19/95 AmeriHost Inn Players Riverboat Hotel, Metropolis (1) 120 02/25/94 AmeriHost Inn Rochelle (1) 61 03/07/97 AmeriHost Inn Sycamore (1) 60 05/31/96 AmeriHost Inn Tuscola (1) 59 08/17/94 Days Inn Melrose Park (1)(3) 123 07/01/88 Days Inn Niles (1) 149 01/01/90 Days Inn Shorewood (1) 179 10/01/89 Palwaukee Motor Inn, Wheeling 138 10/26/89 1,130 Indiana AmeriHost Inn Hammond (1) 86 03/29/96 AmeriHost Inn Muncie 60 04/07/95 AmeriHost Inn Plainfield (1)(2) 60 09/01/92 Days Inn Cloverdale (1)(2) 60 11/04/88 Days Inn Crawfordsville (1)(2) 60 01/30/89 Days Inn Plainfield (1)(2) 64 05/01/90 Days Inn Portage (1) 118 04/01/91 Days Inn Sullivan (1) 60 08/14/87 Ramada Inn Lafayette (1) 144 02/02/94 712 Iowa AmeriHost Inn Mt. Pleasant (1) 63 07/02/97 AmeriHost Inn Storm Lake (1) 61 08/13/97 AmeriHost Inn Waverly (1) 60 08/28/96 184 Kentucky AmeriHost Inn Murray (1) 60 11/01/96 Louisiana Days Inn Kenner, New Orleans 324 11/01/91 Michigan AmeriHost Inn Coopersville (1) 60 12/31/95 AmeriHost Inn Grand Blanc (1) 60 07/17/96 AmeriHost Inn Grand Rapids North, Walker (1) 60 07/05/95 AmeriHost Inn Grand Rapids South (1) 61 06/11/97 AmeriHost Inn Hudsonville (1) 61 11/24/97 AmeriHost Inn Marshall (1) 61 04/02/97 AmeriHost Inn Monroe (1) 63 09/19/97 AmeriHost Inn Muskegon, Norton Shores (1) 61 11/04/96 AmeriHost Inn Port Huron (1) 61 07/01/97 548 Mississippi AmeriHost Inn Batesville (1) 60 04/26/96 AmeriHost Inn Tupelo (1) 61 07/25/97 Days Inn Vicksburg Landing (1) 89 05/13/95 210 Missouri AmeriHost Inn Mexico (1) 61 12/06/97 AmeriHost Inn Warrenton (1) 63 11/07/97 124 Ohio AmeriHost Inn Ashland (1) 62 08/09/96 AmeriHost Inn Athens (1)(2) 102 11/04/89 AmeriHost Inn Delaware (1) 73 05/16/97 AmeriHost Inn Jeffersonville North (1)(2) 60 07/20/96 AmeriHost Inn Jeffersonville South (1)(2) 60 10/14/94 AmeriHost Inn Kenton (1)(2) 60 08/02/96 AmeriHost Inn Lancaster (1)(2) 60 09/04/92 AmeriHost Inn Logan (1)(2) 60 04/16/93 AmeriHost Inn Mansfield (1) 60 11/19/94 AmeriHost Inn Marysville (1)(2) 79 06/01/90 AmeriHost Inn Norwalk 61 07/25/97 AmeriHost Inn Oxford 61 02/01/91 AmeriHost Inn St. Mary's (1)(2) 61 11/25/97 AmeriHost Inn Upper Sandusky (1) 60 04/12/95 AmeriHost Inn Wilmington (1)(2) 61 02/21/97 AmeriHost Inn Wooster East (1) 58 01/18/94 AmeriHost Inn Wooster North (1) 60 10/20/95 AmeriHost Inn Zanesville (1)(2) 60 07/30/96 Days Inn Athens (1)(2) 60 01/16/88 Days Inn Akron/Kent, Brimfield (1)(2) 67 08/04/89 Days Inn Dayton South (1) 215 01/20/92 Days Inn New Philadelphia (1)(2) 104 06/04/92 Ramada Inn Middletown (1) 120 07/03/92 1,724 Pennsylvania AmeriHost Inn Grove City (1) 61 04/27/97 AmeriHost Inn Shippensburg (1) 60 08/09/96 Holiday Inn Altoona (1) 144 08/31/92 Holiday Inn Oil City (1) 106 12/02/92 371 Texas AmeriHost Inn Allen (1) 60 07/25/96 AmeriHost Inn McKinney (1) 61 01/07/97 AmeriHost Inn San Marcos (1) 61 05/23/97 182 Vermont Holiday Inn White River Junction (1) 140 06/24/93 West Virginia AmeriHost Inn New Martinsville (1)(2) 60 05/03/96 AmeriHost Inn Mineral Wells (1)(2) 61 12/30/96 AmeriHost Inn Parkersburg (1)(2) 79 06/26/95 200 Wisconsin AmeriHost Inn Green Bay (1) 60 10/12/96 AmeriHost Inn Kimberly (1) 63 06/30/97 AmeriHost Inn Mosinee (1) 53 04/30/93 AmeriHost Inn Whitewater (1) 61 09/08/97 Menominee Casino-Bingo-Hotel, Keshena 100 09/14/94 337 TOTAL ROOMS 7,081 TOTAL PROPERTIES 88 (1) Indicates properties in which the Company owns a direct or indirect equity or leasehold interest. (2) Indicates properties which are co-managed with partners. (3) Property was sold in 1998.
The table below shows the average occupancy, average daily rate ("ADR") and revenue per available room ("RevPAR") experienced by the Company in 1997 in various locations. These statistics include all hotels open as of December 31, 1997.
Average Average Revenue Per Occupancy Daily Rate Available Room Ohio (23 hotels) 54.1% $53.96 $29.17 Illinois, Iowa and Wisconsin (20 hotels) 56.2% $47.72 $26.80 Georgia (6 hotels) 55.8% $49.33 $27.52 Indiana and Kentucky (10 hotels) 57.9% $50.21 $29.09 Michigan (9 hotels) 57.0% $55.54 $31.65 Pennsylvania (4 hotels) 61.9% $54.58 $33.78 West Virginia (3 hotels) 53.5% $56.49 $30.20 Mississippi (3 hotels) 59.8% $54.45 $32.56 Texas (3 hotels) 50.0% $51.68 $25.82 Other hotels (located in California, Florida, Louisiana, Missouri and Vermont) 52.4% $48.48 $25.39 All hotels 55.6% $51.21 $28.49
LODGING INDUSTRY The United States lodging industry's performance is strongly correlated to economic activity, with changes in gross national product growth affecting both room supply and demand, resulting in cyclical changes in average occupancy rates, average daily rates, and revenue per available room. The general downturn in the economy and the oversupply of rooms during the late 1980's and early 1990's resulted in decreased economic performance in the lodging industry. Since the early 1990's, the United States lodging industry has shown significant improvement. The primary element contributing to the industry's improved performance has been increased economic activity, which has resulted in growth in the demand for hotel rooms. This growth in hotel room demand has resulted in positive trends industry-wide for room revenues. Although industry analysts expect slight declines in industry-wide occupancy over the next few years, they still expect industry-wide revenues to expand given the anticipated demand growth and strong average daily rate increases. According to Coopers & Lybrand L.L.P.'s Hospitality Directions (February 1998), the overall United States hotel room occupancy declined 1.0% in 1997, while average daily rates increased 6.2%, resulting in a 5.1% increase in RevPAR. GROWTH STRATEGY The Company's growth strategy is to increase revenues, EBITDA (as defined below) and net income per share by: (i) developing, operating and owning or leasing additional AmeriHost Inn hotels; (ii) developing and managing hotels for affiliated and unaffiliated parties; (iii) maintaining or enhancing occupancy and average daily rate results at all of its hotels; and (iv) controlling operating and corporate overhead expenses. EBITDA is used by the Company as a supplemental performance measure along with net income to report its operating results. EBITDA is defined as net income, adjusted to eliminate the impact of (i) interest expense; (ii) interest and other income; (iii) leasehold rents for hotels, which the Company considers to be financing costs similar to interest; (iv) income tax expense (benefit); (v) depreciation and amortization; and (vi) gains or losses from property transactions. The Company's primary growth strategy is to focus on the expansion of its proprietary brand, the AmeriHost Inn. During 1997, the Company opened 14 wholly-owned AmeriHost Inn hotels and had another four under construction at December 31, 1997. The Company also continued the development of AmeriHost Inn hotels through joint ventures. During 1997, such joint ventures opened nine AmeriHost Inn hotels and an additional four were under construction at December 31, 1997. The Company may seek to increase its ownership interest in existing AmeriHost Inn hotels in which the Company has less than a 100% ownership interest, if available on favorable economic terms. The Company acquired a 100% ownership interest during 1997 in one hotel in which the Company already held a minority ownership interest. The Company converted this hotel and another hotel from another brand to the AmeriHost Inn brand during 1997. These hotels had been built by the Company using the AmeriHost Inn standard prototype. The Company intends to continue using its hotel development and management expertise to build and operate hotels for itself, as well as for future joint ventures in which the Company holds a minority ownership interest. In addition, the Company is also focused on actively pursuing development contracts and management contracts with unaffiliated entities. This may include building and managing non-AmeriHost Inn hotels. During 1997, the Company began construction on 12 AmeriHost Inn hotels, and completed construction of a record 23 hotels, all of which were AmeriHost Inn hotels. The Company intends to continue developing and constructing AmeriHost Inn hotels in communities located in tertiary and secondary markets which already have established demand generators, such as major traffic arteries, office complexes, industrial parks, shopping malls, colleges and universities or tourist attractions. Typically, the Company seeks communities where an active economic development program is in place, which suggests long-term growth potential for additional lodging demand. In most cases, the local community is interested in a new hotel because existing facilities are dated or inconvenient. The Company provides comfortable, professionally managed accommodations which are typically not available in that community. The Company has an in-house development staff dedicated to identifying and evaluating new development opportunities. Once a market has been identified and a site has been selected, the Company initiates its due diligence process prior to the construction of one of its hotels. Such due diligence typically consists of environmental surveys, feasibility and engineering studies and the securing of zoning and building permits. The Company also maintains an in-house construction and design department, which enables it to manage all phases of construction. The Company's in-house architects and design personnel prepare the blueprints for each AmeriHost Inn hotel through the use of computer assisted drafting equipment, thereby reducing architectural fees. In most cases, the Company hires a general contractor to construct the hotel for a fixed price, eliminating much of the risk typically associated with construction. The Company's project managers oversee the general contractor through each phase of construction in order to assure the quality and timing of the construction. With few exceptions, such as the interior color scheme, each AmeriHost Inn hotel is the same in every detail, including the overall layout, the room sizes and the indoor pool area. The replication of its prototype design allows for accurate budgeting of its construction and overhead costs. Historically, the Company has financed its hotel development and construction through a combination of equity and debt financing, with the equity financing typically provided by the Company and/or its joint venture partners, and the debt financing typically provided by local or regional banks. All of the AmeriHost Inn hotels currently under construction are being financed in this manner, including one joint venture which intends to lease the land. The Company intends to increase its revenue, EBITDA and net income per share through the continued development of its AmeriHost Inn brand hotel and the continued implementation of its operating and marketing strategies. The Company believes that it can develop and operate additional AmeriHost Inn hotels having occupancies and average daily rates similar to those the Company has achieved at its existing AmeriHost Inn hotels. Moreover, the Company believes that the development of additional AmeriHost Inn hotels and expanded geographic diversity will continue to enhance the awareness of the AmeriHost Inn brand and thus improve revenues at existing, as well as future, AmeriHost Inn hotels. The Company believes that leveraging its expertise in hotel development and management by providing these services to unaffiliated parties will also assist the Company in reaching its financial objectives. OPERATING STRATEGY The Company's operating strategy is to provide its customers with a consistent lodging experience by offering a package of amenities and services which meet or exceed the customer's expectations during each stay. The Company has developed uniform standards and procedures for each aspect of the development, construction, operation and marketing of its AmeriHost Inn hotels, from site selection to operational management. The Company's operational management activities are overseen by a Senior Vice President of Operations who supervises regional and area managers, who in turn oversee the general managers of the hotels. Each regional manager is responsible for 6 to 10 hotels, depending on each hotel's size and location. In addition to having responsibilities as the general manager of a specific hotel, each area manager is responsible for overseeing the general managers at 1 to 2 additional hotels. In addition to these managers, the Company has centralized sales and marketing personnel who assist and direct the general managers and other on-site personnel in their marketing efforts. The Company also has internal auditors who perform audits of each hotel at least two times each year, including tests of financial items such as cash and receivables, as well as operational, security and ADA (Americans with Disabilities Act) compliance matters, and who are also responsible for developing and conducting a variety of educational and training seminars for general managers and other on-site personnel. The Company has designed a financial management system whereby all accounting and operating information is processed in the Company's centralized accounting office at its headquarters. The system includes cash management, accounts payable and the generation of daily financial and operating information and monthly financial statements which allow senior management and the regional, area and general managers to closely monitor performance and to quickly react to changes in operational conditions. The Company provides each hotel with standardized forms and procedures to ensure uniform and efficient financial reporting. The Company's financial management system relieves certain management and reporting burdens from the individual hotel managers, enabling them to focus on the operation and marketing of the hotel. The centralized financial management system also enhances the quality and timing of internal financial reports. All payroll functions are also centralized at the Company's headquarters through its employee leasing subsidiary, allowing the Company to have greater control over payroll costs. In addition, since all of the approximately 2,000 hotel personnel are employed by the same company, the costs of certain payroll related expenses are lower than if each hotel maintained its own employees, and the Company is able to offer a more attractive health insurance program to its employees. MARKETING STRATEGY The Company believes it has a unique marketing strategy which is to actively seek involvement in and ties to the local communities in which its hotels are located. The local businesses and residential communities are each hotel's best referral source. When staying in smaller communities where the Company's hotels are located, visitors typically seek recommendations from family, friends and business associates. The general managers of the hotels are expected to devote a majority of their time toward marketing activities with local businesses and the community. In an effort to promote community awareness and build strong relationships with business leaders and local residents, general managers are very active in local civic groups and frequently sponsor special events. In addition, the hotels typically sponsor various local social and community events and permit the use of their facilities by local clubs and civic organizations. This community involvement, combined with a professional marketing program, allows the hotel to showcase its facilities for both business and leisure purposes. By focusing on the local community as its primary referral source, the Company believes that each hotel can build a strong sales force of local residents. With respect to AmeriHost Inn hotels, the Company's primary marketing strategy is to consistently develop and operate AmeriHost Inn hotels using its prototype design under the trademarked AmeriHost Inn diamond-shaped logo. The Company believes that a consistent product offering, including the same design features, amenities and quality guest services, will promote guest loyalty, referrals and repeat business. The amenities and services featured in the AmeriHost Inn prototype design are not consistently found in the hotels of competitors in the markets which the Company targets. By providing amenities and services on a consistent basis, along with centralized administrative and financial reporting systems, the Company believes it is able to operate profitable hotels while offering an excellent value to its guests. During the fall of 1997, the Company introduced its toll-free reservation number. By dialing 800-434-5800, a guest can make a reservation at any one of the AmeriHost Inn hotels throughout the country. The Company anticipates that the reservation system will significantly increase the number of reservations as the brand awareness increases. In an effort to boost brand awareness, the Company has also implemented a regional marketing campaign using various media including radio and newspaper. The markets and media selected for the marketing activities were based on extensive research done by the Company and an advertising consultant. The Company and its joint venture partners have committed that 1% of each hotel's room revenues will be used for the regional marketing program. JOINT VENTURES The Company continued to develop new hotels through joint ventures in 1997, whereby the Company and other investors agree to jointly undertake the development, construction, acquisition or renovation of a hotel property. As of December 31, 1997, the Company had 53 projects with joint venture partners, including multiple projects with certain joint venture partners. The Company's joint ventures have taken various forms, including general partnerships, limited partnerships, and limited liability companies. Each joint venture has been formed with respect to a particular hotel project and reflects the characteristics of that project, including the relative contributions, in cash, property or services, of its partners. In most instances, the joint venture has taken the form of a limited partnership, with a wholly-owned subsidiary of the Company as a general partner with sole or joint management authority. The Company's subsidiary, as general partner, has typically received a partnership interest ranging from 15% to 30% for contributing the Company's expertise. In certain cases, the subsidiary has also contributed a minimal amount of cash. The limited partners (which may include the Company or its affiliates in some instances) have typically contributed the cash equity required to fund the project and have received interests proportionate to their contributions. A typical joint venture agreement provides that the profits and losses of the entity will be allocated among the partners in proportion to their respective interests. However, the distribution of operating cash flow and asset sale proceeds to the Company in proportion to its ownership interest is often subordinate to the prior return of capital and other distributions payable to the other joint venture partners. In addition, in five recent joint venture arrangements, the equity interests held by the joint venture partners are exchangeable into shares of the Company's common stock and the Company has guaranteed minimum annual distributions to the joint venture partners in four of these joint ventures. As the general partner, the Company's subsidiary generally has the sole or primary management authority with