-----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, CYIen4xvuHPCCObYqpJTusF3M9WTGGTDkSy3JmSwNKMowhZsSov9WhxDO3gkCuLO 1ZKThLg2vaqNw3svXibebQ== 0000914760-02-000040.txt : 20020415 0000914760-02-000040.hdr.sgml : 20020415 ACCESSION NUMBER: 0000914760-02-000040 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARLINGTON HOSPITALITY 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: 1934 Act SEC FILE NUMBER: 000-15291 FILM NUMBER: 02589788 BUSINESS ADDRESS: STREET 1: 2355 SOUTH ARLINGTON HEIGHTS ROAD STREET 2: SUITE 400 CITY: ARLINGTON HEIGHTS STATE: IL ZIP: 60005 BUSINESS PHONE: 8472285400 MAIL ADDRESS: STREET 1: 2355 SOUTH ARLINGTON HEIGHTS ROAD STREET 2: SUITE 400 CITY: ARLINGTON HEIGHTS STATE: IL ZIP: 60005 FORMER COMPANY: FORMER CONFORMED NAME: AMERICA POP INC DATE OF NAME CHANGE: 19871111 FORMER COMPANY: FORMER CONFORMED NAME: AMERIHOST PROPERTIES INC DATE OF NAME CHANGE: 19920703 10-K405 1 a32381k02.txt ================================================================================ - -------------------------------------------------------------------------------- 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, 2001 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-15291 ARLINGTON HOSPITALITY, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-3312434 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2355 S. ARLINGTON HEIGHTS RD., SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005 - --------------------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 228-5400 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered ------------------- ---------------------------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.005 per share ---------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| 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 25, 2002 (based upon an estimate that 88.8% of the shares are so owned by non-affiliates and upon the closing price for the Common Stock of $3.00) was $13,205,403. ================================================================================ As of March 25, 2002, 4,958,081 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 Arlington Hospitality, Inc. and subsidiaries (collectively, where appropriate, "Arlington," or the "Company") is engaged in the development and construction of AmeriHost Inn hotels, 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. After developing and operating the AmeriHost brand name for approximately 10 years, the Company sold the AmeriHost Inn and AmeriHost Inn & Suites brand names and franchising rights to Cendant Corporation ("Cendant") in September 2000. Cendant is the world's largest franchising company with hotel brand names such as Days Inn, Super 8 and Wingate. All AmeriHost Inn hotels designed and developed by the Company were constructed using a standard 60- to 120-room, interior corridor and indoor pool prototype design and are located in tertiary and secondary markets. The Company has also designed three- and four-story AmeriHost Inn & Suites prototypes for larger markets. Upon the sale of the AmeriHost Inn and AmeriHost Inn & Suites brand names and franchising rights, the Company simultaneously entered into franchise agreements with Cendant for its AmeriHost Inn hotels. The Company received an initial payment of approximately $5.5 million upon closing and recorded a gain of approximately $5.2 million, net of closing costs. The agreement with Cendant provides for additional incentives to the Company as the AmeriHost Inn and AmeriHost Inn & Suites brand names are expanded, including a fee when a hotel owned by the Company is sold to an operator who enters into a franchise agreement with Cendant, and royalty sharing for all AmeriHost Inn hotels. In conjunction with this transaction, the Company changed its name to Arlington Hospitality, Inc. from Amerihost Properties, Inc. Since 1993, the Company's growth strategy has focused on the expansion of the AmeriHost Inn hotel brand through new development and construction. 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, and is rewarded for this development under the Cendant agreement. The Company believes that the AmeriHost Inn provides a strong brand affiliation with an excellent reputation for consistency. The AmeriHost Inn franchise agreements are long-term agreements and provide for a royalty fee, and a system assessment fee based on the hotel's revenue. In addition, since the Company has extensive experience in all facets of AmeriHost Inn hotel development and operation, it can offer this expertise to other Cendant franchisees. As of December 31, 2001, the Company owned, operated, or managed 78 hotels located in 16 states. Of these hotels, 66 hotels are operated or managed under the AmeriHost Inn brand. Of the 78 hotels, the Company owns a 100% or majority ownership or leasehold interest in 62 hotels and a minority equity interest, ranging from 1% to 37.2%, in 14 hotels. Of the 76 hotels in which the Company has an ownership interest, 66 are AmeriHost Inn hotels and 10 are other brands, which in most cases were acquired, renovated and repositioned in their respective marketplaces between 1987 and 1993. Unaffiliated third parties also operated 19 AmeriHost Inn hotels under franchise agreements with Cendant as of December 31, 2001, which were previously owned and operated by the Company. The other brand hotels are franchised through Days Inn, Howard Johnson Express, Holiday Inn and Ramada Inn. The Company also managed two non-AmeriHost Inn hotels at December 31, 2001 for unaffiliated third parties. As of December 31, 2001, five additional AmeriHost Inn hotels were under construction, three of which are 100% owned by the Company, one of which is minority owned, and one being built by the Company for a third party. -2- The table below sets forth information regarding the hotels at December 31, 2001. Open Under Hotels Construction Total ---------------- ---------------- --------------- Hotels Rooms Hotels Rooms Hotels Rooms ------- ------ ------ ------- ------ ------ 100% or majority owned or leased: AmeriHost Inn hotels 55 3,509 3 239 58 3,748 Other brands 7 945 - - 7 945 ------- ------ ------ ------- ------ ------ 62 4,454 3 239 65 4,693 ------- ------ ------ ------- ------ ------ Minority ownership interest: AmeriHost Inn hotels 11 720 1 85 12 805 Other brands 3 349 - - 3 349 ------- ------ ------ ------- ------ ------ 14 1,069 1 85 15 1,154 ------- ------ ------ ------- ------ ------ Managed only hotels: AmeriHost Inn hotels - - - - - - Other brands 2 249 - - 2 249 ------- ------ ------ ------- ------ ------ 2 249 - - 2 249 ------- ------ ------ ------- ------ ------ Totals: AmeriHost Inn hotels 66 4,229 4 324 70 4,553 Other brands 12 1,543 - - 12 1,543 ------- ------ ------ ------- ------ ------ 78 5,772 4 324 82 6,096 ======= ====== ====== ======= ====== ======
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, and intends to use its expertise for Cendant franchisees. 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 or co-managers 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 two 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. The Company has developed centralized systems and procedures which it believes allow it to manage the hotels effectively and efficiently. The Company may pursue management contracts with additional third parties, including Cendant franchisees, 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, franchising and employee leasing services with respect to hotels in which the Company has a 100% or majority ownership interest have been eliminated in -3- consolidation. Additionally, all revenues attributable to development, construction, management, and employee leasing services with respect to hotels in which the Company has a minority ownership interest and are accounting for under the equity method, have been eliminated to the extent of the Company's ownership percentage. AMERIHOST INN HOTELS All of the Company's AmeriHost Inn hotels are operated pursuant to 20-year franchise agreements with Cendant. Pursuant to these agreements, the Company has access to the reservation system, marketing plans and trademarks. The franchise agreements require the Company to maintain both the quality and condition of the hotel, as well as specific operating procedures. The Company's AmeriHost Inn hotels have been designed and constructed using a two- or three-story prototype, featuring 60 to 120 rooms, interior corridors and an indoor pool area. The AmeriHost Inn hotel's amenities and services include an indoor pool, whirlpool, exercise room, meeting room and extensive exterior lighting for added security. The standard AmeriHost Inn guest room features an electronic card-key lock, in-room safe, in-room coffee maker, telephone with data port for personal computer, a work area and a 25" color television with premium cable service or movies on demand. In addition, each AmeriHost Inn hotel typically 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. The Company's AmeriHost Inn hotels are operated or managed 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 the AmeriHost Inn hotels increase guest satisfaction and repeat business. In addition, the AmeriHost Inn brand maintains its Commitment Plus 100% guest satisfaction guarantee program. This program guarantees that every guest will leave satisfied. All AmeriHost Inn employees have the unconditional authority to correct any oversight to the guest's satisfaction, or we will refund the guest's money, up to 100%. This 100% satisfaction guarantee will help the brand maintain its quality and consistency. 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 $50 to $80 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. As part of the Company's overall strategy to expand the AmeriHost Inn hotel brand, the Company has sold 19 AmeriHost Inn hotels to Cendant franchisees, and intends to pursue the sale of additional AmeriHost Inn hotels in 2002 and beyond. The Company sold three AmeriHost Inn hotels to franchisees in 1999. During 2000, the Company sold four AmeriHost Inn hotels to franchisees, while three joint ventures in which the Company was a partner sold their AmeriHost Inn hotels to franchisees. During 2001, nine AmeriHost Inn hotels which were operated by the Company were sold to franchisees. 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. 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. In addition, the Company acquired one other -4- brand hotel in the fourth quarter of 2001. 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, Howard Johnson Express, 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 64 to 215 rooms, generate average daily rates ranging from $40 to $65 per night and offer a variety of amenities and services. Approximately one-half 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, only if and when attractive terms are available. During 1999, the Company sold one 100% owned non-AmeriHost Inn hotel, and two joint ventures in which the Company was a partner sold their non-AmeriHost Inn hotels. During 2000, the Company sold one 100% owned non-AmeriHost Inn hotel. 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. HOTEL PROPERTIES At December 31, 2001, the Company owned and/or managed 78 hotels in 16 states, concentrated in the midwestern and southern United States. The Company had five additional 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, 2001 by state: Date State Hotel (1) Rooms Operations Began - ----- --------- ------- ---------------- Florida Howard Johnson Express Inn Ft. Myers 123 09/30/92 ------ Georgia AmeriHost Inn Eagles Landing, Stockbridge 60 08/08/95 AmeriHost Inn LaGrange 59 03/01/95 AmeriHost Inn Smyrna 60 12/21/95 Days Inn Northwest, Atlanta (3) 107 11/01/91 Days Inn Peachtree, Atlanta (3) 142 11/01/91 ------ 428 ------ Illinois AmeriHost Inn & Suites Freeport 64 07/28/00 AmeriHost Inn Jacksonville 60 06/14/96 AmeriHost Inn Macomb 60 05/19/95 AmeriHost Inn Players Riverboat Hotel, Metropolis 120 02/25/94 AmeriHost Inn Rochelle 61 03/07/97 AmeriHost Inn Sycamore 60 05/31/96 Days Inn Niles 149 01/01/90 ------ 574 ------ -5- Date State Hotel (1) Rooms Operations Began - ----- ----- ------- ---------------- Indiana AmeriHost Inn & Suites Columbia City 60 03/05/99 AmeriHost Inn & Suites Decatur 60 08/30/98 AmeriHost Inn Hammond 86 03/29/96 AmeriHost Inn & Suites Huntington 62 08/21/98 AmeriHost Inn Plainfield 60 09/01/92 Days Inn Plainfield 64 05/01/90 Ramada Inn Lafayette 144 02/02/94 ------ 536 ------ Iowa AmeriHost Inn & Suites Boone 60 08/21/98 AmeriHost Inn & Suites Le Mars 63 01/07/98 AmeriHost Inn & Suites Mt. Pleasant 63 07/02/97 AmeriHost Inn & Suites Pella 60 11/02/01 AmeriHost Inn Storm Lake 61 08/13/97 AmeriHost Inn Waverly 60 08/28/96 ------ 307 ------ Kentucky AmeriHost Inn Murray 60 11/01/96 ------ Michigan AmeriHost Inn & Suites Battle Creek 62 03/19/99 AmeriHost Inn Coopersville 59 12/31/95 AmeriHost Inn & Suites Dowagiac 64 09/28/01 AmeriHost Inn Grand Rapids North, Walker 60 07/05/95 AmeriHost Inn Grand Rapids South 61 06/11/97 AmeriHost Inn Hudsonville 61 11/24/97 AmeriHost Inn & Suites Monroe 63 09/19/97 AmeriHost Inn Port Huron 61 07/01/97 ------ 487 ------ Mississippi AmeriHost Inn Batesville 60 04/26/96 AmeriHost Inn Tupelo 61 07/25/97 AmeriHost Inn Vicksburg (Rainbow Hotel Casino) 89 05/13/95 Howard Johnson Express Inn Tupelo 125 12/31/01 ------ 335 ------ Missouri AmeriHost Inn Fulton 62 01/21/99 AmeriHost Inn Mexico 61 12/06/97 AmeriHost Inn Warrenton 63 11/07/97 ------ 186 ------ -6- Date State Hotel (1) Rooms Operations Began - ----- ----- ------- ---------------- Ohio AmeriHost Inn Ashland 62 08/09/96 AmeriHost Inn & Suites Athens (2) 102 11/04/89 AmeriHost Inn & Suites Cambridge (2) 72 02/06/98 AmeriHost Inn & Suites Columbus Southeast (2) 60 04/17/98 AmeriHost Inn Delaware 73 05/16/97 AmeriHost Inn & Suites East Liverpool (2) 66 10/20/00 AmeriHost Inn Jeffersonville North (2) 60 07/20/96 AmeriHost Inn Jeffersonville South (2) 60 10/14/94 AmeriHost Inn Kenton (2) 60 08/02/96 AmeriHost Inn Lancaster (2) 60 09/04/92 AmeriHost Inn Logan (2) 60 04/16/93 AmeriHost Inn Marysville 79 06/01/90 AmeriHost Inn & Suites Newark (2) 72 01/29/99 AmeriHost Inn & Suites Oxford (2) 62 12/04/00 AmeriHost Inn St. Marys (2) 61 11/25/97 AmeriHost Inn Upper Sandusky 60 04/12/95 AmeriHost Inn & Suites Wilmington (2) 61 02/21/97 AmeriHost Inn Wooster East 58 01/18/94 AmeriHost Inn Wooster North 60 10/20/95 AmeriHost Inn Zanesville (2) 60 07/30/96 Days Inn New Philadelphia (2) 104 06/04/92 Ramada Inn Dayton Mall 215 01/20/92 Ramada Inn Middletown 120 07/03/92 ------ 1,747 ------ Oklahoma AmeriHost Inn & Suites Enid 60 06/11/98 ------ Pennsylvania AmeriHost Inn Shippensburg 60 08/09/96 Holiday Inn Altoona 144 08/31/92 Arlington Hotel Oil City 106 12/02/92 ------ 310 ------ Tennessee AmeriHost Inn Jackson 60 04/01/98 ------ Texas AmeriHost Inn McKinney 61 01/07/97 AmeriHost Inn & Suites San Marcos 61 05/23/97 ------ 122 ------ West Virginia AmeriHost Inn New Martinsville (2) 60 05/03/96 AmeriHost Inn Parkersburg North (2) 79 06/26/95 AmeriHost Inn Parkersburg South (2) 61 12/30/96 ------ 200 ------ Wisconsin AmeriHost Inn & Suites Lomira 60 06/08/01 AmeriHost Inn & Suites Marshfield 60 09/06/00 AmeriHost Inn Mosinee 53 04/30/93 ------ 173 ------ TOTAL ROOMS 5,772 TOTAL PROPERTIES 78 -7- (1) Unless otherwise noted, the Company owns a direct or indirect equity or leasehold interest in the hotel. (2) Indicates properties which are co-managed with an unaffiliated third party. (3) Indicates properties in which the Company does not have a direct or indirect equity or leasehold interest.
The table below shows the average occupancy, average daily rate ("ADR") and revenue per available room ("RevPAR") experienced by the Company in 2001 in various locations. These statistics include all hotels open as of December 31, 2001. Average Average Revenue Per Occupancy Daily Rate Available Room --------- ---------- -------------- Ohio (23 hotels) 52.8% $60.02 $31.70 Illinois, Iowa and Wisconsin (16 hotels) 55.6% $55.32 $30.78 Michigan and Pennsylvania (11 hotels) 54.3% $58.30 $31.71 Georgia, Mississippi and West Virginia (12 hotels) 55.4% $55.31 $30.67 Indiana and Kentucky (8 hotels) 51.3% $55.47 $28.45 Texas (2 hotels) 70.0% $59.63 $41.75 Other hotels (6 hotels located in Tennessee, Florida, Missouri and Oklahoma) 49.6% $57.50 $28.56 All hotels 53.9% $57.47 $31.00
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 had shown significant improvement. The growth in hotel room demand resulted in a positive trend in industry-wide room revenues. Even as occupancy rates have flattened over the past few years as the supply of new hotels outpaced the demand for room nights, the average daily rates continued to increase, resulting in continued growth for the industry. However, in 2001, the United States lodging industry was negatively impacted by a general downturn in the economy, as well as the terrorist attacks on Washington, D.C. and the World Trade Center in New York City on September 11th. Smith Travel Research reported that revenues for the entire U.S. lodging industry declined over 40% during the few weeks after the attacks. Positive trends have been reported since this time, indicating that the demand for hotel rooms is recovering, however this incident had a significant impact on the profitability of many hotels. In addition, this incident has changed the public's opinion regarding the safety of travel. Smith Travel Research reported that for 2001, occupancy decreased 5.7% and average daily rate decreased 1.4% for the entire U.S. lodging industry, resulting in a 6.9% decrease in revenue per available room (RevPAR). The Company's hotels were also affected, however to a lesser degree. Same room RevPAR for the Company's owned AmeriHost Inn hotels declined 9.6% for the month of September 2001, compared to September 2000. These hotels quickly rebounded, as same room RevPAR declined 0.6% in the month of October, increased 5.2% in November, and increased 5.2% in December. Since the Company's hotels are limited service hotels, located in smaller towns primarily in the Midwest, they were not impacted as much as hotels located in larger cities and near airports. Industry analysts are again projecting that room demand will outpace room supply in 2002. Smith Travel Research expects occupancy to increase slightly in 2002, with average daily rates increasing 2.5%, resulting in a projected increase of 2.3% in RevPAR for the industry. -8- GROWTH STRATEGY The Company's growth strategy is to increase Cash Flow (defined as net income, adjusted to eliminate the impact of depreciation and amortization) and net income per share by: (i) developing, operating and owning or leasing additional AmeriHost Inn hotels; (ii) selling AmeriHost Inn hotels to Cendant franchisees; (iii) developing and managing hotels for affiliated and unaffiliated parties; (iv) maintaining or enhancing occupancy and average daily rate results at all of its hotels; and (v) controlling operating and corporate overhead expenses. Cash Flow is used by the Company as a supplemental performance measure along with net income to report its operating results. The Company's primary growth strategy is to focus on the expansion of the AmeriHost Inn brand. During 2001, the Company opened three wholly-owned AmeriHost Inn hotels, and began construction on four 100% owned AmeriHost Inn hotels, one minority owned AmeriHost Inn hotel, and one AmeriHost Inn hotel for an unrelated third party, five of which are under construction at December 31, 2001. 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. Due to the expansion of the AmeriHost Inn brand over the past several years, and the recognition the brand has received for the consistency of guest services and amenities, the Company decided to begin selling franchises in 1999. After limited success, the Company decided to sell the AmeriHost Inn name and franchise rights to Cendant in September 2000. Although the Company had success in selling its existing hotels to franchisees, it decided to form the relationship with Cendant to help develop new franchisees on a much larger scale, requiring resources which the Company did not have. As structured, the Cendant transaction not only will help in expanding the brand for Cendant's benefit, but it also is expected to significantly benefit the Company over the long term. There are four basic deal points of the Cendant transaction: (1) The Company continues to own all its existing hotels and operate them under favorable franchise agreements with Cendant using the AmeriHost Inn name. (2) Cendant paid the Company an initial one-time fee of approximately $5.5 million, which was recorded in the third quarter of 2000. In addition, the Company received $400,000 on September 30, 2001, and will receive $400,000 on September 30, 2002, and $400,000 on September 30, 2003, as long as the Company maintains certain hotel lease agreements. (3) For the next 15 years, Cendant will pay the Company a development incentive fee every time the Company sells one of its existing AmeriHost Inn hotels to a buyer who executes an AmeriHost Inn franchise agreement with Cendant. In addition, this fee will also be paid to the Company for new hotels that the Company develops which are then sold to a franchisee of Cendant. This fee applies to the next 370 hotels sold by the Company during the 15-year term of the agreement. (4) For the next 25 years, Cendant will pay the Company a portion of all royalty fees Cendant receives from all of its AmeriHost Inn franchisees. While not expected to significantly impact the earnings of the Company in the near term, this royalty sharing may be a major source of cash flow and profits for the Company in the long term, if the Company and Cendant are successful in growing the AmeriHost Inn brand. Due to the significant benefits under the Cendant agreement, the Company's growth strategy is also focused on selling AmeriHost Inn hotels to operators who become Cendant franchisees. When a hotel is sold, the Company expects to realize not only a gain on the sale, but also a development incentive fee and royalty sharing payments pursuant to the Cendant agreement. In 2001, the Company received approximately $1.7 million from Cendant in incentive fees and royalty sharing payments. Consequently, the building and selling of a significant number of AmeriHost Inn hotels is expected to be reflected in the Company's financial statements, in the normal course of business, and consistent with the Company's growth strategy. Additional potential benefits to the Company as a result of the transaction with Cendant include referrals from a preferred manager and developer agreement, whereby Cendant will refer the franchisees to the Company when -9- expertise in hotel development and management is needed. In addition, with a Fortune 500 company behind the AmeriHost Inn brand, operational advantages in name recognition, purchasing leverage, and marketing opportunities may be substantial. 