respect to the joint venture. However, in some instances, the joint venture agreement or applicable law may provide to the other joint venture partners the right to amend the joint venture agreement, approve a transfer of the general partner's partnership interest, remove the general partner for cause, or dissolve the joint venture. The joint venture agreements do not typically restrict the right of the Company or its affiliates to engage in related or competitive business activities. COMPETITION There is significant competition in the mid-price lodging industry. There are numerous hotel chains that operate on a national or regional basis, as well as other hotels, motor inns and other independent lodging establishments throughout the United States. Competition is primarily in the areas of price, location, quality, services and amenities. Many of the Company's competitors have recognized trade names, greater resources and longer operating histories than the Company. However, the Company believes that its management is sufficiently experienced, and the markets which the Company targets for development typically offer lesser competition, enabling the Company to compete successfully. There are a number of companies which develop, construct and renovate hotels. Some of these companies perform these services only for their own account, while others actively pursue contracts for these services with third party owners. The Company believes that it can develop, construct and renovate hotels at costs which are competitive. The Company believes that its use of a well-developed prototype, significant experience (the Company has managed the development and construction of nearly 80 hotels) and volume purchasing of furniture and amenities result in development costs which are lower than those experienced by many competitors building comparable hotels. The Company also believes that its ability to offer additional services, such as hotel management, provides some competitive advantages. There are many hotel management companies which provide management services to hotels similar to the services provided by the Company. While the quantity of competition may be high, the Company believes that the quality of its services, including its information and management systems and employee leasing operations, will enable the Company to compete successfully. The Company believes that its focus on tertiary and secondary markets also lessens competition for the types of services provided by the Company. The Company believes that the relationship between the development and construction costs and the average daily rates achieved by the AmeriHost Inn hotels is more favorable than that experienced by many of the Company's competitors. In addition, a significant portion of the purchasing and accounting functions related to the hotels is handled in the Company's headquarters, thus enabling the local general managers and their staffs to focus their efforts on marketing and sales. The centralization of many functions also assists in keeping costs lower due to certain economies of scale. This allows the AmeriHost Inn hotels to operate efficiently and compete effectively. FRANCHISE AGREEMENTS At December 31, 1997, the Company had franchise agreements (collectively, the "Franchise Agreements") with Days Inn of America, Inc., Promus Hotels, Inc. (regarding Hampton Inns), Holiday Inns, Inc., Holiday Inns Franchising, Inc. and Ramada Franchise Systems, Inc. Although the terms of the various Franchise Agreements differ, each requires the Company to pay a monthly royalty fee for the right to operate the hotel under the "flag" of that Franchisor and to have access to the other benefits provided by such Franchisor, including access to reservation systems, marketing plans and use of trademarks. The royalty fees are typically based on gross revenues attributable to room rentals, plus marketing and reservation contributions, and typically range between 8% and 10% of gross room revenues. In addition, the Company and/or the joint venture which owns a hotel operated pursuant to a Franchise Agreement will have ongoing obligations to maintain the quality and condition of the hotel to the standards required by the Franchisor. The term of a Franchise Agreement typically is between 10 and 20 years, with a substantial penalty for early termination by the Company with either party typically having the right to terminate after five years. The Company believes that it is generally in compliance with its Franchise Agreements, and the loss of any one of the Franchise Agreements would not have a material impact on the Company. EMPLOYEES As of December 31, 1997, the Company and its subsidiaries had 2,053 full and part-time employees: Hotel Management: Operations 25 Accounting and finance 18 Property general managers 90 Hotel Development: 15 Hotel Operations: 886 Corporate: General and administrative 8 Officers 3 Employee Leasing: General and administrative 5 Operations 1,003 2,053 At December 31, 1997 approximately 10 of the Company's housekeeping employees (at the Days Inn Melrose Park) were members of the Hotel, Motel, Club, Cafeteria, Restaurant Employees and Bartenders Union, Local 450 AFL-CIO, and were covered by a collective bargaining agreement which was in place with such union. The Company sold its ownership interest in the Days Inn Melrose Park in February 1998. The Company no longer has any employees covered by a collective bargaining agreement. To date, the Company has not experienced any work stoppages or significant employee-related problems. The Company believes that its relationship with its employees is good. ITEM 2. PROPERTIES. The Company's corporate offices and the offices of its wholly-owned subsidiaries are located in approximately 18,100 square feet of space at 2400 East Devon Avenue, Suite 280, Des Plaines, Illinois 60018. These offices are occupied under a lease that expires on December 31, 2000. At December 31, 1997, the Company had a 100% or majority ownership or leasehold interest in 39 operating hotels and four hotels under construction, located in 14 states. The land, building, furniture, fixtures and equipment and construction in progress for these hotels is reflected in the Company's Consolidated Balance Sheet at December 31, 1997. These assets were substantially pledged to secure the related long-term mortgage debt. See Item 1 and Notes 6 and 7 to the Consolidated Financial Statements under Item 14. In addition to the foregoing, the Company has an equity interest in partnerships which own and/or lease property. See Note 4 to Consolidated Financial Statements under Item 14. ITEM 3. LEGAL PROCEEDINGS The Company is subject to claims and suits in the ordinary course of business. In management's opinion, currently pending legal proceedings and claims against the Company will not, individually or in the aggregate, have a material adverse effect on the Company's financial condition, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year ended December 31, 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq National Market under the symbol HOST. As of March 27, 1998, there were 1,438 holders of record of the Company's Common Stock. The following table shows the range of reported high and low closing prices per share.
High($) Low($) FISCAL 1996 First quarter 8.25 6.25 Second quarter 9.94 8.50 Third quarter 8.63 5.88 Fourth quarter 7.63 6.06 FISCAL 1997 First quarter 7.63 5.31 Second quarter 7.88 6.06 Third quarter 7.13 6.19 Fourth quarter 6.88 5.13 FISCAL 1998 First quarter (through March 27, 1998) 5.81 3.94
The Company has not declared or paid any cash dividends on its Common Stock. The Company currently intends to retain any earnings for use in its business and therefore does not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be made by the Board of Directors in light of the Company's earnings, financial position, capital requirements and such other factors as the Board of Directors deems relevant. In addition, pursuant to the terms of the Company's 7% Subordinated Notes (the "7% Notes"), no dividends may be paid on any capital stock of the Company until the 7% Notes have been paid in full. (See Notes 7 and 8 to the Consolidated Financial Statements under Item 14.) The Board of Directors has the authority to issue up to 100,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of Preferred Stock, including without limitation, dividend rates, conversion rights, voting rights, redemption and sinking fund provisions, and liquidation provisions, and to fix the number of shares constituting any series and the designations of such series, without any further vote or action by the shareholders. The Board of Directors, without shareholder approval, may issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plans to issue any Preferred Stock. ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial data presented below have been derived from the Company's consolidated financial statements. The consolidated financial statements for all years presented have been audited by the Company's independent auditors, whose report on such consolidated financial statements for the three years ended December 31, 1997, 1996 and 1995 is included herein under Item 14. The information set forth below should be read in conjunction with the consolidated financial statements and notes thereto under Item 14 and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(in thousands, except per share data) Fiscal Year Ended December 31, 1997 1996 1995 1994 1993 STATEMENT OF OPERATIONS DATA: Revenue $ 62,666 $ 68,342 $51,962 $ 43,347 $ 34,274 Operating costs and expenses 52,285 54,360 41,317 37,076 30,389 Depreciation and amortization expense 4,532 3,479 2,268 1,141 928 Leasehold rents - hotels 1,729 2,122 1,976 1,661 1,652 Corporate general and administrative 2,140 1,928 2,111 2,013 1,783 Operating income (loss) 1,980 6,453 4,290 1,456 (478) Interest expense, net 3,299 2,142 1,195 427 596 Net income (loss) $ (966) $ 3,395 $ 2,138 $ 571 $ (761) Earnings (loss) per share: Basic $ (0.15) $ 0.57 $ 0.37 $ 0.10 $ (0.16) Diluted $ (0.19) $ 0.49 $ 0.34 $ 0.10 $ (0.16) Weighted average shares outstanding: Basic 6,283 6,008 5,839 5,498 4,677 Diluted 6,659 6,839 6,371 5,525 4,677 BALANCE SHEET DATA: Total assets $ 92,668 $ 66,901 $52,453 $ 34,404 $ 24,174 Long-term debt, including current portion 60,235 34,339 25,014 13,542 6,408 Working capital (2,208) 366 1,854 4,182 5,048 Shareholders' equity 21,593 20,912 17,267 13,672 12,781 OTHER DATA: EBITDA (1) $ 6,023 $ 12,447 $ 8,862 $ 4,143 $ 1,608 Cash provided by operating activities 1,858 7,558 1,918 2,215 693 Cash used in investing activities (28,463) (11,347) (13,506) (8,764) (10,737) Cash provided by financing activities 25,926 5,447 9,933 7,690 10,651 Capital expenditures 29,343 14,049 12,539 7,872 8,292 (1) EBITDA is not defined by generally accepted accounting principles ("GAAP"), however the Company believes it provides relevant information about its operations and is necessary for an understanding of the Company's operations, given its significant investment in real estate. EBITDA should not be considered as an alternative to operating income (as determined in accordance with GAAP) as an indicator of the Company's operating performance or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. EBITDA is defined as net income, adjusted to eliminate the impact of (i) interest expense; (ii) interest and other income; (iii) leasehold rents for hotels, which the Company considers to be financing costs similar to interest; (iv) income tax expense (benefit); (v) depreciation and amortization; and (vi) gains or losses from property transactions. EBITDA for 1997, when calculated to exclude non-recurring charges for costs associated with contractual terminations and costs incurred in connection with a potential merger or acquisition which was not consummated, would have been approximately $7.9 million. EBITDA for 1996, when calculated to exclude a non-recurring charge for costs associated with a public offering of common stock which was not consummated, would have been approximately $12.9 million. EBITDA for 1993, when calculated to exclude a non-cash debt acceleration charge of $485,411 relating to the prepayment of subordinated debt, would have been approximately $2.1 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Company is engaged in the development of AmeriHost Inn hotels, its proprietary brand, and the ownership, operation and management of AmeriHost Inn hotels and other mid-price hotels. As of December 31, 1997, there were 63 AmeriHost Inn hotels open, of which 28 were wholly-owned, two were majority- owned, 30 were minority-owned, and three were managed for unrelated third parties. A total of 25 AmeriHost Inn hotels were opened during the past twelve months, including two hotels which were converted from other brand affiliations. The Company intends to use the AmeriHost Inn brand when expanding its hotel operations segment. All of the hotels currently under construction will be AmeriHost Inn hotels. As of December 31, 1997, eight AmeriHost Inn hotels were under construction, of which four will be wholly-owned, and four will be minority-owned. Same room revenues for all AmeriHost Inn hotels increased approximately 3.9% in 1997 compared to 1996, attributable to an increase of $1.55 in average daily rate and a 1.0% increase in occupancy. These results relate to the AmeriHost Inn hotels that were operating for at least thirteen full months at December 31, 1997. Revenues from hotel operations consist of the revenues from all hotels in which the Company has a 100% or majority ownership or leasehold interest ("Consolidated" hotels). Investments in other entities in which the Company has a minority ownership interest are accounted for using the equity method. As a result of the Company's focus on increasing the number of Consolidated hotels, the Company expects that revenues from the hotel operations segment will increase over time as a percentage of the Company's overall revenues. Development and construction revenues consist of one-time fees for new construction, acquisition and renovation activities performed by the Company for minority-owned hotels and unrelated third parties. The Company also receives revenue from management services provided to minority-owned hotels and unrelated third parties. Employee leasing revenues consist of revenues the Company receives for leasing its employees to minority-owned hotels and unrelated third parties. The results for 1997 were consistent with the Company's primary objective of increasing the number of wholly-owned, Consolidated AmeriHost Inn hotels. Due to the Company's focus on developing and constructing a significant number of Consolidated AmeriHost Inn hotels during 1997, the Company recognized lower revenues and earnings from the development and construction of hotels for minority-owned entities and unrelated third parties. In addition, the Company disposed of several non-AmeriHost Inn hotels during the past twelve months, as part of the Company's plan to invest all available resources into the AmeriHost Inn hotel brand. Although this strategy has a short-term negative impact on revenues and earnings, the Company believes that the long-term benefits will be substantial. The Company will continue to develop hotels for joint ventures on a selected basis. Revenues from Consolidated AmeriHost Inn hotels increased 71.9% to $14.7 million in 1997, from revenues of $8.5 million in 1996, due to the addition of 14 Consolidated AmeriHost Inn hotels during the past twelve months. Revenues from the hotel management and employee leasing segments increased by 9.2% in total during 1997 due primarily to the net addition of seven minority-owned and unrelated third party AmeriHost Inn hotels. These increases were offset by a decrease in non-AmeriHost Inn hotel revenues as a result of the disposition of four hotels during 1997 and a decrease in hotel development and construction revenue from joint ventures, resulting in a decrease in total revenues of 8.3% to $62.7 million during 1997, from $68.3 million in 1996. In addition, a record number of Consolidated AmeriHost Inn hotels opened during 1997. These hotels generally were operating in 1997 during their pre-stabilization period, when revenues are typically lower. Net loss for 1997 was ($966,443), or ($0.19) per diluted share in 1997, compared to net income of $3.4 million, or $0.49 per diluted share in 1996. The Company sold two Consolidated hotels during 1997, resulting in a total gain, net of minority interests, of $1.7 million. These gains were more than offset by non-recurring charges of $1.9 million from the termination of a consulting agreement with Urban 2000 Corp. (a company owned by the Company's Chairman of the Board and a former officer/director), severance fees paid in connection with the departure of an officer/director and costs incurred in connection with a potential merger/acquisition which was not consummated. During 1996, the Company realized gains from the sale of hotels of $907,106, net of minority interests, and incurred $403,657 in costs associated with a public offering of the Company's Common Stock which was not consummated. Excluding the gains from property sales and the non-recurring charges, net income (loss) per diluted share was ($0.18) and $0.44 for 1997 and 1996, respectively. The Company uses EBITDA as a supplemental performance measure along with net income to report its operating results. EBITDA is defined as net income, adjusted to eliminate the impact of (i) interest expense; (ii) interest and other income; (iii) leasehold rents for hotels, which the Company considers to be financing costs similar to interest; (iv) income tax expense (benefit), (v) depreciation and amortization; and (vi) gains or losses from property transactions. EBITDA should not be considered as an alternative to operating income (as determined in accordance with GAAP) as an indicator of the Company's operating performance or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. EBITDA, as defined by the Company, is included herein due to numerous requests by investors and analysts. Management believes that investors and analysts find it to be a useful tool for measuring the Company's ability to service debt. EBITDA decreased 51.6% to $6.0 million during 1997, from $12.4 million during 1996. After eliminating non- recurring charges, EBITDA decreased 38.5% to $7.9 million in 1997 from $12.9 million in 1996. The Company had retained an investment banking firm to review strategic alternatives for the Company. During this process, the Company and its joint venture partners had postponed the development of additional hotels which were expected to begin construction during 1997. Although the Company continues to evaluate strategic alternatives to finance the Company's anticipated growth, it has terminated the services of the investment banking firm. Amerihost had an ownership interest in 79 hotels at December 31, 1997 versus 61 hotels at December 31, 1996 (excluding hotels under construction). This increased ownership was achieved primarily through the development of AmeriHost Inn hotels for the Company's own account and for minority-owned entities. These amounts include a net increase of 11 Consolidated hotels, from 28 at December 31, 1996 to 39 at December 31, 1997. RESULTS OF OPERATIONS The following table sets forth the percentages of revenues of the Company represented by components of net income for 1997, 1996 and 1995.
Percentage of Total Revenue Year Ended December 31, 1997 1996 1995 Revenue 100.0% 100.0% 100.0% Operating costs and expenses 83.4 79.5 79.5 16.6 20.5 20.5 Depreciation and amortization 7.2 5.2 4.4 Leasehold rents - hotels 2.8 3.1 3.8 Corporate general and administrative 3.4 2.8 4.0 Operating income 3.2 9.4 8.3 Interest expense ( 6.5) ( 4.0) ( 3.4) Interest and other income 1.4 1.1 1.2 Equity in income and losses of affiliates ( 0.8) 1.2 0.7 Gain on sale of assets 2.7 1.3 - Non-recurring expenses (3.0) ( 0.6) - Income (loss) before minority interests and income taxes ( 3.0) 8.4 6.8 Minority interests in operations of consolidated subsidiaries and partnerships 0.3 - ( 0.1) Income (loss) before income taxes ( 2.7) 8.4 6.7 Income tax benefit (expense) 1.2 ( 3.4) ( 2.6) Net income (loss) (1.5)% 5.0% 4.1%
1997 Compared to 1996 Revenues decreased 8.3% to $62.7 million in 1997 from revenues of $68.3 million in 1996. Increases in revenues from the Consolidated AmeriHost Inn hotels, the hotel management segment and the employee leasing segment were more than offset by decreases in the hotel development and construction segment and the non- AmeriHost Inn hotel operations segment. Hotel operations revenue increased 4.1% to $31.9 million in 1997 from $30.6 million in 1996. Revenue from Consolidated AmeriHost Inn hotels increased 71.9% in 1997 compared to 1996. This increase was attributable primarily to the addition of 16 Consolidated AmeriHost Inn hotels during 1997, including the addition of 14 newly constructed Consolidated AmeriHost Inn hotels, the acquisition of additional ownership interest in one existing hotel causing it to become a Consolidated AmeriHost Inn hotel, and the conversion of one Consolidated hotel to an AmeriHost Inn hotel. The increases in AmeriHost Inn hotel revenue during 1997 was offset by a decrease of 22.0% in other brand hotel revenue, resulting from the sale of three non-AmeriHost Inn Consolidated hotels, the conversion of one hotel to an AmeriHost Inn hotel, and the termination of the lease for another non-AmeriHost Inn hotel during 1997. The hotel operations segment included the operations of 39 Consolidated hotels (including 30 AmeriHost Inn hotels) comprising 3,124 rooms at December 31, 1997, compared to 28 Consolidated hotels (including 14 AmeriHost Inn hotels) comprising 2,703 rooms at December 31, 1996. After considering the Company's ownership interest in the majority-owned Consolidated hotels, this translates to 2,804 and 2,338 equivalent owned rooms as of December 31, 1997 and 1996, respectively, or an increase of 19.9%. Recently, the Company has experienced an increase in competition in certain markets, primarily from newly constructed hotels. As a result, there is increased downward pressure on occupancy levels. The average daily rates, however, continue to show strong increases. The Company anticipates that the impact from new competition will be short-term for the following reasons. First, as the number of AmeriHost Inn hotels increases, the greater the benefits will be at all locations from marketplace recognition and repeat business. Second, since the Company typically builds hotels in growing markets, it expects to see additional hotel development. As these growth markets mature, the room supply is expected to be commensurate with room demand. Hotel development activity is summarized as follows:
1997 1996 1995 Unaffiliated & Unaffiliated & Unaffiliated & Minority- Consolidated Minority- Consolidated Minority- Consolidated Owned (1) Hotels (2) Owned (1) Hotels (2) Owned (1) Hotels (2) Under construction at beginning of year 7 12 14 3 6 3 Starts 6 6 9 12 14 6 Completions 9 14 16 3 6 6 Under construction at end of year 4 4 7 12 14 3 (1) hotels developed/constructed for unaffiliated third parties and entities in which the Company holds a minority ownership interest (2) hotels developed/constructed for the Company's own account and for entities in which the Company holds a majority ownership interest
Hotel development revenue decreased 36.2% to $14.6 million during 1997 from $22.9 million 1996. The decrease was due to the decrease in hotel development and construction activity performed for unrelated entities or entities in which the Company holds a minority ownership interest. The Company was constructing 13 hotels for minority-owned entities or unrelated third parties during 1997, including nine hotels which opened during 1997, compared to 23 hotels during 1996. The Company also had several additional projects in various stages of pre-construction development during both years. Hotel management revenue increased 8.6% to $3.0 million during 1997 from $2.8 million during 1996. The number of hotels managed for third parties and minority-owned entities increased from 44 hotels, representing 3,745 rooms, at December 31, 1996 to 49 hotels, representing 3,957 rooms, at December 31, 1997. The addition of management contracts for nine newly constructed hotels (561 rooms) was partially offset by the elimination of revenues for one management contract (60 rooms) with a minority-owned hotel which became a Consolidated AmeriHost Inn hotel due to the Company acquiring additional ownership interest, and the termination of three management contracts for non-AmeriHost Inn hotels with unrelated third parties (289 rooms). The management contracts terminated, all of which were for hotels other than the AmeriHost Inn brand, were typically for larger hotels compared to the nine hotels added during 1997. Employee leasing revenue increased 9.3% to $13.1 million during 1997 from $12.0 million during 1996, due primarily to the addition of hotels managed for minority-owned entities as described above, and the related increase in payroll costs which is the basis for the employee leasing revenue. Total operating costs and expenses decreased 3.8% to $52.3 million (83.4% of total revenues) during 1997 from $54.4 million (79.5% of total revenues) during 1996. Operating costs and expenses in the hotel operations segment increased 12.5% to $23.7 million during 1997 from $21.1 million during 1996. This increase resulted primarily from the net addition of 11 Consolidated hotels to this segment and is directly related to the 71.9% increase in Consolidated AmeriHost Inn hotel revenue during 1997, offset by the 22.0% decrease in non- AmeriHost Inn hotel revenue. Hotel operations segment operating costs and expenses as a percentage of segment revenue increased to 74.4% during 1997 from 68.9% during 1996. The increase from consolidated AmeriHost Inn hotels was due primarily to a greater number of hotels in 1997 operating during their initial stabilization period, when revenues are typically lower. The increase from non- AmeriHost Inn hotels was due to a decrease in same room revenue and additional expenses associated with the sale/disposition of four hotels. Operating costs and expenses for the hotel development segment decreased 30.2% to $13.7 million during 1997 from $19.7 million during 1996, consistent with the 36.2% decrease in hotel development revenues for 1997. Operating costs and expenses in the hotel development segment as a percentage of segment revenue increased to 93.7% during 1997 from 85.7% during 1996. The activity in 1997 consisted primarily of construction activity which has higher operating costs in relation to the revenue recognized. The activity in 1996 also consisted of a significant level of construction activity, however 1996 also included was a greater level of development activity which has lower operating costs in relation to the revenue recognized. In addition, the activity in 1996 included contracts whereby the Company acted as construction manager, whereby the Company only records the net construction management fee as revenue. Hotel management segment operating costs and expenses increased 5.9% to $2.0 million during 1997, from $1.9 million during 1996. The increase in hotel management segment operating expenses was consistent with the 8.6% increase in segment revenues for 1997, offset by the termination in the first quarter of 1997 of certain contractual payments which had been made to co-managers and the allocation of preopening costs associated with the significant number of hotels opened during 1997. Employee leasing operating costs and expenses increased 9.5% to $12.8 million during 1997 from $11.7 million during 1996, which is consistent with the 9.3% increase in segment revenue for 1997. Depreciation and amortization expense increased 30.3% to $4.5 million during 1997 from $3.5 million during 1996. This increase was primarily attributable to the net addition of 11 Consolidated hotels to the hotel operations segment and the resulting depreciation and amortization therefrom. Leasehold rents - hotels decreased 18.5% to $1.7 million during 1997 from $2.1 million during 1996. The decrease in 1997 compared to 1996 was primarily due to the sale of two leased Consolidated non-AmeriHost Inn hotels, the exercise of the lease purchase option for a Consolidated non-AmeriHost Inn hotel, and the termination of the lease for another Consolidated non-AmeriHost Inn hotel, partially offset by an increase in percentage rents for certain hotels which are based on the hotel's operating revenues. Corporate general and administrative expense increased 11.0% to $2.1 million during 1997 from $1.9 million during 1996, and can be attributed primarily to the Company's overall growth and the allocation of costs associated with hotel development activity. The Company's operating income decreased 69.3% to $2.0 million during 1997 from $6.5 million during 1996. The following discussion of operating income by segment is exclusive of any corporate overhead cost allocation. Operating income from the hotel operations segment decreased 44.8% to $2.4 million in 1997 from $4.4 million in 1996, resulting from the impact of the significant number of Consolidated AmeriHost Inn hotels operating in 1997 during their initial stabilization period as well as the sale of four non-AmeriHost Inn hotels during 1997 and late 1996. Operating income from the hotel development segment decreased 73.9% to $838,452 during 1997 from $3.2 million during 1996. The decrease in hotel development operating income was due to the decrease in hotels developed and constructed for third parties and minority-owned entities during 1997. Operating income from the hotel management segment increased 13.2% to $647,230 during 1997 from $571,680 during 1996. This increase was due primarily to the net addition of five hotel management contracts with minority-owned and unaffiliated entities during 1997. Employee leasing operating income increased 3.6% to $320,826 during 1997 from $309,805 during 1996, due to the increase in employee leasing agreements with minority-owned entities. Interest expense increased 46.5% to $4.1 million during 1997 from $2.8 million during 1996. This increase was primarily attributable to the additional mortgage financing of newly constructed Consolidated AmeriHost Inn hotels. The Company's share of equity in income (loss) of affiliates decreased to ($516,583) during 1997 from $809,443 during 1996. The decrease in equity in income of affiliates during 1997 was primarily due to the significant number of newly constructed minority-owned hotels which were operating during their initial stabilization period, when revenues are typically lower, the increasing impact of seasonality as the number of minority-owned hotels increases, and the sale of a minority-owned hotel during the third quarter of 1996. The Company expensed $1.7 million in 1997 in costs associated with the termination of a consulting agreement with a company owned by the Chairman of the Board of Directors and a former director, and the termination of an employment agreement with this former director. In addition, the Company expensed $177,044 in 1997 in costs associated with a potential merger or acquisition which was not consummated. During 1996, the Company expensed $403,657 in costs associated with a public offering of the Company's Common Stock which was not consummated. The Company considers these costs non- operational costs which are non-recurring in nature. The Company recorded an income tax benefit of $737,000 in 1997 compared to income tax expense of $2.4 million in 1996, which is directly attributable to the pre-tax loss incurred in 1997. 1996 compared to 1995 Revenues increased 31.5% to a record $68.3 million in 1996 from revenues of $52.0 million in 1995. This increase was due primarily to significant increases in revenues from hotel operations and hotel development. Hotel operations revenue increased 25.7% to a record $30.6 million in 1996, compared to $24.4 million in 1995. This increase was attributable to the net addition of four Consolidated Hotels to the hotel operations segment during 1996, and the net addition of ten Consolidated Hotels during 1995, the majority of which were opened during the second half of 1995. The Company held a minority ownership position in two of the four hotels which became Consolidated Hotels in 1996 when additional ownership interests were acquired. The hotel operations segment included 28 Consolidated Hotels comprising 2,703 rooms at the end of 1996, compared to 24 Consolidated Hotels comprising 2,516 rooms at the end of 1995, and 14 Consolidated Hotels comprising 1,543 rooms at the end of 1994, or an increase of 75.2% in total rooms from December 31, 1994 to December 31, 1996. Same room revenues for the Consolidated Hotels increased slightly, by 0.3% in 1996. Hotel development revenue increased 87.4% to a record $22.9 million in 1996 from $12.2 million in 1995. Excluding the Consolidated Hotels, the Company had 23 hotels under construction during 1996, versus 20 hotels in 1995. Although the number of hotels under construction was only slightly greater in 1996, total segment revenues increased significantly since 12 of the 14 hotels which began construction in 1995 were not started until the fourth quarter, resulting in the recognition in 1996 of a large portion of total contracted revenues for these projects. In addition to the hotel projects under construction, the Company had several projects in various stages of pre-construction development at the end of both 1995 and 1996. Hotel management revenues decreased 7.5% to $2.8 million in 1996 from $3.0 million in 1995. Hotel management and employee leasing revenues are recognized from hotels which are owned by unrelated third parties and entities in which the Company holds a minority ownership interest. The number of hotels managed for third parties and minority owned entities increased from 34 hotels (3,261 rooms) at December 31, 1995 to 44 hotels (3,745 rooms) at December 31, 1996. The addition of 16 management contracts in 1996 was offset by the loss of four management contracts with minority-owned entities as a result of a hotel/investment sale, and two minority-owned hotels which became Consolidated Hotels in 1996 due to the Company acquiring additional ownership interests in these hotels. All 16 management contracts added during 1996 were for newly constructed hotels opened throughout 1996. Management fees recognized in 1996 from these hotels were lower due to their partial year of operation and the impact of their initial stabilization period when hotel revenues are typically lower. The terminated management contracts, all of which were for hotels other than the AmeriHost Inn brand, were for larger hotels compared to the 16 hotels added during 1996. Consequently, the decrease in management fee revenue from the terminated management contracts was greater than the revenues added from the 16 newly constructed hotels during 1996. Employee leasing revenue, which is based on actual employee payroll costs, decreased 2.8% to $12.0 million in 1996 from $12.4 million in 1995 as the timing of the 16 hotels added and six hotel management contracts terminated as discussed above, resulted in slightly lower payroll costs during 1996 compared to 1995. Operating costs and expenses increased 31.6% to $54.4 million (79.5% of total revenues) in 1996 from $41.3 million (79.5% of total revenues) in 1995. Operating costs and expenses in the hotel operations segment increased 23.6% to $21.1 million in 1996 from $17.1 million in 1995, resulting primarily from the net addition of four Consolidated Hotels to this segment and is directly related to the 25.7% increase in segment revenue. Hotel operations segment operating costs and expenses as a percentage of segment revenue decreased to 68.9% in 1996 from 70.1% in 1995, due primarily to improvements in operating efficiency and the increase in newly constructed AmeriHost Inn hotels, whose operating costs are typically lower than the older, acquired hotels. Operating costs and expenses for the Consolidated AmeriHost Inn hotels were 57.6% of hotel revenue in 1996. Operating costs and expenses for the non-AmeriHost Inn Consolidated Hotels were 73.3% of hotel revenues in 1996, compared to 69.9% of hotel revenues in 1995, which increase was due primarily to the conversion of four Consolidated Hotels to AmeriHost Inn hotels and higher expenses associated with the severe weather conditions in the first quarter of 1996. Operating costs and expenses in the hotel development segment increased 94.2% to $19.7 million in 1996 from $10.1 million in 1995, consistent with the 87.4% increase in hotel development revenues. Operating costs and expenses in the hotel development segment as a percentage of segment revenue increased to 85.7% in 1996 from 82.7% in 1995. There was significant construction activity in 1996, with a greater number of hotels under construction in 1996 as compared to 1995. Additionally, a significant number of hotels began construction in the fourth quarter of 1995, whereby the majority of the associated construction costs were incurred in 1996. Hotel construction activity has significantly higher associated operating costs compared to the pre-construction hotel development activity, translating to a higher percentage of segment revenue. Hotel management segment operating costs and expenses decreased 3.7% to $1.9 million in 1996 from $2.0 million in 1995, due primarily to efficiencies achieved in the management of all hotels operated and/or managed. Employee leasing operating costs and expenses decreased 3.6% to $11.7 million in 1996 from $12.1 million in 1995, attributable to the 2.8% decrease in segment revenue as well as operational efficiencies. Depreciation and amortization expense increased 53.4% to $3.5 million in 1996 from $2.3 million in 1995. This increase was primarily attributable to the net addition of four Consolidated Hotels in 1996 and ten Consolidated Hotels in 1995, the majority of which were opened