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 and in some instances, for Cendant franchisees. In addition, the Company is also pursuing development contracts and management contracts with unaffiliated entities. During 2001, the Company began construction on six hotels, and completed construction of three 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. The Company either hires a general contractor to construct the hotel for a fixed price, or acts as the general contractor and enters into all sub-contracts directly. Since the Company builds hotels pursuant to fixed contracts, in order to minimize its risk associated with any cost overruns, the Company will also enter into fixed contracts with the general contractor, if any, as well as any subcontractors, prior to the commencement of construction. The Company's project superintendents or managers oversee 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 or lease financing, with the equity financing typically provided by the Company and/or its joint venture partners, debt financing typically provided by local or regional banks, and leasing arrangements with a REIT (PMC Commercial Trust). In 2001, the Company also secured a $20 million new construction facility with a lender who also holds the mortgage on two existing hotels owned by the Company, of which $5.7 million has been utilized through December 31, 2001. All of the AmeriHost Inn hotels under construction at December 31, 2001 are being financed through a combination of debt and equity. The Company believes that it can develop, operate and sell 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, through the Company as well as through Cendant, 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 and Cendant franchisees will also assist the Company in reaching its financial objectives. -10- 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. Cendant has also adopted the standards and procedures developed by the Company to be adhered to by all franchisees. 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. Each area manager is responsible for overseeing the general managers at 1 to 2 hotels, in addition to having responsibilities as the general manager of a specific hotel. The Company also has centralized sales and marketing personnel who assist and direct the general managers and other on-site personnel in their marketing efforts. The Company's internal auditors 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. These auditors 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 1,400 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. The Company also participates in the Global Distribution System ("GDS"). GDS is the airline reservation system through which most travel agents make hotel bookings. GDS offers tremendous exposure of the AmeriHost Inn brand to travel agents globally. In addition, our guests are now able to book hotel reservations easily through their preferred travel agent. With respect to AmeriHost Inn hotels, the Company's primary marketing strategy is to consistently develop and operate AmeriHost Inn hotels using its prototype designs under the AmeriHost Inn diamond-shaped logo. The -11- 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 designs 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. Cendant also maintains a toll-free reservation number for the AmeriHost Inn hotels. By dialing 800-434-5800, a guest can make a reservation at any one of the AmeriHost Inn hotels throughout the country. In addition, the Company's internet web site as well as the AmeriHost Inn web site are capable of accepting reservations on-line, further improving our guests' ability to book rooms easily. The Company anticipates that the reservation system will significantly increase the number of reservations as the brand awareness increases. The Company also periodically implements a regional marketing campaign using various media including radio and newspaper. The markets and media selected for the marketing activities are based on extensive research done by the Company and in some cases, an advertising consultant. As part of its franchise agreements with Cendant, the Company, as well as the other AmeriHost Inn franchisees, contribute monthly to the AmeriHost Inn marketing fund. This fund is used by Cendant to promote the brand on national and regional levels. Marketing fund contributions are based on hotel revenues. The Company targets independent hotel owners and developers to purchase the Company's AmeriHost Inn hotels. The Company receives numerous inquiries and offers for its existing hotels primarily through word-of-mouth and the Company's web sites, including hotelsforsaleonline.com. The Company believes that the consistency maintained by the AmeriHost Inn hotels with regard to amenities and service will attract buyers, along with the brand's central reservation system and marketing programs. With Cendant behind the brand, the interest in purchasing the Company's AmeriHost Inn hotels is expected to remain significant. JOINT VENTURES The Company continued to develop new hotels through joint ventures in 2001 whereby the Company and other investors agree to jointly undertake the development, construction, acquisition or renovation of a hotel property. As of December 31, 2001, the Company had 19 projects (one under construction) 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 or a limited liability company, with a wholly-owned subsidiary of the Company as a general partner or managing member with sole or joint management authority. The Company's subsidiary, as general partner or managing member, has typically received an ownership interest ranging from 1% to 30% for contributing the Company's expertise. In certain cases, the subsidiary has also contributed a minimal amount of cash. The limited partners or members (which may include the Company or its affiliates in some instances) have typically contributed the cash equity required to fund the project and have received interests proportionate to their contributions. A typical joint venture agreement provides that the profits and losses of the entity will be allocated among the partners in proportion to their respective interests. However, the distribution of operating cash flow and asset sale proceeds to 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 two joint venture arrangements, the equity interests held by the joint venture partners, including equity interests held by a Director of the Company (Item 13), are exchangeable into shares of the Company's common stock and the Company has guaranteed minimum annual distributions to the joint venture partners. As the general partner or managing member, the Company's subsidiary generally has significant 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 -12- 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 segment of the lodging industry. There are numerous hotel chains that operate on a national or regional basis, as well as other hotels, motor inns and other independent lodging establishments throughout the United States. 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 approximately 100 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 staff 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, 2001, the Company had franchise agreements (collectively, the "Franchise Agreements") with AmeriHost Inn Franchise Systems, Inc., Days Inn of America, Inc., Howard Johnson's Franchise Systems, Inc., 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 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 fees, including the marketing and reservation system assessments, typically range between 4% and 10% of gross revenues attributable to room rentals. 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. The Company believes that it is 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. -13- EMPLOYEES As of December 31, 2001, the Company and its subsidiaries had 1,477 full and part-time employees: Hotel Management: Operations 31 Accounting and finance 13 Property general managers 81 Hotel Development: 13 Hotel Operations: 987 Corporate: General and administrative 10 Officers 2 Employee Leasing: General and administrative 3 Operations 337 ------ 1,477 ====== 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 owns the office building in which its corporate offices and the offices of its wholly-owned subsidiaries are located at 2355 South Arlington Heights Road, Suite 400, Arlington Heights, Illinois 60005. The five-story building contains approximately 50,000 rentable square feet, of which the Company occupies approximately 19,000 square feet. Nearly all of the additional space is leased to various tenants under long-term agreements. This office building is pledged to secure the related long-term mortgage debt. At December 31, 2001, the Company had a 100% or majority ownership or leasehold interest in 62 operating hotels located in 16 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, 2001. 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, 2001. -14- 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 25, 2002 there were 1,250 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 2000 First quarter 3.75 2.88 Second quarter 3.94 3.00 Third quarter 3.94 3.00 Fourth quarter 4.13 2.31 FISCAL 2001 First quarter 3.75 2.75 Second quarter 4.24 3.01 Third quarter 3.90 2.10 Fourth quarter 3.49 1.95 FISCAL 2002 First quarter (through March 25, 2002) 3.00 1.92 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. 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. -15- 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 certified public accountants, whose reports on such consolidated financial statements for each of the three years in the period ended December 31, 2001 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) (not covered by independent auditor's report) Fiscal Year Ended December 31, ------------------------------------------------------ 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- STATEMENT OF OPERATIONS DATA: Revenue $ 77,153 $ 76,151 $76,058 $ 68,618 $ 62,666 Operating costs and expenses 58,500 58,736 57,868 54,286 52,285 Depreciation and amortization expense 4,676 4,542 4,567 5,487 4,532 Leasehold rents - hotels 6,510 6,525 7,307 4,192 1,729 Corporate general and administrative 1,908 1,695 1,537 1,569 2,140 Operating income 5,559 4,653 4,780 3,084 1,980 Interest expense, net 4,332 4,819 5,155 5,592 3,299 Gain on sale of assets and franchising rights 886 6,663 553 305 1,698 Income (loss), before extraordinary item and cumulative effect of change in accounting principle(1) $ 755 $ 4,010 $ 201 $ (1,167) $ (966) ======== ======== ======== ======== ======== Net income (loss) $ 755 $ 4,010 $ 201 $ (2,796) $ (966) ======== ======== ======== ======== ======== Income (loss) per share, before extraordinary item and cumulative effect of change in accounting principle(1): Basic $ 0.15 $ 0.81 $ 0.04 $ (0.19) $ (0.15) ======== ======== ======== ======= ======= Diluted $ 0.13 $ 0.74 $ 0.02 $ (0.20) $ (0.19) ======== ======== ======== ======= ======= Net income (loss) per share: Basic $ 0.15 $ .0.81 $ 0.04 $ (0.45) $ (0.15) ======== ======== ======== ======= ======= Diluted $ 0.13 $ 0.74 $ 0.02 $ (0.45) $ (0.19) ======== ======== ======== ======= ======= Weighted average shares outstanding: Basic 4,975 4,976 5,567 6,180 6,283 ======== ======== ======== ======== ======== Diluted 5,182 5,272 5,857 6,513 6,659 ======== ======== ======== ======== ======== BALANCE SHEET DATA: Total assets $115,174 $ 98,143 $103,108 $115,281 $ 92,668 Long-term debt, including current portion 72,199 58,604 60,349 71,841 60,235 Working capital (deficiency) (5,160) (4,172) (6,817) (6,924) (2,208) Shareholders' equity 19,067 18,266 14,181 18,316 21,593 OTHER DATA: Net income plus depreciation (2) $ 5,431 $ 8,552 $ 4,768 $ 4,319 $ 3,566 Cash provided by (used in) operating activities 15,907 1,143 (885) 5,408 1,858 Cash (used in) provided by investing activities (27,505) 2,728 12,344 15,555 (28,463) Cash provided by (used in) financing activities 14,617 (5,908) (12,187) (18,819) 25,926 Capital expenditures 25,400 10,434 2,103 42,183 29,343 -16- (1) The Company recorded an extraordinary loss of $333,000 in 1998, net of income taxes, relating to the early extinguishment of mortgage debt on hotels sold in connection with a sale/leaseback transaction. The Company recorded a cumulative effect of a change in accounting principle of $1,296,000 in 1998, net of income taxes, relating to the adoption of Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities." (2) "Net Income Plus Depreciation" 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. "Net Income Plus Depreciation" 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. "Net Income Plus Depreciation" is defined as net income before extraordinary items and cumulative effect of a change in accounting principle, adjusted to eliminate the impact of depreciation and amortization.
-17- ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Company is engaged in the development and sale of AmeriHost Inn hotels, and the ownership, operation and management of AmeriHost Inn hotels and other mid-price hotels. Since the Company's inception, the Company has constructed over 100 hotels. In addition, the Company has acquired other brand hotels, or has formed joint ventures to acquire other brand hotels. As of December 31, 2001, the Company had 66 AmeriHost Inn hotels open, of which 54 were wholly-owned or leased, one was majority-owned, and 11 were minority-owned. The Company opened three AmeriHost Inn hotels during the past twelve months. The Company intends to use the AmeriHost Inn brand when expanding its hotel operations segment. As of December 31, 2001, three wholly-owned AmeriHost Inn hotels were under construction. Same room revenues for all AmeriHost Inn hotels owned and operated by the Company, including minority owned hotels, increased approximately 2.9% during the fourth quarter of 2001, compared to the fourth quarter of 2000, attributable to a decrease of $0.74 in average daily rate offset by a 4.2% increase in occupancy. These results relate to the 63 AmeriHost Inn hotels that were operating for at least thirteen full months during the three months ended December 31, 2001. During 2001, same room revenue for all AmeriHost Inn hotels owned and operated by the Company decreased approximately 1.8%, attributable to an increase in average daily rate of $1.23 offset by a 3.4% decrease in occupancy. These results relate to the 70 AmeriHost Inn hotels that were operating for at least thirteen full months during the twelve months ended December 31, 2001. Revenues from hotel operations consist of the revenues from all hotels in which the Company has a 100% or controlling ownership or leasehold interest ("Consolidated" hotels). Development and construction revenues consist of fees for new construction and renovation activities performed by the Company for unconsolidated minority-owned hotels and unrelated third parties. The Company records commissions and revenue from the sale of its Consolidated AmeriHost Inn hotels, based upon the net sale price, as these sales are considered part of the Company's strategy of building and selling hotels, and therefore expanding the AmeriHost Inn brand. The Company also receives revenue from management and employee leasing services provided to unconsolidated minority-owned hotels and unrelated third parties. Revenues from Consolidated AmeriHost Inn hotels decreased 8.4% to $45.1 million during 2001, from revenues of $49.2 million during 2000, due primarily to the sale of hotels to franchisees. Revenues from the development segment decreased 72.3% to $1.9 million in 2001, from $7.0 million in 2000, due to the decrease in hotel development activity for minority owned and third party entities. Revenues from hotel sales and commissions were $12.9 million during 2001, as a result of the sale of nine AmeriHost Inn hotels. Revenues from hotel management and employee leasing segments decreased by 20.5% in total during 2001, due primarily to the sale or termination of hotels under management contracts. Revenues from Consolidated non-AmeriHost Inn hotels decreased 6.8% during 2001, compared to 2000, as a result primarily of the sale of one non-AmeriHost Inn hotel. Total revenues increased 1.3% to $77.2 million during 2001, from $76.2 million during 2000, due primarily to the increase from hotel sales and commissions. The Company recorded net income of $755,100 in 2001, or $0.13 per diluted share, compared to net income of $4.0 million or $0.74 per diluted share in 2000. In 2000, the Company recorded a gain on the sale of the AmeriHost Inn brand names and franchising rights in the amount of approximately $5.2 million, net of closing costs, as discussed below. On September 30, 2000, the Company sold the AmeriHost Inn and AmeriHost Inn & Suites brand names and franchising rights to Cendant Corporation. The Company received approximately $5.2 million upon closing, net of closing costs. The agreement with Cendant also provides for favorable royalty payment terms and additional long-term incentives to the Company as the AmeriHost Inn brands are expanded, including royalty sharing and a hotel development incentive fee each time a hotel owned by the Company is sold to an operator who becomes a Cendant franchisee. The Company uses Cash Flow, defined as net income plus depreciation and amortization, as a supplemental performance measure, along with net income, to report its operating results. Net income plus depreciation and amortization 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 -18- Company's operations, given its significant investment in real estate. Cash Flow, as defined, 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. Cash Flow, as defined, was $5.4 million during 2001, compared to $8.6 million during 2000. The United States lodging industry was negatively impacted by the terrorist attacks on the World Trade Center in New York City on September 11, 2001. Smith Travel Research reported that revenue per available room (RevPAR) for the entire U.S. lodging industry declined over 40% during the week ended September 22, 2001. Smith Travel Research has reported positive trends since this week, indicating the demand for hotel rooms is recovering, however this incident had a significant impact on the profitability of many hotels. The Company's hotels were also negatively impacted, however to a lesser degree. Same room RevPAR for the Company's AmeriHost Inn hotels declined 9.6% for the month of September, however the hotels rebounded quickly as same room RevPAR decreased 0.6% for the month of October, increased 5.2% for the month of November, and increased 5.2% for the month of December 2001. Since the Company's hotels are limited service hotels, located in smaller towns primarily in the Midwest, they were not impacted as much as hotels located in larger cities and near airports. Excluding hotels under construction, Arlington had an ownership interest in 76 hotels at December 31, 2001, versus 81 hotels at December 31, 2000. The increased ownership from the development of AmeriHost Inn hotels for the Company's own account and the acquisition of a non-AmeriHost Inn hotel was offset by the sale of AmeriHost Inn hotels to franchisees. These figures include a net decrease of four Consolidated hotels, from 66 at December 31, 2000 to 62 at December 31, 2001. CRITICAL ACCOUNTING POLICIES Consolidation Policy A joint venture project will be consolidated if the Company has a majority (i.e., greater than 50%) ownership interest, or when the Company has a minority ownership interest (i.e., less than 50%) and can exercise control over the critical decisions of the joint venture. The Company will evaluate several factors in determining whether or not it has control over the joint venture to warrant consolidation. These factors include the nature of the Company's ownership (for example, the sole general partner in a limited partnership, the sole managing member of a limited liability company, etc.), oversight of the daily operations, and the ability to make major decisions such as to refinance or sell the hotel asset without the consent of the other partners, among others. Minority owned joint ventures in which the Company maintains a non-controlling ownership interest are accounted for by the equity method. Under this method, the Company maintains an investment account, which is increased by contributions made and its share of the joint venture's income, and decreased by distributions received and its share of the joint venture's losses, in accordance with the terms of the joint venture agreement. The Company's share of each joint venture's income or loss, including gains and losses from capital transactions, is reflected on the Company's statement of operations as "Equity in income and (losses) from unconsolidated joint ventures" in the accompanying financial statements. Revenue Recognition The revenue from the operation of a consolidated hotel is recognized as part of the hotel operations segment when earned. Typically, cash is collected from the guest at the time of check-in or check-out, however the Company also extends credit to selected corporate customers. The Company had a reserve for specifically identified doubtful corporate accounts receivable in the amount of $150,000 at December 31, 2001. This reserve represents approximately 14% of the outstanding corporate account receivable balance at December 31, 2001. The reserve for doubtful accounts is reviewed periodically for reasonableness and is considered appropriate at December 31, 2001. The Company's intention is to operate the consolidated hotels until a buyer is found at an appropriate price. The Company may actively try to sell the hotel during the construction period, upon opening, or anytime thereafter. -19- Once the sale of the hotel is consummated, the Company will realize the value from its development. Under this scenario, the Company will depreciate the hotel assets and classify them as investment assets while it operates the hotel, since it is not assured that a sale will ultimately be consummated. Beginning in 2001, the Company records the hotel sale price as development revenue and the net cost basis of the hotel asset as development expense, when the sale is consummated, as part of the ongoing operational activity of the Company. Prior to 2001, the sale of two consolidated AmeriHost Inn hotels (during the third quarter of 1999) were recorded as operating activity in the hotel development segment. The sales of all other hotels, which had been operated for longer than 12 months, were recorded as a "gain on sale" below the operating income line, computed as the difference between the net sale price and the net cost basis of building the hotel. This treatment was considered appropriate since the strategy of building and selling had not yet been solidified until the consummation of the Cendant transaction in the latter part of 2000. The Company seeks not only to generate profit from the sale of a hotel, but also to generate a development incentive fee and a long-term, ongoing royalty sharing fee from Cendant Corporation. The Company recorded $12.9 million in hotel sales and commission revenue in 2001. The Company and the REIT which owns certain of the Company's leased hotels closed on the sale of nine AmeriHost Inn hotels