during the second half of 1995, to the hotel operations segment and the resulting depreciation and amortization therefrom. Leasehold rents - hotels increased 7.4% to $2.1 million in 1996 from $2.0 million in 1995. This increase was primarily due to the addition of one leased Consolidated Hotel in the fourth quarter of 1995, partially offset by the termination of another leased Consolidated Hotel in the second quarter of 1995 as a result of the sale of the hotel. Corporate general and administrative expenses decreased 8.7% to $1.9 million in 1996 from $2.1 million in 1995. The decrease was due primarily to operational efficiencies and the allocation of costs associated with increased hotel development activity. The Company's operating income increased 50.4% to $6.5 million in 1996 from $4.3 million in 1995, or an increase of $2.2 million. Operating income from the hotel operations segment increased 30.6% to $4.4 million in 1996 from $3.4 million in 1995, resulting primarily from the addition of 14 Consolidated Hotels during 1995 and 1996. Operating income from the hotel development segment increased 53.8% to $3.2 million in 1996 from $2.1 million in 1995, due to the increased level of hotel development and construction activity. Hotel development operating income as a percentage of segment revenues decreased to 14.0% in 1996 from 17.1% in 1995 due to the higher level of construction activity in 1996 which has higher revenues and a lower gross margin than pre- construction development activity. Hotel management segment operating income decreased 31.2% to $571,680 in 1996 from $831,007 in 1995, due primarily to the termination of four hotel management contracts with minority-owned entities and unrelated third parties during 1996, as well as the elimination of management fees from Consolidated Hotels. Employee leasing operating income increased to $309,805 in 1996 from $216,075 in 1995. Interest expense increased 57.6% to $2.8 million in 1996 versus $1.8 million in 1995, primarily attributable to the additional, permanent mortgage financing obtained for newly constructed Consolidated Hotels. The Company's share of equity in income (loss) of affiliates increased 108.9% to $809,443 in 1996 from $387,439 in 1995. This increase was due primarily to gains on the sale of three minority owned hotels in 1996 and an increase in same room revenue. The Company expensed $403,657 in 1996 in costs associated with a public offering of the Company's Common Stock which was not consummated. The Company considers these costs non-operational costs which are non-recurring in nature. There were no such costs in 1995. The Company recorded income tax expense of $2.4 million in 1996 compared to income tax expense of $1.3 million in 1995, which increase is directly attributable to the increase in pre-tax income. LIQUIDITY AND CAPITAL RESOURCES The Company has four main sources of cash from operating activities: (i) revenues from hotel operations; (ii) fees from development, construction and renovation projects; (iii) fees from management contracts; and (iv) fees from employee leasing services. Cash from hotel operations is typically received at the time the guest checks out of the hotel. Approximately 10% of the Company's hotel operations revenues is generated through other businesses and contracts and is usually paid within 30 to 45 days from billing. Fees from development, construction and renovation projects are typically received within 15 to 45 days from billing. Due to the procedures in place for processing its construction draws, the Company typically does not pay its contractors until the Company receives its draw from the equity or lending source. The Company enters into agreements with contractors for the construction of Consolidated Hotels, including hotels under construction at December 31, 1997, after both the construction and long-term mortgage financing is in place. A portion of the advances to affiliates is for construction purposes which will be collected as the construction of the hotels progresses and the equity and debt financing become available to the affiliate through the construction draw process. Management fee revenues typically are received by the Company within five working days from the end of each month. Cash from the Company's employee leasing segment typically is received 24 to 48 hours prior to the pay date. During 1997, the Company generated cash from operating activities of $1.9 million, compared to $7.6 million during 1996, or a decrease in cash provided by operating activities of $5.7 million. The decrease in cash flow provided by operations during 1997, when compared to 1996, can be attributed to a significant decrease in hotel development and construction activity for minority-owned entities, the increasing impact of seasonality and the significant number of hotels operating during their initial stabilization period as the number of Consolidated hotels increased from 28 hotels at December 31, 1996 to 39 hotels at December 31, 1997. In addition, during 1997, the Company paid $1.7 million in termination and severance costs from the termination of the consulting agreement with Urban 2000 and the resignation of a former officer. See Item 13. Cash used in investing activities is concentrated in three principal areas: (i) the purchase of property and equipment through the construction and renovation of Consolidated hotels; (ii) the purchase of equity interests in hotels; and (iii) the making of loans to affiliated and non-affiliated hotels for the purpose of construction, renovation and working capital. During 1997, the Company used $28.5 million in investing activities compared to $11.3 million in 1996. During 1997, the Company used $29.3 million to purchase property and equipment for Consolidated AmeriHost Inn hotels, used $1.6 million for investments in and advances to affiliates, net of distributions and repayments, and received $3.4 million from the sale of hotels. During 1996, the Company used cash in investing activities primarily for the purchase of $14.0 million in property and equipment for Consolidated hotels, received $2.1 million in distributions and advance repayments from affiliates, net of investments in and advances to affiliates, and received $1.8 million from the sale of property. Cash provided from financing activities was $25.9 million during 1997 compared to $5.4 million during 1996. In 1997, the primary factors were proceeds of $25.9 million from the mortgage financing of Consolidated hotels, net of principal repayments, net proceeds of $1.2 million from the exercise of common stock purchase options, and net repayments of $417,715 on the Company's operating line-of-credit. In 1996, cash provided from financing activities was attributable to proceeds of $6.5 million from the mortgage financing of Consolidated hotels, net of principal repayments, proceeds of $202,966 from the issuance of the Company's common stock, the payment of $403,657 in aborted stock offering costs, and net repayments of $609,612 on the Company's operating line- of-credit. At December 31, 1997, the Company had $1.3 million outstanding under its operating line-of-credit. The Company's line-of-credit was renewed and increased to $10.0 million effective May 1, 1997. The operating line-of-credit (i) is collateralized by a security interest in certain of the Company's assets, including its interest in various joint ventures; (ii) bears interest at an annual rate equal to the lending bank's base rate plus 1/2% (with a minimum interest rate of 7.5%); and (iii) matures May 1, 1998. At December 31, 1997, the Company also had outstanding $2.25 million of its 7% Subordinated Notes which are unsecured obligations due October 9, 1999 and which pay interest quarterly. Pursuant to the terms of the 7% Subordinated Notes, no dividends may be paid on any capital stock of the Company until the 7% Subordinated Notes have been paid in full. At the Company's sole discretion, the 7% Subordinated Notes may be prepaid at any time without penalty. In March 1998, the Company's Board of Directors, authorized the repurchase, from time to time on the open market, of up to $1 million of Common Stock over the next year. The Company expects cash from operations to be sufficient to pay all operating and interest expenses in 1998. YEAR 2000 As is the case with other companies using computers in their operations, the Company has to address the Year 2000 compliance issue. The Year 2000 issue arises from the widespread use of computer programs that rely on two-digit date codes to perform computations or decision-making functions. The Company has begun its review of its computer programs to identify the systems that would be affected by the Year 2000 issue, and is in the process of reviewing any exposure the Company may have from vendors and financial institutions. However, the majority of the Company's critical computer applications are contracted out to a third-party provider. We have received written confirmation from this provider that they will be fully Year 2000 compliant by December 31, 1998. The Company believes that the cost, if any, to correct any Year 2000 issues in regards to its other systems will not be material. SEASONALITY The lodging industry, in general, is seasonal by nature. The Company's 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 markets in which the Company's hotels are located, as well as general business and leisure travel trends. This seasonality can be expected to continue to cause quarterly fluctuations in the Company's revenues, and is expected to have a greater impact as the number of Consolidated hotels increases. Quarterly earnings may also be adversely affected by events beyond the Company's control such as extreme weather conditions, economic factors 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. INFLATION Management does not believe that inflation has had, or is expected to have, any significant adverse impact on the Company's financial condition or results of operations for the periods presented. RECENTLY ISSUED ACCOUNTING STANDARDS Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, establishes standards for computing and presenting earnings per share and simplifies the standards previously found in APB Opinion No. 15, which has been superseded. It replaces the presentation of primary earnings per share with a presentation of basic earnings per share, which excludes dilution and is computed by dividing net income attributable to holders of common stock by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share is computed in a similar manner to fully diluted earnings per share pursuant to APB Opinion No. 15. This Statement is effective for the Company in 1997. All prior year earnings per share amounts have been restated to conform with the provisions of this Statement. SFAS No. 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income, its components and accumulated balances in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. This Statement is effective for the Company for 1998 and requires comparative information for earlier years to be restated. SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, which supersedes SFAS No. 14, Financial Reporting for Segments of a Business Enterprise, establishes standards for the way that public enterprises report information about operating segments in annual and interim financial statements. It also establishes new standards for disclosures regarding products and services, geographic areas and major customers. This Statement is effective for the Company for 1998 and requires comparative information for earlier years to be restated. The Company's consolidated balance sheets and the related consolidated statements of income, changes in shareholder's equity and cash flows will not be affected by the implementation of SFAS No. 130 and SFAS No. 131. PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 All statements contained herein that are not historical facts, including but not limited to, statements regarding the Company's hotels under construction and the operation of AmeriHost Inn hotels are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital to finance the Company's business plan on terms satisfactory to the Company; competitive factors, such as the introduction of new hotels or renovation of existing hotels in the same markets; changes in travel patterns which could affect demand for the Company's hotels; changes in development and operating costs, including labor, construction, land, equipment, and capital costs; general business and economic conditions; and other risk factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements filed as a part of this Form 10-K are included under "Exhibits, Financial Statements and Reports on Form 8-K" under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no disagreements on accounting and financial disclosure matters which are required to be described by Item 304 of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Company's executive officers and directors are: Name Age Position
H. Andrew Torchia 54 Chairman of the Board and Director Michael P. Holtz 41 President, Chief Executive Officer and Director Russell J. Cerqua 41 Executive Vice President of Finance, Secretary, Treasurer, Chief Financial Officer Reno J. Bernardo 66 Director Salomon J. Dayan 52 Director Richard A. Chaifetz 44 Director
H. Andrew Torchia, a co-founder of the Company, has been a Director of the Company since its inception in 1984. Mr. Torchia was President and Chief Executive Officer of the Company from 1985 until 1989, when he became Chairman of the Board. As Chairman, Mr. Torchia's primary areas of responsibility include business development, corporate finance and strategic and financial planning. Mr. Torchia is also the President and 51% stockholder of Urban 2000 Corp. ("Urban"), a hotel development consulting firm, which was initially the sole shareholder of the Company and is currently a principal stockholder. See "Principal Stockholders" under Item 12. Mr. Torchia also owns a 50% interest in American International Hotel Corporation which leases the Best Western at O'Hare. Mr. Torchia has 30 years of experience in hotel development, operations and franchising. Prior to founding the Company, Mr. Torchia served as head of regional development for Best Western International and as head of independent franchise sales organizations for Quality Inns International and Days Inns. Michael P. Holtz has been a Director of the Company since August 1985. From 1985 to 1989, Mr. Holtz served as the Company's Treasurer and Secretary. In 1986, Mr. Holtz was promoted to Chief Operating Officer of the Company with direct responsibility for the Company's day-to-day operations. In 1989, Mr. Holtz was elected President and Chief Executive Officer of the Company. Mr. Holtz is responsible for development and implementation of all Company operations including hotel development, finance and management. Mr. Holtz has over 20 years experience in the operation, development and management of hotel properties. Russell J. Cerqua has been the Executive Vice President of Finance and Chief Financial Officer of the Company since 1987, and Treasurer and a Director of the Company since 1988. In 1989, in addition to his other responsibilities, Mr. Cerqua was elected Secretary of the Company. On February 5, 1998, Mr. Cerqua resigned as a director of the Company. His primary responsibilities include internal and external financial reporting, corporate and property financing, development of financial management systems, hotel accounting for managed properties and financial analysis. Prior to joining the Company, Mr. Cerqua was an audit manager with Laventhol & Horwath, the Company's former independent certified public accountants, and was responsible for the Company's annual audits. Mr. Cerqua was involved in public accounting for over 9 years, with experience in auditing, financial reporting and taxation. Mr. Cerqua is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants and the Illinois CPA Society. Reno J. Bernardo served as the Senior Vice President of Construction of the Company from 1987 through March 1994, when he retired. His primary responsibilities included managing construction of new properties and directing renovation projects. In 1989, Mr. Bernardo became a Director of the Company and continues to serve in this capacity. From 1985 to 1986, Mr. Bernardo was Vice President of Construction with Devcon Corporation, a hotel construction company. From 1982 to 1985, Mr. Bernardo was Project Superintendent with J.R. Trueman and Associates, a hotel construction company, and a subsidiary of Red Roof Inns, where his responsibilities included supervision of the development and construction of several Red Roof Inns. Salomon J. Dayan, M.D. has been a director of the Company since August 1996. Since 1980, Dr. Dayan, a physician certified in internal and geriatric medicine, has been the Chief Executive Officer of Salomon J. Dayan Ltd., a multi-specialty medical group which he founded and which is dedicated to the care of the elderly in hospital and nursing home settings. Since 1986, Dr. Dayan has been the Medical Director and Executive Director of Healthfirst, a corporation which operates multiple medical ambulatory facilities in the Chicago, Illinois area, and since 1994 he has also been an assistant professor at Rush Medical Center in Chicago. Dr. Dayan is currently the Chairman of the Board of Directors of Greater Chicago Financial Corporation, a bank holding company owning interest in two banks. Dr. Dayan also has numerous investments in residential and commercial real estate. Richard A. Chaifetz has been a director of the Company since August 1997. Dr. Chaifetz has been Chairman, President and Chief Executive Officer of ComPsych Behavioral Health Corporation since its inception in 1987. ComPsych is a leading domestic and international provider of employee assistance and managed behavioral health services to corporate America. Dr. Chaifetz, a licensed psychologist, is also a majority shareholder in several other health care and service companies. In addition, Dr. Chaifetz is a member of the board of directors of several private and not-for-profit organizations. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the annual and long-term compensation for services as officers to the Company for the fiscal years ended December 31, 1997, 1996 and 1995, of those persons who were, at December 31, 1997 (i) the Chairman of the Board of Directors, (ii) the chief executive officer, and (iii) the other two most highly compensated executive officers of the Company (the "Named Officers"). See "Compensation of Directors" under Item 11.
SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Restricted Securities Name and Principal Stock Underlying All Other Position Year Salary Bonus Awards Options(#)(1) Compensation(2) H. Andrew Torchia (3) 1997 $ - $ - $ - - $ 15,000 Chairman of the Board 1996 - - - - 15,000 1995 - - - 120,000 15,000 Michael P. Holtz 1997 334,615 - - 50,000 12,375 President and Chief 1996 375,000 - - - 10,000 Executive Officer 1995 322,115 - 196,927 360,000 10,000 Russell J. Cerqua 1997 165,577 10,000 - 15,625 12,369 Executive Vice President 1996 160,000 - - - 10,000 Finance, Secretary, Treasurer 1995 149,423 - 56,690 153,333 10,000 and Chief Financial Officer Richard A. D'Onofrio (3) 1997 15,000 - - - 373,136 Executive Vice President 1996 144,000 36,000 - - 15,000 1995 137,500 27,500 - 120,000 15,000 (1) All options were fully vested as of December 31, 1997. (2) Represents life insurance premiums paid by the Company on behalf of the Named Officers. Amounts for 1997 include the Company's 401(k) matching contributions of $2,375 and $2,369 for Messrs. Holtz and Cerqua, respectively. The amount shown for Mr. D'Onofrio in 1997 represents the amount paid pursuant to the terms of his termination agreement. (3) Mr. Torchia, Chairman of the Board and a Director of the Company, received no annual compensation for services as an officer of the Company in 1995, 1996 or 1997. For a discussion of the fees paid to Urban, a hotel development consulting firm in which Mr. Torchia owns a 51% interest and Mr. D'Onofrio owns a 49% interest, pursuant to a consulting agreement between the Company and Urban which was terminated in 1997, see "Certain Transactions."
BONUS PLANS In April of each year, the Company has issued restricted Common Stock to its employees as an incentive for their continued employment. The Company's management determines those employees who are entitled to receive such Common Stock bonus. During 1997, the Company issued 9,350 shares of Common Stock, none of which were issued to the Named Officers reflected above. STOCK OPTIONS The following table summarizes the number and terms of stock options granted to each of the Named Officers during the year ended December 31, 1997. OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term % of Total Options Granted to Exercise or Options Employees in Base Price Expiration Name Granted(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($) Michael P. Holtz 50,000 27.61% $1.53 Feb. 2007 391,745 669,138 Russell J. Cerqua 15,625 8.63% $1.53 Feb. 2007 122,420 209,106
The following table provides information concerning the exercise of stock options during 1997, and the year-end value of unexercised options for each of the Named Officers of the Company. OPTION EXERCISES AND YEAR-END VALUE TABLE
Number of Unexercised Value of Unexercised Shares Options Held at in-the-Money Options at Acquired Value December 31, 1997 December 31, 1997 (1) Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable H. Andrew Torchia 110,000 $ 222,844 185,063 - $ 359,461 $ - Michael P. Holtz 110,000 222,844 470,000 - 877,188 - Russell J. Cerqua 44,375 93,625 198,958 - 377,168 - Reno J. Bernardo 44,375 93,625 1,000 1,000 - - Salomon J. Dayan - - 31,000 1,000 - - Richard A. Chaifetz - - - 1,000 - - Richard A. D'Onofrio 110,000 198,469 183,688 - 357,570 - _______________ (1) The closing sale price of the Company's Common Stock on such date on the Nasdaq National Market was $5.75.
EMPLOYMENT AGREEMENTS The Company's two executive officers, Michael P. Holtz, President and Chief Executive Officer, and Russell J. Cerqua, Secretary, Treasurer, Executive Vice President of Finance and Chief Financial Officer, provide services to the Company under the terms of employment agreements dated January 1, 1995 and amended February 4, 1997. Mr. Holtz's annual base compensation for 1997 was reduced to $325,000 from $425,000 pursuant to an amendment dated February 4, 1997. On April 22, 1997, Mr. Holtz exercised his option to renew his agreement for an additional three- year period ending December 31, 2000. On January 1, 1998, Mr. Holtz received options to purchase a minimum of 364,100 shares of the Company's common stock at the market price on date of issuance under the Company's 1996 Omnibus Incentive Stock Plan, of which 110,000 vested immediately, 121,000 will vest on January 1, 1999 and 133,100 will vest on January 1, 2000. In December of each year, the Compensation Committee will determine (i) a performance bonus to be paid for the then-current year and (ii) Mr. Holtz's base salary for the following year, which base salary will not be less than Mr. Holtz's then-existing base salary. In lieu of the 40,000 shares of common stock Mr. Holtz was to receive in April 1997 under the terms of his employment agreement, Mr. Holtz received non-qualified options to purchase 50,000 shares of the Company's common stock at an exercise price of $1.53. Under the terms of the amended employment agreement, all stock awards were eliminated. Mr. Cerqua's annual base cash compensation for 1997 was reduced to $165,000 from $175,000 pursuant to an amendment dated February 4, 1997. His agreement was extended for a two-year period ending December 31, 1999. On January 1, 1998, Mr. Cerqua received options to purchase 115,500 shares of the Company's common stock at the market price on date of issuance under the Company's 1996 Omnibus Incentive Stock Plan of which 55,000 vested immediately and 60,500 will vest on January 1, 1999. In December of each year, the Compensation Committee will determine (i) a performance bonus to be paid for the then-current year and (ii) Mr. Cerqua's base salary for the following year, which base salary will not be less than Mr. Cerqua's then-existing base salary. In lieu of the 12,500 shares of common stock Mr. Cerqua was to receive in April 1997 under the terms of his employment agreement, Mr. Cerqua received non-qualified options to purchase 15,625 shares of the Company's common stock at an exercise price of $1.53. Under the terms of the amended employment agreement, all stock awards were eliminated. Each employment agreement entitles the executive officer to receive severance payments, equal to two years' compensation with regard to Mr. Holtz and one year's compensation with regard to Mr. Cerqua, if his employment is terminated by the Company without cause or if he elects to terminate such employment for a "good reason," including a change of control of the Company. For purposes of the employment agreements, a change of control means (i) any change in the Company's Board of Directors such that a majority of the Board of Directors is composed of members who were not members of the Board of Directors on the date the employment agreements were made or (ii) removal of the executive from membership on the Board of Directors by a vote of a majority of the shareholders of the Company or failure of the Board of Directors to nominate the executive for re-election to Board membership. Each executive officer is also entitled to severance payments, equal to one year's compensation with regard to Mr. Holtz and six month's compensation with regard to Mr. Cerqua, if he voluntarily terminates his employment with the Company for a reason other than a "good reason" and provides appropriate notice of such resignation. In January 1997, Mr. D'Onofrio resigned from his positions as Executive Vice President and a director of the Company. In connection therewith, Mr. D'Onofrio continued to receive his salary until the end of 1997 and received a lump-sum severance payment of $195,000. COMPENSATION OF DIRECTORS Each nonemployee Director of the Company received an annual retainer fee of $9,000 ($750 per month) in 1997. Each nonemployee Director of the Company also received $250 for each Board of Directors meeting attended in person, $150 for each Board of Directors meeting conducted by telephone and $150 for each committee meeting. Each Director is reimbursed for all out-of-pocket expenses related to attendance at Board meetings. Mr. Torchia, a Director of the Company, also indirectly received fees through a consulting agreement between the Company and Urban which was terminated as of January 31, 1997. Under the terms of the consulting agreement, Urban had received a monthly consulting fee of $20,000 for the provision of business development services to the Company. The Company also paid Urban $74,050 in additional fees in 1997, for transactions brought to the Company prior to the termination of the consulting agreement. See "Certain Relationships and Related Transactions" under Item 13. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 27, 1998, by (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's Directors, (iii) each of the Named Officers and (iv) all Directors and executive officers as a group.
Shares Beneficially Owned As of March 27, 1998 Name Number Percent Michael P. Holtz 786,907 (1) 11.6% H. Andrew Torchia (6) 667,801 (1)(2) 10.4 Wellington Management Company 600,000 (3) 9.7 Massachusetts Financial Services Company 517,000 (4) 8.3 Dimensional Fund Advisors, Inc. 372,100 (5) 6.0 Salomon J. Dayan 311,659 (1) 4.9 Russell J. Cerqua 312,413 (1) 4.8 Richard A. Chaifetz 83,800 (1) 1.4 Reno J. Bernardo 53,612 (1) 0.9 ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (6 PERSONS) 2,216,192 29.9% (1) Includes shares subject to options exercisable presently or within 60 days as follows: Mr. Holtz, 580,000 shares, Mr. Torchia, 218,750 shares (including options for 68,750 shares owned by Urban 2000 Corp., see (2) below), Mr. Cerqua, 253,958 shares, Dr. Dayan, 156,676 shares, and Mr. Bernardo, 2,000 shares. (2) Includes 375,832 shares owned by Urban 2000 Corp., options to purchase 68,750 shares owned by Urban which are exercisable presently or within 60 days, and 7,676 shares owned by Niles 1290 Corp., a wholly-owned subsidiary of Urban 2000 Corp. Mr. Torchia is the President and 51% stockholder of Urban 2000 Corp. Mr. Torchia disclaims beneficial ownership of all but an aggregate of 195,589 shares and options exercisable into 35,063 shares owned directly, or indirectly, by Urban. (3) Based upon information provided in its Schedule 13G dated January 12, 1998, Wellington Management Company ("WMC"), in its capacity as investment advisor, may be deemed beneficial owner of 600,000 shares of the Company which are owned by numerous investment counselling clients. Of the shares shown above, WMC has shared voting power for 520,000 shares and shared investment power for 600,000 shares. (4) Based upon information provided in its Schedule 13G dated February 12, 1998, Massachusetts Financial Services Company ("MFS"), in its capacity as investment manager, may be deemed beneficial owner of 517,000 shares of the Company which are also beneficially owned by MFS Series Trust II - MFS Emerging Growth Stock Fund, shares of which are owned by numerous investors. MFS has sole voting and investment power for the 517,000 shares. (5) Based upon information provided in its Schedule 13G dated February 9, 1998, Dimensional Fund Advisors, Inc. ("DFA"), in its capacity as investment advisor, may be deemed beneficial owner of 372,100 shares of the Company which are owned by numerous investment counselling clients. Of the shares shown above, DFA has shared voting power for 127,600 shares and sole investment power for 372,100 shares. (6) The address of this stockholder is c/o Amerihost Properties, Inc., 2400 East Devon, Suite 280, Des Plaines, Illinois.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Urban 2000 Corp. ("Urban") is owned 51% by H. Andrew Torchia, the Chairman of the Board of Directors of the Company. Urban, a hotel development consulting firm, and Mr. Torchia provided business development and consulting services to the Company under a consulting agreement (the "Consulting Agreement") with Urban. Under the terms of the Consulting Agreement, Urban received (i) a monthly consulting fee of $20,000, (ii) a residual fee based on the management fees the Company received from management arrangements or relationships which resulted from contacts initiated for the Company by Urban and (iii) transaction fees, based on an established fee schedule and consistent with industry practice, for transactions introduced by Urban. The Company also provided Urban with use of the Company's telephone system. No additional amounts were paid to Urban for the reimbursement of expenses. As part of this arrangement, Mr. Torchia did not receive compensation for the services he provides to the Company, other than warrants and other non-cash compensation for his services as Chairman. During 1995 and 1996, Urban received an annual consulting fee of $240,000 plus aggregate additional fees of $236,138 and $206,154, respectively, from the Company and received $82,400, in 1995 in other transactional fees directly from joint ventures in which the Company is a general partner. The Consulting Agreement was terminated as of January 31, 1997. Urban received the $20,000 consulting fee for January 1997 and additional fees of $74,050 during 1997 for projects which were in process at the time of the termination. In addition, Urban received in 1997 a payment of $1,289,141 in connection with the termination of the Consulting Agreement. In December 1994, two of the Company's officers executed notes in the amount of $956,292 to the Company for the purchase of a note and related receivables which the Company had received in connection with the acquisition of seven management contracts in 1992, and 165,784 shares of the Company's common stock which was held as collateral on the note. The officer notes provided for the accrual of interest at 8% per annum, with the principal balance and all accrued interest due December 31, 1997 and were collateralized by a total of 273,369 shares of the Company's Common Stock. These notes receivable and related interest receivable were repaid by the officers in 1997 with 185,023 shares of the Company's common stock. In the past, certain of the Company's directors and executive officers have, directly or indirectly, invested in joint ventures with the Company. For example, Mr. Torchia, through Urban, has invested an aggregate of approximately $157,000 as limited partners and approximately $49,000 as a general partner in four joint ventures since 1991. In addition, Dr. Dayan, a director of the Company, has invested approximately $1.6 million in seven joint ventures since 1988. Dr. Dayan and each of the Company's directors and executive officers who have made such investments have done so on the same terms as all other investors in such joint ventures. In addition to his investments in certain joint ventures, Dr. Dayan also holds an interest in a mortgage on one of the joint ventures. The mortgage, which has been in place since 1989, (i) has a current outstanding balance of approximately $460,000, (ii) bears interest at an annual rate of prime plus 4% (with a minimum annual interest rate of 12%), and (iii) is payable in monthly installments through 1999. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. Financial Statements: The following consolidated financial statements are filed as part of this Report on Form 10-K for the fiscal year ended December 31, 1997. (a)(1) Financial Statements: Report of Independent Certified Public Accountants F-1 Consolidated Balance Sheets at December 31, 1997 and 1996 F-2 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 F-6 Notes to Consolidated Financial Statements F-8 (a)(2) Financial Statement Schedules: No financial statement schedules are submitted as part of this report because they are not applicable or are not required under regulation S-X or because the required information is included in the financial statements or notes thereto. (a)(3) 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 Amerihost Properties, Inc. 3.2 By-laws of Amerihost Properties, Inc. 4.2 Specimen Common Stock Purchase Warrant for Employees 4.3 Specimen 7% Subordinated Note 4.4 Specimen Common Stock Purchase Warrant for 7% Subordinated Noteholders 4.5 Form of Registration Rights Agreement for 7% Subordinated Noteholders The following exhibits were included in the Registrant's Amendment No. 1 to Form S-2 filed on July 3, 1996, and are incorporated by reference herein: Exhibit No. Description 10.4 Employment Agreement between Amerihost Properties, Inc. and Michael P. Holtz 10.6 Employment Agreement between Amerihost Properties, Inc. and Russell J. Cerqua The following exhibits were included in the Registrant's Proxy Statement for Annual Meeting of Shareholders filed on July 25, 1996, and are incorporated by reference herein: Exhibit No. Description 10.2 1996 Omnibus Incentive Stock Plan (Annex A) 10.3 1996 Stock Option Plan for Nonemployee Directors (Annex B) The following exhibits were included in the Registrant's Report on Form 10-K filed March 24, 1997; and are incorporated herein by reference: Exhibit No. Description 10.7 Urban 2000 Corp. Termination Agreement 10.8 Richard A. D'Onofrio Termination Agreement 10.9 Amendment of Employment Agreement between Amerihost Properties, Inc. and Michael P. Holtz 10.10 Amendment of Employment Agreement between Amerihost Properties, Inc. and Russell J. Cerqua The following exhibits are included in this Report on Form 10-K filed March 31, 1998: Exhibit No. Description 21.1 Subsidiaries of the Registrant 23.1 Consent of BDO Seidman, LLP 27.0 Financial Data Schedule Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended December 31, 1997. 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. AMERIHOST PROPERTIES, INC. By: /s/ Michael P. Holtz Michael P. Holtz Chief Executive Officer By: /s/ Russell J. Cerqua Russell J. Cerqua Chief Financial Officer By: /s/ James B. Dale James B. Dale Vice President Finance/ Corporate Controller March 31, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ H. Andrew Torchia /s/ Michael P. Holtz H. Andrew Torchia, Director Michael P. Holtz, Director March 31, 1998 March 31, 1998 /s/ Reno J. Bernardo /s/ Richard A. Chaifetz Reno J. Bernardo, Director Richard A. Chaifetz, Director March 31, 1998 March 31, 1998 /s/ Salomon J. Dayan Salomon J. Dayan, Director March 31, 1998 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Board of Directors of Amerihost Properties, Inc. We have audited the accompanying consolidated balance sheets of Amerihost Properties, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amerihost Properties, Inc. and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. BDO Seidman, LLP Chicago, Illinois March 26, 1998 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 2,349,503 $ 3,029,039 Accounts receivable (including $1,375,936 and $3,119,905 from related parties) 3,440,241 5,083,973 Notes receivable, current portion (including $35,000 in 1996 from related parties) (Note 2) 1,459,986 187,816 Prepaid expenses and other current assets 209,779 223,136 Refundable income taxes 2,342,734 30,629 Costs and estimated earnings in excess of billings on uncompleted contracts (including $1,913,103 and $2,048,259 with related parties) (Note 3) 1,913,103 2,083,259 Total current assets 11,715,346 10,637,852 Investments in and advances to unconsolidated hotel joint ventures (Notes 4 and 6) 5,319,689 4,036,207 Property and equipment (Notes 6, 7 and 13): Land 10,365,676 7,334,562 Buildings 49,156,742 27,885,463 Furniture, fixtures and equipment 15,366,291 10,984,572 Construction in progress 3,549,408 4,709,064 Leasehold improvements 1,223,206 2,404,060 79,661,323 53,317,721 Less accumulated depreciation and amortization 9,345,991 7,481,889 70,315,332 45,835,832 Notes receivable, less current portion (Note 2) 1,355,395 2,710,615 Other assets (including deferred income taxes of $171,000 at December 31, 1996), net of accumulated amortization of $4,255,609 and $3,240,829 (Notes 5 and 9) 3,962,336 3,680,650 5,317,731 6,391,265 $ 92,668,098 $ 66,901,156