during 2001. The Company provides hotel development, management, and staffing services to unrelated third parties and minority owned joint ventures. Under this scenario, revenues can be recognized in three ways: (i) the Company will record revenue from the development and construction of the hotel, (ii) if the Company enters into a hotel management agreement with the owner, it will recognize revenue in accordance with the terms of the agreement, and (iii) if the Company enters into a hotel staffing agreement with the owner, it will recognize revenue in accordance with the terms of the agreement. An unrelated third party or a minority owned joint venture may contract with the Company for any or all three services, however the Company will not provide employee leasing services unless it also provides hotel management services pursuant to a written agreement. The Company will recognize revenue from the development and construction of hotels for third parties and unconsolidated minority-owned entities pursuant to development and construction contracts with the hotel ownership entity. All contracts must be fully executed prior to the start of construction. In addition, the Company will not begin construction on a hotel for a joint venture or third party until it is assured that both the equity and debt financing are in place. The Company records revenue as the total contract price, and all development and construction costs as operating expenses in the hotel development segment. Development fee revenue from construction/renovation projects with unaffiliated third parties or entities in which the Company has a non-controlling minority ownership interest is recognized using the percentage-of-completion method. Construction fee revenue from construction/renovation projects with unaffiliated third parties or entities in which the Company has a non-controlling minority ownership interest is recognized on the percentage-of-completion method, generally based on the ratio of costs incurred to estimated total contract costs. Revenue from contract change orders is recognized to the extent costs incurred are recoverable. Profit recognition begins when construction reaches a progress level sufficient to estimate the probable outcome. Provision is made for anticipated future losses in full at the time they are identified. For the next 15 years, Cendant will pay the Company a development incentive fee every time the Company sells one of its existing AmeriHost Inn hotels to a buyer who executes an AmeriHost Inn franchise agreement with Cendant. In addition, this fee will also be paid to the Company for new hotels that the Company develops which are then sold to a franchisee of Cendant. This fee applies to the first 370 hotels sold by the Company during the 15-year term of the agreement. The fee is computed based on the most recent twelve months revenue, or a stipulated per room amount if the hotel has been open less than one year. Since the Cendant agreement provides for the potential reimbursement of this fee, from future fees earned, in the event the buyer defaults on the franchise agreement within the first 76 months, these fees are deferred when received, in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The deferred fees are amortized as hotel development segment revenue on a straight-line basis over the 76-month period, as the contingencies on the revenues are removed. The Company received $1.6 million in development incentive fees from the sale of AmeriHost Inn hotels during 2001, of which $147,792 was recognized as hotel development revenue in 2001. -20- For the next 25 years, Cendant will pay the Company a portion of all royalty fees Cendant receives from all of its AmeriHost Inn franchisees. Generally, Cendant receives royalty fees from each of their franchisees based upon a percentage of guest room revenue, ranging from 4% to 5%. In turn, Cendant will pay the Company a portion of this fee as stipulated in the agreement. The Company received $85,310 in royalty sharing payments in 2001. The Company records this royalty sharing fee as hotel development segment revenue when the related royalty fee is received. The Company recognizes management fee revenue when it performs hotel management services for unrelated third parties and minority owned joint ventures. The management fees are computed based upon a percentage of total hotel revenues, ranging from 4% to 8%, plus incentive fees in certain instances, in accordance with the terms of the individual written management agreements. The Company recognizes the management fee revenue in the hotel management segment as the related hotel revenue is earned. The Company recognizes employee leasing revenue when it staffs hotels, and performs related services, for unrelated third parties and minority owned joint ventures. The Company centrally employs all the employees working at the hotels. Employee leasing revenues are generally computed as the actual payroll costs plus an administrative fee ranging from 2% to 3%, in accordance with the terms of the individual written staffing agreements. The Company recognizes the employee leasing revenue in the employee leasing segment as the related payroll cost is incurred. Although the Company maintains employee leasing agreements with the hotel ownership entities, the Company is still ultimately responsible for its employees. In addition, the Company is responsible for maintaining and determining staffing levels, scheduling, hiring, firing, performance reviews, etc. through the Company's General Managers. Moreover, the Company is at risk with regard to personnel issues and lawsuits. As such, the Company has recorded employee leasing revenues primarily as the gross payroll cost plus the administrative fee, which is considered appropriate. During 1998 and 1999, the Company sold 30 hotels to a Real Estate Investment Trust ("REIT") for approximately $73 million. Upon the sale of the hotels, the Company simultaneously entered into agreements to lease back each of the hotels from the REIT. The leases are for an initial term of 15 years, as amended, and provide for rent in the amount of 10% of the original sale price, increased annually after year three by the lesser of 2% or the CPI adjustment. The gains from the sale of the hotels in 1998 and 1999 were deferred for financial statement reporting purposes, due to the continuing involvement with the long-term lease agreement, and are being amortized on a straight line basis into income as a reduction of leasehold rent expense over the 15 year initial term. Assuming the Company leases all of the remaining REIT hotels until the end of the initial term, approximately $757,000 will be amortized annually as a reduction of leasehold rent expense. When the Company builds a hotel for a minority owned joint venture, a portion of the profit is deferred. The deferral is computed as the Company's ownership in the joint venture multiplied by the development fee profit and the construction profit (as it is recognized on the percentage of completion basis). The deferred income is recognized by the Company over the estimated useful life of the related hotel asset. A portion of the deferral is amortized over the same life the joint venture is depreciating the hotel asset (generally, 39 years), and the remaining portion is amortized over the same life the joint venture is depreciating the furniture, fixtures & equipment (generally, 7 years). Impairment of Long-Lived Assets The Company periodically reviews the carrying value of certain of its long-lived assets, including its investment in joint ventures which own long-lived assets, in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would estimate the undiscounted sum of the expected cash flows of such assets to determine if such sum is less than the carrying value of such assets to ascertain if an impairment exists. If an impairment exists, the Company would determine the fair value by using quoted market prices, if available for such assets, or if quoted market prices are not available, the Company would obtain an -21- appraisal or discount the expected future cash flows of such assets. During 2001, our reviews indicated that there was no permanent impairment of the Company's long-lived assets. During 2000, the Company reduced the carrying value of an investment in a joint venture by approximately $110,000 in connection with such review. The adjustment is reflected in the equity in income of unconsolidated joint ventures line in the accompanying consolidated financial statements. RESULTS OF OPERATIONS The following table sets forth the percentages of revenues of the Company represented by components of net income for 2001, 2000 and 1999. Percentage of Total Revenue Year Ended December 31, (unaudited) ---------------------------------------------- 2001 2000 1999 -------- -------- -------- Revenue 100.0% 100.0% 100.0% Operating costs and expenses 75.8 77.1 76.1 ------ ----- ------- 24.2 22.9 23.9 Depreciation and amortization 6.1 6.0 6.0 Leasehold rents - hotels 8.4 8.6 9.6 Corporate general and administrative 2.5 2.2 2.0 ------ ----- ------- Operating income 7.2 6.1 6.3 Interest expense (6.7) (7.4) (7.9) Interest and other income 1.8 1.5 1.9 Equity in income and losses of affiliates (1.2) (0.1) (0.2) Gain on sale of assets 1.1 8.8 0.7 Income before minority interests and income taxes 2.2 8.9 0.8 Minority interests in operations of consolidated subsidiaries and partnerships (0.4) (0.1) (0.3) ------ ----- ------- Income before income taxes 1.8 8.8 0.5 Income tax expense (0.8) (3.5) (0.2) Net income 1.0% 5.3% 0.3% ====== ====== =======
2001 compared to 2000 Revenues increased 1.3% to $77.2 million during 2001, from $76.2 million during 2000. The increase in the hotel sales and commissions segment was offset by decreases in the hotel operations, hotel development, hotel management and employee leasing segments. Hotel operations revenue decreased 8.1% to $56.4 million during 2001, from $61.4 million during 2000. Revenues from Consolidated AmeriHost Inn hotels decreased 8.4% to $45.1 million during 2001, from $49.2 million during 2000. This decrease was attributable primarily to the decrease in same room revenues and the sale of nine Consolidated AmeriHost Inn hotels in 2001, partially offset by the opening of three new Consolidated AmeriHost Inn hotels, and the acquisition of one Consolidated AmeriHost Inn hotel from an unconsolidated minority owned -22- joint venture in 2001. Revenues from Consolidated non-AmeriHost Inn hotels decreased 6.8% during 2001, compared to 2000. This decrease was primarily the result of the sale of one Consolidated non-AmeriHost Inn hotel at the end of 2000. The hotel operations segment included the operations of 63 Consolidated hotels (including 55 AmeriHost Inn hotels) comprising 4,560 rooms at December 31, 2001, compared to 66 Consolidated hotels (including 60 AmeriHost Inn hotels) comprising 4,630 rooms at December 31, 2000. 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 and average daily rates. The Company believes that as the number of AmeriHost Inn hotels increases, the greater the benefits will be at all locations from marketplace recognition and repeat business. In addition, the Company typically builds new hotels in growing markets where it anticipates a certain level of additional hotel development. Hotel development activity is summarized as follows: 2001 2000 1999 -------------------------- --------------------------- ------------------------ 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 - 2 4 - 1 5 Starts 2 4 - 3 4 - Completions - 3 4 1 1 5 Under construction at --- --- ---- ---- --- --- end of year 2 3 - 2 4 - === === ==== ==== === === (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 72.3% to $1.9 million during 2001, from $7.0 million during 2000. The Company was constructing one hotel for a minority-owned joint venture and one hotel for an unrelated third party during 2001, both of which were under construction at December 31, 2001. In 2000, four hotels were under construction during the year, all of which were completed prior to December 31, 2000. The Company also had several additional projects in various stages of pre-construction development during these periods. Hotel management revenue decreased 14.7% to $1.1 million during 2001, from $1.3 million in 2000. The number of hotels managed for third parties and minority-owned entities decreased from 17 hotels, representing 1,378 rooms, at December 31, 2000 to 16 hotels, representing 1,318 rooms, at December 31, 2001. The decrease in revenue is primarily due to a 4.4% reduction in rooms under contract and the decrease in same room revenues of those hotels. Employee leasing revenue decreased 21.8% to $4.7 million during 2001, from $6.0 million during 2000, due primarily to the reduction in hotels managed for minority-owned entities and unrelated third parties as described above, and the associated decrease in payroll costs which is the basis for the employee leasing revenue. Other revenue, consisting primarily of leasing revenue from the Company's office building in 2001, and franchising revenue in 2000, decreased to $169,612 in 2001, from $586,276 during 2000. On October 1, 2001, the Company purchased the office building in which its headquarters is located. The building contains approximately 50,000 rentable square feet, of which the Company occupies approximately 19,000 square feet. Nearly all of the remaining space is leased to unrelated third parties pursuant to long-term leases. On September 30, 2000, the Company sold the AmeriHost Inn franchising rights to Cendant Corporation. As a result, the Company did not report franchising revenue in 2001. -23- Total operating costs and expenses decreased 0.4% to $58.5 million (75.8% of total revenues) in 2001, from $58.7 million (77.1% of total revenues) during 2000, primarily due to decreases in operating costs and expenses from the hotel operations and development segments as described below, offset by an increase in operating costs from hotel sales. Operating costs and expenses in the hotel operations segment decreased 5.7% to $42.1 million during 2001, from $44.7 million in 2000. A decrease in operating costs associated with the fewer number of hotels included in this segment (62 hotels at December 31, 2001 versus 66 hotels at December 31, 2000), were partially offset by significant increases in energy costs, inflationary increases in operating expenses and the greater number of stabilized hotels. Hotel operations segment operating costs and expenses as a percentage of segment revenue increased to 74.7% during 2001, from 72.8% during 2000, due primarily to the inflationary increases and higher energy costs. Operating costs and expenses as a percentage of revenues for the Consolidated AmeriHost Inn hotels increased to 73.0% in 2001, from 70.7% in 2000. Operating costs and expenses for the hotel development segment decreased 78.6% to $1.5 million during 2001, from $6.9 million during 2000, consistent with the 72.3% decrease in hotel development revenues for 2001. Operating costs and expenses in the hotel development segment as a percentage of segment revenue decreased to 76.5% during 2001, from 98.8% during 2000, due to the decrease in hotel development activity for unrelated third parties and unconsolidated joint ventures. The results for 2000 consisted of a greater amount of construction activity, which resulted in higher operating costs in relation to the revenue recognized. The results for 2001 consisted of a greater amount of pre-construction, hotel development activity, which resulted in lower operating costs in relation to the revenue recognized. Hotel management segment operating costs and expenses decreased 11.2% to $716,802 during 2001, from $806,959 during 2000. This decrease was primarily due to the decrease in the number of hotels operated and managed for unrelated third parties and minority-owned entities and consistent with the 14.7% decrease in hotel management segment revenue. Employee leasing operating costs and expenses decreased 22.2% to $4.6 million in 2001, from $5.9 million during 2000, which is consistent with the 21.8% decrease in segment revenue during 2001. Other operating costs and expenses, consisted primarily of expenses related to the management of the Company's office building in 2001, and franchising activity in 2000. Other operating expenses were $2,958 in 2001 and $489,064 in 2000. On October 1, 2001, the Company purchased the office building in which its headquarters is located and assumed the landlord duties for the other tenants. On September 30, 2000, the Company sold the AmeriHost Inn brand names and franchising rights to Cendant Corporation. As a result, the Company did not report franchising operating costs in 2001. Depreciation and amortization expense increased 2.9% to $4.7 million during 2001, from $4.5 million during 2000. This increase was primarily attributable to the opening of three new Consolidated AmeriHost Inn hotels, and the acquisition of one AmeriHost Inn hotel from a joint venture in 2001 and the resulting depreciation and amortization therefrom, partially offset by the sale of nine Consolidated Hotels that closed in 2001. Leasehold rents - hotels remained relatively unchanged at $6.5 million during both 2001 and 2000. The decrease primarily attributable to the termination of four leased hotels as a result of the lessor selling these hotels during 2001, was offset by the reduction in deferred gain amortization as a result of the extension of the hotel leases with the REIT. The amortization of deferred gain from the sale of the hotels to the REIT was $818,000 and $1,487,000 in 2001 and 2000, respectively. Corporate general and administrative expense increased 12.6% to $1.9 million during 2001, from $1.7 million during 2000, and can be attributed primarily to the overall growth of the Company and the recognition of $167,000 in expenses during the first quarter of 2001 related to the issuance of stock options to a non-employee for consulting services and transitional accounting fees, offset by a concerted effort to reduce administrative expenses. The Company's operating income increased 19.2% to $5.5 million during 2001, from $4.7 million during 2000. The following discussion of operating income by segment is exclusive of any corporate general and administrative expense. Operating income from Consolidated AmeriHost Inn hotels decreased 45.1% to $3.1 million during 2001, from $5.6 million during 2000. This decrease in operating income was due to the decrease in the number of -24- consolidated AmeriHost Inn hotels operated by the Company, a decrease in same room revenues, and increases in certain hotel operating expenses including energy costs. Operating income from the hotel development segment increased to $445,952 during 2001, from $62,872 during 2000. The increase in hotel development operating income was due to the increase in pre-construction hotel development activity for unrelated third parties and unconsolidated joint ventures during 2001, compared to 2000, which has a higher gross profit margin than the construction activity. The hotel management segment had operating income of $295,356 during 2001, compared to $399,771 during 2000. This decrease was due primarily to a reduction in the number of hotel rooms managed for unrelated third parties and unconsolidated joint ventures. Employee leasing operating income increased slightly to $110,642 during 2001, compared to $108,812 during 2000, due primarily to the decrease in employee leasing agreements with unrelated third parties and unconsolidated joint ventures, offset by the allocation of certain costs. During 2001, the Company modified the terms of three hotel loan agreements with the related lenders to obtain more favorable interest rates. In addition, the Company assisted three joint ventures in modifying their loan agreements to obtain lower interest rates. Based upon a discounted cash flow analysis of the interest rate differentials, the modification transactions did not qualify to be treated as an extinguishment of debt with the simultaneous acquisition of new debt. Interest expense decreased 8.1% to $5.2 million during 2001, from $5.6 million during 2000. This decrease was primarily attributable to the aforementioned sales of hotels whereby the Company does not incur any interest expense on the sold hotels after the sale dates as well as the reduction of interest rates on certain loan agreements, partially offset by the mortgage financing of newly constructed Consolidated hotels. The Company capitalizes interest expense incurred during the pre-opening construction period of a Company Owned hotel project, as part of the total development cost. The amount capitalized includes both interest charges from a direct construction loan, plus interest computed at the Company's incremental borrowing rate on the total costs incurred to date in excess of the construction loan funding. The Company capitalized $336,748, $100,275 and $121,238 in 2001, 2000, and 1999, respectively, in construction period interest which is included in property and equipment. The Company's share of equity in income (loss) of affiliates was ($925,654) during 2001, compared to ($101,872) during 2000. The decrease in equity of affiliates during 2001 was primarily attributable to the sale of two minority-owned properties in the first half of 2000 at a significant gain, as well as the recognition of losses in 2001 in excess of the Company's ownership interest for two joint ventures. Distributions from affiliates were $19,220 during 2001, compared to $473,808 during 2000. The Company recorded gains from the sale of assets of $886,338 during 2001, compared to $6.7 million in 2000. During 2001, the gains were comprised primarily of the unamortized deferred gains remaining from the original sale of four hotels to the REIT, which were recognized upon the consummation of the sales of these hotels by the REIT to unrelated third parties in 2001 and the simultaneous termination of the Company's leases with the REIT. The Company expects to continue recognizing the unamortized deferred gain from the future sale of REIT owned hotels. The Company reported a gain on sale from the sale of the AmeriHost Inn name and franchising rights in 2000 for approximately $5.2 million. In addition, four Consolidated Hotels were sold in 2000, where the Company recorded gains on the sales. The Company recorded income tax expenses of $615,000 in 2001, compared to $2.7 million in 2000, which are directly related to the pre-tax income incurred in 2001 and 2000, respectively. The Company reported net income of $755,100 in 2001, compared to $4.0 million in 2000, primarily due to the factors discussed above. 