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1997 1996 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 4,780,444 $ 5,293,184 Bank line-of-credit (Note 6) 1,289,709 1,707,424 Accrued payroll and related expenses 1,004,265 935,120 Accrued real estate and other taxes 885,610 685,796 Other accrued expenses and current liabilities 843,805 828,596 Current portion of long-term debt (Note 7) 5,119,194 1,554,200 Total current liabilities 13,923,027 11,004,320 Long-term debt, net of current portion (Note 7) 55,116,028 32,785,108 Deferred income taxes (Note 9) 108,000 - Deferred income 927,444 630,899 Commitments (Notes 8, 12 and 13) Minority interests 1,000,740 1,569,200 Shareholders' equity (Notes 8 and 12): Preferred stock, no par value; authorized 100,000 shares; none issued - - Common stock, $.005 par value; authorized 25,000,000 shares; issued and outstanding 6,212,925 shares at December 31, 1997, and 6,036,921 shares at December 31, 1996 31,065 30,185 Additional paid-in capital 17,860,655 17,170,154 Retained earnings 4,138,014 5,104,457 22,029,734 22,304,796 Less: Stock subscriptions receivable (Note 8) (436,875) (436,875) Notes receivable (Note 8) - (956,292) 21,592,859 20,911,629 $ 92,668,098 $ 66,901,156
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995 Revenue (Note 10): Hotel operations: AmeriHost Inn hotels $ 14,655,498 $ 8,526,923 $ 876,025 Other hotels 17,223,293 22,088,368 23,483,974 Development and construction 14,639,746 22,937,267 12,238,128 Management services 3,023,944 2,784,031 3,010,935 Employee leasing 13,123,035 12,005,759 12,353,355 62,665,516 68,342,348 51,962,417 Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 10,735,219 4,908,624 644,900 Other hotels 12,988,297 16,180,182 16,420,141 Development and construction 13,719,250 19,651,500 10,117,782 Management services 2,043,526 1,930,229 2,003,310 Employee leasing 12,798,585 11,689,461 12,131,262 52,284,877 54,359,996 41,317,395 10,380,639 13,982,352 10,645,022 Depreciation and amortization 4,532,500 3,478,878 2,268,181 Leasehold rents - hotels (Note 13) 1,728,933 2,121,876 1,976,154 Corporate general and administrative 2,139,647 1,928,134 2,110,939 Operating income 1,979,559 6,453,464 4,289,748 Other income (expense): Interest expense (4,053,933) (2,767,828) (1,755,745) Interest income 755,115 625,386 560,724 Other income 136,018 141,941 44,099 Equity in net income and losses of affiliates (516,583) 809,443 387,439 Gain on sale of assets 1,697,999 907,105 - Non-recurring expenses (Note 16) (1,874,492) (403,657) - Income (loss) before minority interests and income taxes (1,876,317) 5,765,854 3,526,265 Minority interests in operations of consolidated subsidiaries and partnerships 172,874 (13,200) (59,173) Income (loss) before income taxes (1,703,443) 5,752,654 3,467,092 Income tax benefit (expense) (Note 9) 737,000 (2,358,000) (1,329,000) Net income (loss) $ (966,443) $ 3,394,654 $ 2,138,092 Net income (loss) per share: Basic $ (0.15) $ 0.57 $ 0.37 Diluted $ (0.19) $ 0.49 $ 0.34
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Stock subscrip- Common stock Additional Retained tions Total paid-in earnings and notes shareholders' Shares Amount capital (Deficit) receivable equity BALANCE AT JANUARY 1, 1995 5,570,013 $ 27,850 $ 15,465,891 $ (428,289) $ (1,393,167) $ 13,672,285 Shares issued for compensation and investment 407,200 2,036 1,454,346 - - 1,456,382 Net income for the year ended December 31, 1995 - - - 2,138,092 - 2,138,092 BALANCE AT DECEMBER 31, 1995 5,977,213 29,886 16,920,237 1,709,803 (1,393,167) 17,266,759 Shares issued for compensation and investment 10,583 53 47,194 - - 47,247 Exercise of common stock warrants 49,125 246 202,723 - - 202,969 Net income for the year ended December 31, 1996 - - - 3,394,654 - 3,394,654 BALANCE AT DECEMBER 31, 1996 6,036,921 30,185 17,170,154 5,104,457 $ (1,393,167) 20,911,629 Shares issued for compensation 9,350 47 49,092 - - 49,139 Exercise of common stock options 508,750 2,544 2,259,281 - - 2,261,825 Acquisition of common stock (157,073) (786) (1,094,964) - - (1,095,750) Compensation recognized relating to employee stock options granted - - 301,465 - - 301,465 Tax benefit relating to the exercise of non-qualified options - - 356,533 - - 356,533 Repayment of notes receivable from officers (Note 8) (185,023) (925) (1,180,906) - 956,292 (225,539) Net loss for the year ended December 31, 1997 - - - (966,443) - (966,443) BALANCE AT DECEMBER 31, 1997 6,212,925 $ 31,065 $ 17,860,655 $4,138,014 $ (436,875) $ 21,592,859
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995 Cash flows from operating activities: Cash received from customers $ 65,006,272 $ 68,751,159 $ 49,673,144 Cash paid to suppliers and employees (57,063,416) (57,127,365) (44,715,078) Interest received 546,889 546,369 491,749 Interest paid (3,994,403) (2,665,921) (1,660,803) Income taxes refunded (paid) (939,572) (1,946,099) (1,870,727) Contract and employment termination costs (1,697,448) - - Net cash provided by operating activities 1,858,322 7,558,143 1,918,285 Cash flows from investing activities: Distributions, and collections on advances, from affiliates 2,274,863 6,609,091 1,848,911 Purchase of property and equipment (29,343,109) (14,049,010) (12,539,148) Purchase of investments in, and advances to, minority owned affiliates (4,658,738) (4,471,603) (2,665,272) Acquisitions of partnership interests, net of cash acquired 156,067 (580,809) 74,124 Increase in notes receivable (6,000) (51,464) - Collections on notes receivable 139,050 49,455 42,114 Preopening and management contract costs (416,195) (488,280) (316,926) Proceeds from sale of assets 3,390,576 1,762,221 - Proceeds from sale of investments - - 55,000 Other - (127,058) (5,000) Net cash used in investing activities (28,463,486) (11,347,457) (13,506,197) Cash flows from financing activities: Proceeds from issuance of long-term debt 34,813,511 8,822,046 8,478,903 Principal payments on long-term debt (8,880,899) (2,367,671) (724,709) Proceeds from line of credit 14,832,285 12,433,212 4,461,182 Repayment on line of credit (15,250,000) (13,042,824) (2,144,146) Decrease in minority interest (578,300) (197,000) (138,069) Proceeds from issuance of common stock 1,166,075 202,969 - Aborted stock offering and merger costs (177,044) (403,657) - Net cash provided from financing activities 25,925,628 5,447,075 9,933,161 Net increase (decrease) in cash (679,536) 1,657,761 (1,654,751) Cash and cash equivalents, beginning of year 3,029,039 1,371,278 3,026,029 Cash and cash equivalents, end of year $ 2,349,503 $ 3,029,039 $ 1,371,278
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1997 1996 1995 Reconciliation of net income (loss) to net cash provided by operating activities: Net income (loss) $ (966,443) $ 3,394,654 $ 2,138,092 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,532,500 3,478,878 2,268,181 Equity in net (income) loss of affiliates and amortization of deferred income 516,583 (809,443) (387,439) Minority interests in net income of subsidiaries (172,874) 13,200 59,173 Amortization of deferred interest and loan discount 39,760 39,760 39,760 Bad debt expense 200,000 - - Compensation recognized through issuance of common stock and common stock options 350,604 30,210 212,843 (Gain) loss on sale of investments, property and equipment (1,697,999) (907,105) 18,585 Aborted stock offering and merger costs 177,044 403,657 - Deferred income taxes 279,000 212,000 104,000 Changes in assets and liabilities, net of effects of acquisitions: Decrease (increase) in accounts receivable 1,613,450 (1,797,183) (519,695) (Increase) decrease in prepaid expenses and other current assets (188,264) (107,006) 251,305 (Increase) decrease in refundable income taxes (1,955,572) 199,901 (230,530) Decrease (increase) in costs and estimated earnings in excess of billings 170,156 1,817,620 (1,895,605) Increase in other assets (1,137,535) (604,246) (547,318) (Decrease) increase in accounts payable (557,958) 1,506,912 471,881 Decrease in income taxes payable - - (415,197) Increase in accrued payroll and other accrued expenses and current liabilities 220,601 383,277 300,700 Increase in accrued interest 14,137 56,514 49,549 Increase in deferred income 421,132 246,543 - Net cash provided by operating activities $ 1,858,322 $ 7,558,143 $ 1,918,285
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization: Chicagoland Concessions, Inc. (the "Company") was incorporated under the laws of Delaware on September 19, 1984, to operate concession stands in the Chicago metropolitan area. On September 19, 1985, the Company changed its name to America Pop, Inc. In December, 1986, the Company ceased its operations of all concession stand facilities and during 1987, repositioned itself into hotel/motel development, construction and ownership/operation. In order to more appropriately reflect the nature of the Company's business, on August 21, 1987, the Company changed its name to Amerihost Properties, Inc. 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 ownership interest. All significant intercompany accounts and transactions have been eliminated. Construction accounting: Development fee revenue from construction/renovation projects is recognized using the percentage-of-completion method over the period beginning with the execution of contracts and ending with the commencement of construction/renovation. Construction fee revenue from construction/renovation projects 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. Cash equivalents: The Company considers all investments with an initial maturity of three months or less to be cash equivalents. Concentrations of credit risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, accounts receivable and notes receivable. The Company invests temporary cash balances in financial instruments of highly rated financial institutions generally with maturities of less than three months. A substantial portion of accounts receivable are from hotels located in the midwestern United States, where collateral is generally not required, and from hotel operators for the development and construction of hotels pursuant to written contracts. 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Fair values of financial instruments: The carrying values reflected in the consolidated balance sheet at December 31, 1997 reasonably approximate the fair values for cash and cash equivalents, accounts and contracts receivable and payable, and variable rate long-term debt. The majority of the notes receivable are collateralized by shares of the Company's common stock, investments in hotels, a second mortgage on a hotel property, and personal guarantees. Construction/renovation and working capital notes are repaid to the Company within a relatively short period after their origination. The notes receivable bear interest at rates approximating the current market rates and the carrying value approximates their fair value. The Company estimates that the fair value of its fixed rate long-term debt at December 31, 1997 approximates the carrying value considering the property specific nature of the notes and in certain cases, the subordinated nature of the debt. In making such assessments, the Company considered the current rate at which the Company could borrow funds with similar remaining maturities and discounted cash flow analyses as appropriate. Investments: Investments in entities in which the Company has a non-majority ownership interest are accounted for using the equity method, under which method the original investment is increased (decreased) by the Company's share of earnings (losses), and is reduced by dividends or distributions when received. Property and equipment: Property and equipment are stated at cost. Repairs and maintenance are charged to expense as incurred and renewals and betterments are capitalized. Depreciation is being provided for assets placed in service, principally by use of the straight-line method over their estimated useful lives. Leasehold improvements are being amortized by use of the straight-line method over the term of the lease. Construction period interest in the amount of $548,469, $167,433 and $119,749 was capitalized in 1997, 1996 and 1995, respectively, and is included in property and equipment. For each classification of property and equipment, depreciable periods are as follows: Building 31.5-39 years Furniture, fixtures and equipment 5-7 years Leasehold improvements 3-10 years Other assets: Investment in leases: Investment in leases represents the amounts paid for the acquisition of leasehold interests for certain hotels. These costs are being amortized by use of the straight-line method over the terms of the leases. Costs of management contracts acquired and preopening costs: The costs of management contracts acquired includes amounts paid to acquire hotel management contracts. Preopening costs include hiring, training, and other costs incurred in connection with new hotel openings and new management contracts. These amounts are being amortized by use of the straight-line method over periods ranging from two to five years. Deferred loan costs: Deferred loan costs represent the costs incurred in issuing the 7% subordinated notes and other mortgage notes. These costs are being amortized by use of the interest method over the life of the debt. Franchise fees: Franchise fees represent the initial franchise fees paid to franchisors for certain hotels and are being amortized by use of the straight-line method over the terms of the franchise licenses, ranging from 10 to 20 years. Deferred income: Deferred income represents that portion of development, construction and renovation fees earned from entities in which the Company holds an ownership interest. The portion of fees deferred is equal to the Company's proportional ownership interest in the entity. The balance of the fees are recorded in income as earned. The deferred income is being amortized over the life of the operating assets owned by the affiliated entity. Also included in deferred income is the unamortized portion of loan fees collected from a loan made to an unaffiliated party in connection with the acquisition of management contracts. The loan fees are being amortized into interest income over the life of the loan. 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 depreciation of property and equipment and deferred income. Earnings per share: In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement No. 128, "Earnings Per Share" (FAS 128). FAS 128 replaced the calculation of primary and fully diluted earnings per share ("EPS") with basic and diluted EPS. Unlike primary EPS, basic EPS excludes any dilutive effects of options, warrants and convertible securities. Diluted EPS is very similar to fully diluted EPS. All EPS amounts presented have been restated, as applicable, to conform with the new requirements. The calculation of basic and diluted earnings per share for each of the three years ended December 31 is as follows:
1997 1996 1995 Net income $ (966,443) $ 3,394,654 $ 2,138,092 Impact of convertible partnership interests (325,291) (71,699) - $ (1,291,734) $ 3,322,955 $ 2,138,092 Average common shares outstanding 6,282,874 6,007,597 5,838,594 Dilutive effect of: Convertible partnership interests 376,225 111,042 6,615 Stock options - 720,568 525,837 Dilutive common shares outstanding 6,659,099 6,839,207 6,371,046 Earnings per share: Basic $ (0.15) $ 0.57 $ 0.37 Diluted $ (0.19) $ 0.49 $ 0.34
Advertising: The costs of advertising, promotion and marketing programs are charged to operations in the year incurred. These costs were approximately $899,000, $686,000 and $462,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and reported amounts of revenue and expenses during the reported periods. Actual results may differ from those estimates. Reclassifications: Certain reclassifications have been made to the 1995 and 1996 financial statements in order to conform to the 1997 presentation. Asset impairments: 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 a permanent impairment exists. If a permanent 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. Impact of New Accounting Standards: In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income" ("SFAS 130") and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). Each of the new statements is effective for periods beginning after December 15, 1997, and requires that certain additional information be reported in the financial statements and related notes. The Company will adopt SFAS 130 in the first quarter of 1998 and expects to provide the segment disclosures required by SFAS 131 in its 1998 Annual Report to Shareholders. The impact of these new standards will not be material. 2. NOTES RECEIVABLE:
Notes receivable consists of: 1997 1996 Diversified Innkeepers, Inc. (a) $ 1,316,495 $ 1,421,804 Mortgage note receivable (b) 1,353,886 1,396,627 Other notes 145,000 80,000 2,815,381 2,898,431 Less current portion 1,459,986 187,816 Notes receivable, less current portion $ 1,355,395 $ 2,710,615 (a) In connection with the purchase of management contracts from Diversified Innkeepers, Inc. in 1991, the Company executed notes to provide financing to the shareholders of Diversified in the amount of $1,500,000, collateralized by 125,000 shares of the Company's common stock, a limited partnership interest in a hotel, a second mortgage on another hotel property, and a personal guarantee by the shareholders. The note was modified in October 1995, providing for monthly payments of $16,250, including interest at the rate of 10% per annum, and is due the earlier of the termination of the related management contracts or September 30, 2000. (b) Promissory note receivable which was received in connection with the sale of the Days Inn Bowling Green, Ohio. The note provides for monthly payments of $15,040 including interest at the rate of 10% per annum. The note is due on October 6, 1998 and is collateralized by a mortgage on the Days Inn Bowling Green, Ohio.