2000 compared to 1999 Revenues increased 0.1% to $76.2 million during 2000, from $76.1 million during 1999. The increases in the hotel development segment and other revenue (AmeriHost Inn franchising) were offset by decreases in the hotel operations segment. Hotel operations revenue decreased 1.2% to $61.4 million during 2000, from $62.1 million during 1999. Revenues from Consolidated AmeriHost Inn hotels decreased 0.6% to $49.2 million during 2000, from $49.5 million during 1999. This decrease was attributable primarily to the addition of seven Consolidated AmeriHost Inn hotels which -25- opened during 1999 and 2000, and an increase in same room revenues, offset by the sale of seven Consolidated AmeriHost Inn hotels in 1999 and 2000. Revenues from Consolidated non-AmeriHost Inn hotels decreased 3.7% during 2000, compared to 1999. This decrease was primarily the result of the sale of three Consolidated non-AmeriHost Inn hotels during 1999 and 2000. The hotel operations segment included the operations of 66 Consolidated hotels (including 60 AmeriHost Inn hotels) comprising 4,630 rooms at December 31, 2000, compared to 69 Consolidated hotels (including 62 AmeriHost Inn hotels) comprising 4,867 rooms at December 31, 1999. After considering the Company's ownership interest in the majority-owned Consolidated hotels, this translates to 4,391 and 4,624 equivalent owned rooms as of December 31, 2000 and 1999, respectively, or a decrease of 5.0%. The Company believes that as the number of AmeriHost Inn hotels increases, the greater the benefits will be at all locations from marketplace recognition and repeat business. In addition, the Company typically builds new hotels in growing markets where it anticipates a certain level of additional hotel development. Hotel development revenue increased 8.6% to $7.0 million during 2000, from $6.4 million during 1999. The Company was constructing three hotels for minority-owned entities during 2000, all of which began construction in 1999 and opened during 2000. The majority of the revenues for these projects was recognized in 2000, however the Company also sold two AmeriHost Inn hotels in 1999 and recognized related development segment revenues and expenses. The Company also had several additional projects in various stages of pre-construction development during these periods. Hotel management revenue remained consistent at $1.3 million during both 2000 and 1999. The number of hotels managed for third parties and minority-owned entities decreased from 18 hotels, representing 1,696 rooms, at December 31, 1999 to 17 hotels, representing 1,378 rooms, at December 31, 2000. The fluctuation in revenue is primarily due to an 18.8% reduction in rooms under contract offset by increases in same room revenues of those hotels. Employee leasing revenue remained flat, at $6.0 million during both 2000 and 1999, due primarily to the reduction in hotels managed for minority-owned entities and unrelated third parties as described above offset by increases in payroll costs which is the basis for the employee leasing revenue. Other revenue, consisting primarily of franchising revenue increased to $586,276 during 2000, from $222,187 during 1999. On September 30, 2000, the Company sold the AmeriHost Inn franchising rights to Cendant Corporation. As a result, the Company will no longer report franchising revenue. Total operating costs and expenses increased 1.5% to $58.7 million (77.1% of total revenues) during 2000, from $57.9 million (76.1% of total revenues) during 1999 primarily due to increases in operating costs and expenses from the development segment as described below. Operating costs and expenses in the hotel operations segment remained essentially flat as anticipated inflationary increases were offset by the reduction in the number of Consolidated hotels. Hotel operations segment operating costs and expenses as a percentage of segment revenue remained consistent at 72.8% during 2000, from 72.7% during 1999, due primarily to inflationary increases and start up costs associated with new hotels, offset by increased operational efficiencies. Operating costs and expenses as a percentage of revenues for the Consolidated AmeriHost Inn hotels changed only slightly during 2000, compared to 1999. Operating costs and expenses for the hotel development segment increased 27.9% to $6.9 million during 2000, from $5.4 million during 1999, consistent with the 8.6% increase in hotel development revenues for 2000. Operating costs and expenses in the hotel development segment as a percentage of segment revenue increased to 98.8% during 2000, from 83.9% during 1999. The third quarter of 1999 consisted primarily of the sale of two AmeriHost Inn hotels. The results for 2000 consisted of a greater amount of construction activity, which resulted in higher operating costs in relation to the revenue recognized. Hotel management segment operating costs and expenses decreased 0.3% to $806,959 during 2000, from $809,061 during 1999. This decrease was primarily due to the decrease in the number of hotels operated and managed for unrelated third parties and minority-owned entities offset by increases in same room revenue. Employee leasing operating costs and expenses increased 2.1% to $5.9 million during 2000, from $5.7 million during 1999, which is the result of increased payroll costs during 2000 compared to 1999. -26- Other operating costs and expenses, consisting primarily of franchising activity operating costs and expenses decreased 37.8% to $489,064 during 2000, from $786,658 during 1999. On September 30, 2000, the Company sold the AmeriHost Inn brand names and franchising rights to Cendant Corporation. As a result, the Company will no longer report franchising operating costs. Depreciation and amortization expense decreased 0.5% to $4.5 million during 2000, from $4.6 million during 1999. This decrease was primarily attributable to the sale of ten Consolidated hotels that closed in 1999 and 2000, partially offset by the addition of eight Consolidated hotels to the hotel operations segment opened during 1999 and 2000, and the resulting depreciation and amortization therefrom. Leasehold rents - hotels decreased 10.7% to $6.5 million during 2000, compared to $7.3 million during 1999. The decrease was primarily attributable to the termination of two leased hotels as a result of the lessor selling these hotels during 1999 and 2000. Corporate general and administrative expense increased 10.3% to $1.7 million during 2000, from $1.5 million during 1999, and can be attributed primarily to the overall growth of the Company and the allocation of certain general and administrative expenses. The Company's operating income decreased 2.6% to $4.7 million during 2000, from $4.8 million during 1999. The following discussion of operating income by segment is exclusive of any corporate general and administrative expense. Operating income from Consolidated AmeriHost Inn hotels increased 10.3% to $5.7 million during 2000, from $5.2 million during 1999. These increases in operating income were due to the increase in same room revenues as a significant number of recently opened Consolidated AmeriHost Inn hotels were still operating in 1999 during their pre-stabilization period when revenues are typically lower, offset by the sale of Consolidated AmeriHost Inn hotels during the past 12 months. Operating income from the hotel development segment decreased to $62,872 during 2000, from $1.0 million during 1999. The decrease in hotel development operating income was due to the sale of two AmeriHost Inn hotels open less than 12 months during the third quarter 1999, offset by the greater number of hotels developed and constructed for third parties and minority-owned entities during 2000, compared with 1999. The hotel management segment had operating income of $399,771 during 2000, from operating income of $448,710 during 1999. This decrease was due primarily to a reduction in general and administrative costs for the management segment, offset by fewer hotels managed during the past twelve months for unrelated third parties and minority-owned properties. Employee leasing operating income decreased to $108,812 during 2000, from $242,309 during 1999, due primarily to the decrease in employee leasing agreements with minority-owned entities and unrelated third parties. Interest expense decreased 7.1% to $5.6 million during 2000, from $6.0 million during 1999. This decrease was primarily attributable to the aforementioned sales of hotels whereby the Company does not incur any interest expense on the sold hotels after the sale dates, partially offset by the mortgage financing of newly constructed Consolidated hotels. The Company's share of equity in income (loss) of affiliates was ($101,872) during 2000, compared to ($160,837) during 1999. The fluctuation in equity of affiliates during 2000 was primarily attributable to the sale of minority-owned properties in 1999 and 2000 at various gains. Distributions from affiliates were $473,808 during 2000, compared to $278,096 during 1999. The Company recorded gains on the sale of assets of $6.7 million in 2000, compared to $553,298 in 1999. The increase in gain on sale was due to the sale of the AmeriHost Inn name and franchising rights in 2000 for approximately $5.2 million. In addition, four consolidated hotels were sold in 2000, compared to three consolidated hotels in 1999, where the Company recorded gains on the sales. The Company recorded income tax expenses of $2.7 million in 2000, compared to $160,000 in 1999, which are directly related to the pre-tax income incurred in 2000 and 1999, respectively. -27- The Company reported net income of $4.0 million in 2000, compared to net income of $200,591 in 1999, primarily due to the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company has five main sources of cash from operating activities: (i) revenues from hotel operations; (ii) fees from development, construction and renovation projects including the sale of hotel assets; (iii) fees from management contracts; (iv) fees from employee leasing services; and (v) hotel development incentive fees and royalty sharing pursuant to the Cendant transaction. 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. Management fee revenues are typically 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 on or before the pay date. The Company typically receives an earnest money deposit from the buyer of a hotel when a sales contract is signed. The remaining proceeds from the sale of hotel assets are received at the time of closing. The development incentive fee from Cendant is typically received within 20 days of the closing. Royalty sharing payments from Cendant are received quarterly, based on the actual royalty payments received by Cendant from the AmeriHost Inn franchisees. During 2001, the Company's cash provided from operations was $15.9 million, compared to $1.2 million during 2000, or an increase in cash provided by operations of $14.7 million. The increase in cash flow from operations during 2001, when compared to 2000, can be attributed primarily to the sale of nine AmeriHost Inn hotels during 2001. The Company invests cash in three principal areas: (i) the purchase of property and equipment through the construction, renovation and acquisition 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. From time to time, the Company may also utilize cash to purchase its own common stock. Pursuant to an amendment to the master lease agreement with the REIT, the Company can facilitate the sale of up to eight leased hotels by the REIT. When the REIT sells a leased hotel to a buyer who becomes an AmeriHost Inn franchisee of Cendant, the Company receives: (i) a commission for facilitating the transaction which is based upon the sale price, (ii) an incremental fee from Cendant, and (iii) long-term royalty sharing fees from Cendant from the future royalties paid to Cendant. Both the Company and the REIT choose which properties are sold. For each hotel chosen by the Company, one hotel is also chosen by the