3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS: Information regarding contracts-in-progress is as follows at December 31, 1997 and 1996:
1997 1996 Costs incurred on uncompleted contracts $ 4,761,447 $ 7,362,250 Estimated earnings 1,345,196 2,434,673 6,106,643 9,796,923 Less billings to date 4,193,540 7,713,664 Costs and estimated earnings in excess of billings on uncompleted contracts $ 1,913,103 $ 2,083,259
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES: The Company has ownership interests, ranging from 10% to 50%, in general partnerships, limited partnerships and limited liability companies formed for the purpose of owning and operating hotels. These investments are accounted for using the equity method. The Company had investments in 43 hotels at December 31, 1997 with a total balance of $623,751, and investments in 37 hotels at December 31, 1996 with a total balance of $1,595,858. 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 and mortgage financing. The advances were $4,695,938 and $2,440,349 at December 31, 1997 and 1996, respectively, and are included in investment in and advances to unconsolidated hotel joint ventures on the accompanying balance sheets. During 1996, the Company acquired additional partnership interests in two hotels which resulted in these hotels being 100% or majority owned by the Company subsequent to the acquisition dates. The following is a summary of the acquisitions: 1996 Fair value of assets acquired $ 3,459,301 Cash paid and redemption of note receivable (547,558) Liabilities assumed $ 2,911,743 The following represents unaudited condensed financial information for all of the Company's investments in affiliated companies accounted for under the equity method at December 31, 1997, 1996 and 1995.
1997 1996 1995 Current assets $ 4,338,114 $ 3,893,360 $ 3,135,884 Noncurrent assets 88,712,619 86,363,804 55,760,025 Current liabilities 4,939,989 5,060,920 5,137,164 Noncurrent liabilities 75,359,216 64,218,232 39,676,033 Equity 12,751,528 20,978,012 14,082,712 Gross revenue 33,427,950 28,990,672 31,128,888 Gross operating profit 12,100,004 13,175,668 12,137,897 Depreciation and amortization 6,025,447 4,296,057 3,591,929 Net income (loss) (2,042,178) 1,585,133 2,337,969
5. OTHER ASSETS: Other assets, net of accumulated amortization, at December 31, 1997 and 1996 are comprised of the following:
1997 1996 Franchise fees and other assets $ 1,551,142 $ 1,167,221 Management contracts and preopening costs 1,032,176 907,404 Deferred loan costs 885,732 728,866 Investment in leases 493,286 706,159 Deferred income taxes (Note 9) - 171,000 Total $ 3,962,336 $ 3,680,650
6. BANK LINE-OF-CREDIT: The Company has a $10,000,000 bank operating line-of-credit, of which $1,289,709 and $1,707,424 was outstanding at December 31, 1997 and 1996, respectively. The operating line-of-credit (i) is collateralized by a security interest in certain of the Company's assets, including its interests in various joint ventures; (ii) bears interest at an annual rate equal to the bank's base lending rate (8.5% at December 31, 1997) plus one- half of one percent with a floor of 7.5%; and (iii) matures May 1, 1998. The line-of-credit note contains two financial covenants, one requiring a minimum of $18 million of net worth and the other which requires a debt to net worth ratio of not more than 3.0 to 1.0. At December 31, 1997 the debt to net worth ratio covenant was not met, however, the Company has obtained a waiver from the bank through the maturity date of May 1, 1998. 7. LONG-TERM DEBT:
Long-term debt consists of: 1997 1996 Mortgage notes maturing 1998 through 2017, with a weighted average effective interest rate of 9.24% $ 57,816,261 $ 31,407,030 7% Subordinated Notes ($2,250,000 face amount) due October 1999, with an effective interest rate of 9%, net of unamortized discount of $79,438 and $124,830 at December 31, 1997 and 1996, respectively 2,170,562 2,125,170 Other 248,399 807,108 60,235,222 34,339,308 Less current portion 5,119,194 1,554,200 $ 55,116,028 $ 32,785,108
The mortgage notes are collateralized by the related hotel properties. The notes generally provide for monthly payments of principal and interest based on loan amortization schedules, with interest at fixed rates ranging from 7.63% to 10.5% (weighted average interest rate of 8.98% at December 31, 1997), and floating rates ranging from prime plus 0.5% to prime plus 2.0% (weighted average interest rate of 9.42% at December 31, 1997). Construction loans of $1,984,526 at December 31, 1997 provide for interest only during the construction period and convert to long-term permanent mortgage notes upon completion of the hotels. Construction loans of $2,681,226 at December 31, 1996 converted to permanent mortgage notes during 1997. The construction loans have been included in the mortgage note balances at December 31, 1997 and 1996. Certain of the mortgage notes provide for financial covenants, principally minimum net worth requirements. The aggregate maturities of long-term debt, excluding construction loans, are approximately as follows:
Year Ending December 31, Amount 1998 5,119,000 1999 7,819,000 2000 2,794,000 2001 4,505,000 2002 10,751,000 Thereafter 27,263,000 $ 58,251,000
8. SHAREHOLDERS' EQUITY: Authorized shares: The Company's corporate charter authorizes 25,000,000 shares of Common Stock and 100,000 shares of Preferred Stock without par value. The Preferred Stock may be issued in series and the Board of Directors shall determine the voting powers, designations, preferences and relative participating optional or other special rights and the qualifications, limitations or restrictions thereof. Common Stock: The Company issued 9,350, 5,555, and 60,450 shares of Common Stock to employees in 1997, 1996 and 1995, respectively, as incentive bonuses. The Company recognized compensation expense of $49,139, $30,210, and $212,843 in 1997, 1996, and 1995, respectively. Dividend restrictions: Pursuant to the terms of the Company's subordinated notes (Note 7), no dividends may be paid on any capital stock of the Company until such notes have been paid in full. Stock options and warrants: In connection with a financial services agreement, the Company issued options to acquire 75,000 shares of common stock at an exercise price of $3.52 per share. These options were exercised in 1997. In connection with the issuance of debt, the Company has issued warrants for the purchase of common stock. At December 31, 1997, warrants to purchase 151,294 shares of common stock are outstanding with exercise prices ranging from $3.56 to $6.88 per share and are exercisable through January 2000. During 1996, 49,125 warrants were exercised at prices ranging from $4.00 to $6.88 per share. The Company has issued options to acquire shares of the Company's common stock to certain of its partners in various hotel joint ventures referred to in Note 4. At December 31, 1997, options to purchase 80,000 shares of common stock are outstanding with exercise prices ranging from $6.13 to $8.00 per share and are exercisable through April 2004. Limited partnership conversion: The Company is a general partner in five partnerships where the limited partners have the right at certain times and under certain conditions to convert their limited partnership interests into 376,225 shares of the Company's common stock. Stock subscriptions receivable: In connection with the Diversified transaction, the Company issued 125,000 stock options which were exercised in January 1993, in consideration for a secured promissory note in the amount of $436,875 with interest at 6.5% per annum. The total principal balance is due September 30, 1999, unless the stock is sold or the related management contracts are terminated, and is collateralized by limited partnership interests. This note receivable has been classified as a reduction of shareholders' equity on the accompanying balance sheets. Notes receivable: In December 1994, two of the Company's officers executed notes in the amount of $956,292 to the Company for the purchase of a note and related receivables which the Company had received in connection with the acquisition of seven management contracts in 1992, and 165,784 shares of the Company's common stock which was held as collateral on the note. The officer notes provided for interest to be accrued at 8% per annum, with the principal balance and all accrued interest due December 31, 1997 and were collateralized by a total of 273,369 shares of the Company's Common Stock. These notes receivable and related interest receivable were repaid by the officers in 1997 through the tender of 185,023 shares of the Company's common stock. 9. TAXES ON INCOME: The provisions for income taxes (benefit) in the consolidated statements of operation are as follows:
1997 1996 1995 Current $ (1,016,000) $ 2,146,000 $ 1,225,000 Deferred 407,000 212,000 220,000 Valuation allowance decrease (128,000) - (116,000) Income tax (benefit) expense $ (737,000) $ 2,358,000 $ 1,329,000
Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to a net deferred income tax asset (liability) relate to the following:
1997 1996 Deferred income recognized for tax purposes and deferred for financial reporting purposes $ 354,000 $ 244,000 Differences in the basis of property and equipment due to majority owned partner- ships consolidated for financial reporting purposes but not for tax purposes 648,000 664,000 1,002,000 908,000 Gain from installment sale recognized for financial reporting purposes and deferred for tax purposes (117,000) (121,000) Cumulative depreciation differences (993,000) (488,000) (1,110,000) (609,000) Valuation allowance - (128,000) Net deferred income tax asset (liability) $ (108,000) $ 171,000
The following reconciles income tax expense (benefit) at the federal statutory tax rate with the effective rate:
1997 1996 1995 Income taxes (benefit) at the federal statutory rate (34.0%) 34.0% 34.0% State taxes, net of federal tax benefit (1.8%) 7.0% 7.6% Decrease in valuation allowance (7.5%) - (3.3%) Effective tax rate (43.3%) 41.0% 38.3%
10. RELATED PARTY TRANSACTIONS: The following table summarizes related party revenue from various unconsolidated partnerships in which the company has an ownership interest:
1997 1996 1995 Development/acquisition revenue $ 14,268,017 $ 21,500,972 $ 9,316,810 Renovation revenue - - 83,925 Hotel management revenue 1,817,210 1,841,588 1,825,202 Employee leasing revenue 7,980,384 5,937,611 5,979,522 Interest income 335,172 366,545 250,086
In January 1991, the Company entered into an agreement with Urban 2000 Corp. ("Urban"), a company owned by the Chairman and another Officer/Director of the Company who resigned in 1997. This agreement provided for monthly payments to Urban of $20,000 for business development consulting services. No additional amounts were paid to Urban for reimbursement of expenses. Consistent with its standard industry practice, the Company also paid additional fees for transactions brought to the Company by Urban. Urban received $74,050, $206,154 and $236,138 in transaction fees from the Company in 1997, 1996 and 1995, respectively, and also received $82,400 in 1995 in other transactional fees directly from partnerships in which the Company is a general partner. The Chairman was not compensated by the Company in his capacity as an officer. As of January 31, 1997, the Company and Urban agreed to terminate this consulting agreement. In connection with the termination of this agreement, the Company recognized $1,289,141 in related termination costs in 1997. 11. BUSINESS SEGMENTS: The Company's business is primarily involved in four segments: (1) hotel operations, consisting of the operations of all hotels in which the Company has a 100% or majority ownership or leasehold interest, (2) hotel development, consisting of development, construction and renovation activities, (3) hotel management, consisting of hotel management activities and (4) employee leasing, consisting of the leasing of employees to various hotels. Results of operations of the Company's business segments are reported in the consolidated statements of operations. The following represents revenues, operating costs and expenses, operating income, identifiable assets, capital expenditures and depreciation and amortization for each business segment:
Revenues 1997 1996 1995 Hotel operations $ 31,878,791 $ 30,615,291 $ 24,359,999 Hotel development 14,639,746 22,937,267 12,238,128 Hotel management 3,023,944 2,784,031 3,010,935 Employee leasing 13,123,035 12,005,759 12,353,355 $ 62,665,516 $ 68,342,348 $ 51,962,417 Operating costs and expenses Hotel operations $ 23,723,516 $ 21,088,806 $ 17,065,041 Hotel development 13,719,250 19,651,500 10,117,782 Hotel management 2,043,526 1,930,229 2,003,310 Employee leasing 12,798,585 11,689,461 12,131,262 $ 52,284,877 $ 54,359,996 $ 41,317,395 Operating income Hotel operations $ 2,422,728 $ 4,385,720 $ 3,359,383 Hotel development 838,452 3,217,224 2,091,480 Hotel management 647,230 571,680 831,007 Employee leasing 320,826 309,805 216,075 Corporate (2,249,677) (2,030,965) (2,208,197) $ 1,979,559 $ 6,453,464 $ 4,289,748 Identifiable assets Hotel operations $ 82,530,247 $ 55,456,702 $ 41,835,019 Hotel development 2,824,933 6,228,166 5,447,715 Hotel management 1,612,596 1,640,692 1,163,671 Employee leasing 1,415,174 1,169,755 825,468 Corporate 4,285,148 2,405,841 3,181,429 $ 92,668,098 $ 66,901,156 $ 52,453,302 Capital Expenditures Hotel operations $ 29,272,953 $ 13,856,662 $ 12,065,286 Hotel development 7,288 57,036 377,296 Hotel management 40,830 62,756 29,634 Employee leasing 4,228 4,956 1,602 Corporate 17,810 67,600 65,330 $ 29,343,109 $ 14,049,010 $ 12,539,148 Depreciation/Amortization Hotel operations $ 4,003,613 $ 3,018,890 $ 1,959,421 Hotel development 82,044 68,545 28,866 Hotel management 333,188 282,121 176,618 Employee leasing 3,624 6,493 6,018 Corporate 110,031 102,829 97,258 $ 4,532,500 $ 3,478,878 $ 2,268,181
12. STOCK BASED COMPENSATION: The Company applies APB No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for options granted to employees. In August 1996, the Company established qualified incentive stock option plans for employees and directors. Under the plan for employees, on an annual basis, options for up to 3% of its common stock, as defined, can be granted. Under the plan for directors, a total of 50,000 options can be granted. The exercise price per share may not be less than the fair market value per share on the date the options are granted. Generally, options vest over a period of up to two years and are exercisable for a period of ten years from the date of grant. The Company has granted to various key employees, non-qualified options to purchase shares of common stock with exercise prices ranging from $3.00 to $6.50 per share. The exercise price is the market price on the date of grant. At December 31, 1997, options to purchase 1,062,833 shares of common stock are outstanding. These options are currently exercisable and expire through September 2007. In 1997, the Company granted to two officers, options to purchase 65,625 shares of common stock with an exercise price of $1.53 per share. These options are currently exercisable and expire in February 2007. Pursuant to APB Opinion 25, the Company recognized $301,465 in compensation expense in 1997 as a result of this below-market grant. The following table summarizes the employee stock options granted, exercised and outstanding:
Weighted Average Shares Exercise Price Options outstanding January 1, 1995 652,250 $ 4.50 Options granted 898,833 4.45 Options outstanding December 31, 1995 1,551,083 4.47 Forfeitures (11,500) 6.38 Options granted 2,000 7.81 Options outstanding December 31, 1996 1,541,583 4.46 Options exercised (433,750) 4.61 Forfeitures (43,000) 4.93 Options granted 181,125 4.62 Options outstanding December 31, 1997 1,245,958 $ 4.42 Options exercisable December 31, 1997 1,167,958 $ 4.29
The weighted-average grant-date fair value of stock options granted to employees during the year and the weighted-average significant assumptions used to determine those fair values, using a modified Black-Sholes option pricing model, and the pro forma effect on earnings of the fair value accounting for employee stock options under Statement of Financial Accounting Standards No. 123 are as follows:
1997 1996 1995 Grant-date fair value per share: Options issued at market $ 2.90 $ 2.70 $ 2.85 Options issued below market 4.96 - - Weighted average exercise prices: Options issued at market $ 6.37 $ 7.81 $ 4.45 Options issued below market 1.53 - - Significant assumptions (weighted-average): Risk-free interest rate at grant date 6.14% 5.51% 6.04% Expected stock price volatility 0.37 0.62 0.79 Expected dividend payout n/a n/a n/a Expected option life (years) (a) 5.63 5.00 4.24 Net income (loss): As reported $ (966,443) $ 3,394,654 $ 2,138,092 Pro forma $ (1,626,473) $ 2,994,790 $ 1,514,818 Net income (loss) per share - Basic: As reported $ (0.15) $ 0.57 $ 0.37 Pro forma $ (0.26) $ 0.50 $ 0.26 Net income (loss) per share - Diluted: As reported $ (0.19) $ 0.49 $ 0.34 Pro forma $ (0.29) $ 0.43 $ 0.24 (a) The expected option life considers historical option exercise patterns and future changes to those exercise patterns anticipated at the date of grant.
The following table summarizes information about employee stock options outstanding at December 31, 1997:
Options Outstanding Options Exercisable Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price $ 1.53 to 4.75 869,125 7.73 Years $ 3.55 869,125 $ 3.55 $ 6.31 to 7.81 376,833 8.96 6.43 298,833 6.44 $ 1.53 to 7.81 1,245,958 8.10 $ 4.42 1,167,958 $ 4.29
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: Office lease: The Company entered into an operating lease for its existing office facilities which expires December 2000. The Company may cancel the lease effective December 1, 1998 with a 180-day notice and a cancellation penalty payment of approximately $71,000. Hotel leases: The Company leases five hotels as of December 31, 1997, the operations of which are included in the Company's consolidated financial statements. The Company leases or sub-leases three of these hotels from partnerships in which the Company owns an equity interest, up to 16.33%. All of the leases are triple net and provide for monthly base rent payments ranging from $9,500 to $23,500. Three of the leases also provide for additional rent payments ranging from $36,000 to $72,000 per annum, plus percentage rents equal to 10% of room revenues in excess of stipulated amounts. The leases and sub-leases expire through December 31, 2001. All five leases provide for an option to purchase the hotel. Some of the purchase prices are based upon a multiple of gross room revenues for the preceding twelve months with a specified maximum, and the others are based on a fixed amount. At December 31, 1997, the aggregate purchase price for these leased hotels was approximately $16,230,000. During 1997, the Company exercised options to purchase two hotels previously under lease. Total rent expense for all operating leases was approximately $1,939,000, $2,322,000, and $2,157,000 in 1997, 1996 and 1995, respectively, including approximately $1,103,000, $1,280,000, and $1,280,000 in 1997, 1996 and 1995, respectively, to affiliated entities in which the Company has a minority ownership interest. Minimum future rent payments under all operating leases are as follows:
Year Ending December 31, Affiliated Non-Affiliated Total 1998 $ 700,000 $ 740,000 $ 1,440,000 1999 700,000 744,000 1,444,000 2000 - 749,000 749,000 2001 - 535,000 535,000 2002 - 535,000 535,000 Thereafter - 812,000 812,000 $ 1,400,000 $ 4,115,000 $ 5,515,000
Limited partnership guaranteed distributions: The Company is a general partner in four partnerships where the Company has guaranteed minimum annual distributions to the limited partners based on a percentage of their original capital contributions, ranging from 10% to 15%. During 1998, all guaranteed minimum annual distributions were revised to 10%. Guarantees: The Company has provided approximately $37,000,000 in guarantees as of December 31, 1997 on mortgage loan obligations for 24 of its affiliated partnerships which expire at various dates through April 1, 2018. Other partners have also guaranteed portions of the same obligations. The partners of two of the partnerships have entered into cross indemnity agreements whereby each partner has agreed to indemnify the others for any payments made by any partner in relation to these guarantees in excess of their ownership interest. The Company is secondarily liable for the obligations and liabilities of the limited partnerships and limited liability corporations in which it holds a general partnership or managing member ownership interest as described in Note 4. Construction in progress: At December 31, 1997, the Company had approximately $7,824,000 remaining to pay contractors for the construction of 23 hotels, a portion of which is included in accounts payable. These commitments will be funded through construction and long-term mortgage financing currently in place. Employment agreements: The Company has entered into employment agreements with two executive officers expiring at various dates through December 31, 2000. The agreements provide for aggregate annual base salaries totaling $490,000 in both 1998 and 1999, and $325,000 in 2000 to be paid to the two executive officers. The employment agreements provide for cash bonuses to be determined annually by the compensation committee of the Board of Directors, stock options and severance pay should the officer be terminated without cause. 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 years ended December 31, 1997, 1996 and 1995:
1997 1996 1995 Notes receivable received from sale of hotel $ 100,000 $ 1,400,000 Reduction of notes receivable and related interest in exchange for common stock $ 1,181,831 $ 52,860 Reduction of notes payable assumed by buyer upon sale of hotel $ 62,141 Purchase of investments and other assets through issuance of common stock, assumption and issuance of notes payable, and reduction of notes receivable $ 549,556 $ 1,010,188 Exchange of limited partnership interests and note receivable $ 90,000 Reduction of accounts and note payable through issuance of common stock and warrants $ 233,351
15. FOURTH QUARTER ADJUSTMENTS: During the fourth quarter of 1997, the Company expensed approximately $177,000 in costs associated with a potential merger or acquisition of the Company. During the fourth quarter of 1996, the Company expensed approximately $404,000 in costs associated with a public offering of the Company's Common Stock which was not consummated. 16. NON-RECURRING EXPENSES: The Company expensed $1,697,448 in 1997 in costs associated with (i) the termination of a consulting agreement with a company owned by the Chairman of the Board of Directors and a former director, and (ii) the termination of an employment agreement with this former director. In addition, the Company expensed $177,044 in costs associated with a potential merger or acquisition which was not consummated. During 1996, the Company expensed $403,657 in costs associated with a public offering of the Company's Common Stock which was not consummated. The Company considers these costs non- operational costs which are non-recurring in nature. EX-21 2 Exhibit 21.1 AMERIHOST PROPERTIES, INC. LISTING OF SUBSIDIARIES
State of Incorporation Ownership Entity or Organization Percentage Amerihost Development, Inc. Illinois 100.00% Amerihost International, Inc. Delaware 100.00% Amerihost Lodging Group, Inc. Delaware 100.00% Amerihost Management, Inc. Illinois 100.00% Amerihost Renovations, Inc. Illinois 100.00% Amerihost Staffing, Inc. Illinois 100.00% AP Equities of Arkansas, Inc. Arkansas 100.00% AP Equities of Florida, Inc. Florida 100.00% AP Equities of Indiana, Inc. Indiana 100.00% AP Equities of Ohio, Inc. Ohio 100.00% AP Hotels of Georgia, Inc. Georgia 100.00% AP Hotels of Illinois, Inc. Illinois 100.00% AP Hotels of Kansas, Inc. Kansas 100.00% AP Hotels of Michigan, Inc. Delaware 100.00% AP Hotels of Mississippi, Inc. Mississippi 100.00% AP Hotels of Ohio, Inc. Delaware 100.00% AP Hotels of Pennsylvania, Inc. Pennsylvania 100.00% AP Hotels of Texas, Inc. Delaware 100.00% AP Hotels of Vermont, Inc. Vermont 100.00% AP Hotels of Vermont, Inc. Delaware 100.00% AP Hotels of West Virginia, Inc. West Virginia 100.00% AP Lodging of Ohio, Inc. Ohio 100.00% AP Properties of Ohio, Inc. Ohio 100.00% API of Indiana, Inc. Indiana 100.00% API of Wisconsin, Inc. Wisconsin 100.00% Hammond Investors, Inc. Indiana 100.00% Niles Illinois Hotel Corporation Illinois 100.00% Schiller Park Investors, Inc. Illinois 100.00% Shorewood Hotel Investments, Inc. Illinois 100.00% Shorewood Investors, Inc. Illinois 100.00% AP Hotels of West Virginia, Inc. West Virginia 100.00% AmeriHost Inns of Illinois, Inc. Illinois 100.00% AmeriHost Inns of Ohio, Inc. Ohio 100.00% AP Hotels of Wisconsin, Inc. Wisconsin 100.00% AP Hotels of Iowa, Inc. Iowa 100.00% AP Hotels of Kentucky, Inc. Kentucky 100.00% API/Crawfordsville, Inc. Indiana 100.00% API/Cloverdale, Inc. Indiana 100.00% API/Marysville, Inc. Ohio 100.00% API/Plainfield, Inc. Indiana 100.00% AP Hotels of California, Inc. California 100.00% AmeriHost Inns of Michigan, Inc. Michigan 100.00% AP Hotels of Missouri, Inc. Missouri 100.00% AP Properties of Mississippi, Inc. Mississippi 100.00% AP Hotels of Tennessee, Inc. Tennessee 100.00% AP Hotels of Oklahoma, Inc. Oklahoma 100.00% AP Hotels of Indiana, Inc. Indiana 100.00% AP Hotels/Altoona, Inc. Pennsylvania 100.00% API/Athens, OH, Inc. Ohio 100.00% API/Hammond, IN, Inc. Indiana 100.00% API/Lancaster, OH, Inc. Ohio 100.00% API/Logan, OH, Inc. Ohio 100.00% API/Macomb, IL, Inc. Illinois 100.00% API/Metropolis, IL, Inc. Illinois 100.00% AP Hotels/Parkersburg, WV, Inc. West Virginia 100.00% API/Sullivan, IN, Inc. Indiana 100.00% API/Sycamore, IL, Inc. Illinois 100.00% API/Washington C.H., OH, Inc. Ohio 100.00% AmeriHost Inns of America, Inc. Delaware 100.00% AmeriHost Inns, Inc. Delaware 100.00% Sullivan Motel Associates, Ltd. Indiana 56.00% White River Junction, VT 393 Limited Partnership Vermont 83.30% Metropolis, IL 1292 Limited Partnership Illinois 54.90% Bowling Green, Ohio 590 Limited Partnership Ohio 64.16% Findlay, Ohio 391 Limited Partnership Ohio 56.67% Dayton, Ohio 1291 Limited Partnership Ohio 61.50% Altoona, PA 792 Limited Partnership Pennsylvania 62.78% New Philadelphia, Ohio 1092 Limited Partnership Ohio 50.35% Kenton, Ohio 1095 Limited Partnership Ohio 52.50%
EX-23 3 Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Amerihost Properties, Inc. Des Plaines, Illinois We hereby consent to the incorporation by reference in the Company's previously filed Registration Statements on Form S-3 (file nos. 33-72742 and 33-32333) and on Form S-8 (file no. 33-32331) of our report dated March 26, 1998 relating to the consolidated financial statements of Amerihost Properties, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. BDO Seidman, LLP Chicago, Illinois March 26, 1998 EX-27 4
5 12-MOS 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 2,349,503 3,029,039 1,371,278 0 0 0 6,813,330 7,355,048 7,383,895 0 0 0 0 0 0 11,715,346 10,637,852 9,173,866 79,661,323 53,317,721 38,229,128 9,345,991 7,481,889 5,404,102 92,668,098 66,901,156 52,453,302 13,923,027 11,004,320 9,072,448 0 0 0 0 0 0 0 0 0 31,065 30,185 29,886 21,561,794 20,881,444 17,236,873 92,668,098 66,901,156 52,453,302 62,665,516 68,342,348 51,962,417 62,665,516 68,342,348 51,962,417 52,284,877 54,359,996 41,317,395 52,284,877 54,359,996 41,317,395 8,401,080 7,528,888 6,355,274 0 0 0 4,053,933 2,767,828 1,755,745 (1,703,443) 5,752,654 3,467,092 (737,000) 2,358,000 1,329,000 (966,443) 3,394,654 2,138,092 0 0 0 0 0 0 0 0 0 (966,443) 3,394,654 2,138,092 (0.15) 0.67 0.37 (0.19) 0.49 0.34 Restated.
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