REIT. The Company's choice is final when the sale transaction closes. The REIT makes its corresponding choice at this time. If the Company and the REIT are not successful in selling the REIT's choice within a 12-month period, then the Company is obligated under the agreement to purchase the hotel from the REIT. If the Company does not complete the purchase of the hotel within the specified time period, then the Company's rent payment for all REIT hotels shall be increased by 0.25% each time. The Company cannot close on the sale of its third and fourth choice until the first and second REIT choices have been sold (or purchased by the Company), respectively. During 2001, the Company facilitated the sale of two hotels by the REIT (the Company's first and second choices), and purchased one hotel from the REIT (the REIT's first choice). The Company must either facilitate the sale of the REIT's second choice, or purchase the hotel, by June 2, 2002, in order to avoid the scheduled rent increase of 0.25%. The Company expects to acquire this hotel prior to June 2, 2002, with approximately $700,000 in cash, plus mortgage financing already committed from an affiliate of the REIT. On September 18, 2000, the Company finalized the terms of an agreement to purchase the remaining ownership interests in three existing joint ventures at a specified price. One of these acquisitions was completed in 2001, with the remaining two to be completed before December 31, 2002. The Company expects to use approximately $1.6 million for the purchase of these two joint venture interests. -28- During 2001, the Company used $27.5 million in investing activities compared to receiving $2.7 million during 2000. During 2001, the Company bought out a partner's interest in one joint venture for $795,384, used $25.4 million to purchase property and equipment for Consolidated Hotels, and used $1.5 million for investments in and advances to affiliates, net of distributions and collections on advances from affiliates. During 2000, the Company received $13.1 million from the sale of hotels, used $10.4 million to purchase property and equipment for Consolidated Hotels, and used $2,655 for investment in and advances to affiliates, net of distributions and collections on advances from affiliates. Cash provided by financing activities was $14.6 million during 2001 compared to cash used by financing activities of $6.0 million during 2000. In 2001, the primary factors were principal repayments of $9.2 million on the mortgage financing of Consolidated hotels, including the repayment of mortgages in connection with the sale of hotels, offset by $20.6 million in proceeds from the mortgage financing of Consolidated hotels, and net proceeds of $3.4 million on the Company's operating line-of-credit. In 2000, the contributing factors were principal repayments of $6.4 million on the mortgage financing of Consolidated hotels, including the repayment of mortgages in connection with the sale of hotels, and $4.2 million in net repayments on the Company's operating line-of-credit, offset by $4.7 million in proceeds from the issuance of long-term debt. The Company modified three of its mortgage loan agreements with existing lenders during the third quarter of 2001, resulting in the reduction of their respective interest rates to market. Based upon a discounted cash flow analysis of the interest rate differentials, these modifications did not qualify to be treated as debt extinguishments. As such, costs incurred in connection with the modifications were deferred and amortized, in addition to the existing deferred loan costs related to the original financing, over the remaining term of the respective loans. The Company, through wholly owned subsidiaries, is a general partner or managing member in 18 joint ventures. As such, the Company is secondarily liable for the obligations and liabilities of these joint ventures. As of December 31, 2001, these joint ventures had $29.9 million outstanding under mortgage loan agreements. Approximately $7.6 million of this amount has been included in the Company's consolidated financial statements as of December 31, 2001 since it is from joint ventures in which the Company has a majority or controlling ownership interest, leaving approximately $22.3 million in off balance sheet mortgage debt with unconsolidated joint ventures. Of this amount, the Company has also provided approximately $15.6 million in guarantees to the lenders. Other partners have also guaranteed portions of this amount. Two unconsolidated joint venture mortgage loans in the amount of $3.2 million at December 31, 2001 mature in 2002. The lender for one of these mortgage loans in the amount of $1.6 million has indicated they would extend the loan for up to ten years, and the extension of the other mortgage loan in the amount of $1.6 million is currently being negotiated. The Company expects both of these loans to be extended prior to their maturity. One unconsolidated joint venture mortgage loan in the amount of $1.8 million at December 31, 2001 matures in 2003. The Company expects this loan to be extended or refinanced prior to its maturity. The remaining joint venture mortgage loans mature after 2003. From time to time, the Company advances funds to joint ventures for working capital and renovation projects. The Company has also provided the mortgage financing for one unconsolidated joint venture. The advances, including the mortgage note, bear interest at rates ranging from prime to 10% per annum and are due upon demand. The advances were $7.0 and $8.5 million at December 31, 2001 and 2000, respectively, and are included in investments in and advances to unconsolidated hotel joint ventures in the Company's consolidated financial statements. The Company expects the joint ventures to repay these advances through cash flow generated from hotel operations, mortgage financing, and/or the sale of the hotel. Certain of the Company's hotel mortgage notes and the Company's office building mortgage note contain financial covenants, principally minimum net worth requirements, debt to equity ratios, and minimum debt service coverage ratios. At December 31, 2001, the Company was not in compliance with the minimum debt service coverage ratio contained in one mortgage loan agreement, aggregating approximately $1.6 million. However the Company has obtained a waiver with respect to this violation. In addition, one joint venture where the Company has guaranteed the mortgage debt was not in compliance with the minimum debt service coverage ratio covenant contained in the mortgage loan agreement. This joint venture has also obtained a waiver from the lender regarding this violation. -29- At December 31, 2001, the Company had $6.8 million outstanding under its operating line-of-credit. The operating line-of-credit (i) had a limit of $7.5 million; (ii) was collateralized by a security interest in certain of the Company's assets, including its interest in various joint ventures; (iii) bore interest at an annual rate equal to the lending bank's base rate plus 1/2%; and (iv) matured February 28, 2002. The line of credit note contained financial covenants, requiring a minimum net worth, a maximum debt to net worth ratio, and a minimum debt service coverage ratio. The Company was in compliance with these covenants as of December 31, 2001. Prior to its expiration in February 2002, the Company replaced its line-of-credit with another bank. The new operating line-of-credit has a limit of $8.5 million, is collateralized by substantially all the assets of the Company, subject to first mortgages from other lenders on hotel assets, bears interest at a rate based on either the prime rate or LIBOR as chosen quarterly by the Company, plus a spread adjusted quarterly based on the Company's leverage ratio, ranging from zero to 0.5% (if Prime based) or 3.0% (if LIBOR based), and matures February 19, 2003. The new line-of-credit agreement also provides for the maintenance of certain financial covenants, including minimum tangible net worth, a maximum leverage ratio, and a minimum debt service coverage ratio. The aggregate maturities of long-term debt and future minimum rent payments under all operating leases are as follows: Year Ending Long-term Operating December 31, Debt Leases ------------- ---------------- ----------------- 2002 $ 2,110,652 $ 6,383,000 2003 14,808,979 6,409,000 2004 7,562,016 6,359,000 2005 1,851,855 6,517,000 2006 4,947,081 6,642,000 Thereafter 40,918,338 47,187,000 ---------------- ----------------- $ 72,198,921 $ 79,497,000 ================ ================= The Company expects cash from operations, including proceeds from the sale of hotels, to be sufficient to pay all operating and interest expenses in 2002, as well as commitments to purchase hotel assets. 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 In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 133 has been amended by SFAS No. 137, which delayed the effective date to periods beginning after June 15, 2000, and by SFAS No. 138, -30- which amends the accounting and reporting standards for certain derivative instruments and certain hedging activities. The Company, to date, has not engaged in derivative and hedging activities. Statement of Financial Accounting Standards No. 142, "Accounting for Goodwill and Other Intangible Assets," issued in 2001, requires, among other things, that effective January 1, 2002, goodwill resulting from a business combination accounted for as a purchase no longer be amortized, but be subjected to ongoing impairment review. The Company does not have any goodwill recorded as of December 31, 2001. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairments or Disposal of Long-Lived Assets" ("SFAS 144"). Adoption of SFAS 144 is required for fiscal years beginning after December 15, 2001, and interim periods within those years, with early adoption encouraged. SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS 121 and related literature and establishes a single accounting model, based on the framework established in SFAS 121, for long-lived assets to be disposed of by sale. The Company will adopt SFAS 144 in the first quarter of 2002. The Company is in the process of determining the impact, if any, of adopting SFAS 144. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's long-term debt obligations. The Company has some cash flow exposure on its long-term debt obligations to changes in market interest rates. The Company primarily enters into long-term debt obligations in connection with the development and financing of hotels. The Company maintains a mix of fixed and floating debt to mitigate its exposure to interest rate fluctuations. The Company's management believes that fluctuations in interest rates in the near term would not materially affect the Company's consolidated operating results, financial position or cash flows as the Company has limited risks related to interest rate fluctuations. The table below provides information about financial instruments that are sensitive to changes in interest rates, for each interest rate sensitive asset or liability as of December 31, 2001. The carrying amounts reflected approximate the estimated fair values. As the table incorporates only those exposures that existed as of December 31, 2001, it does not consider those exposures or positions which could arise after that date. Moreover, the information presented therein is merely an estimate and has limited predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, hedging strategies and prevailing interest rates at the time. -31- Average Nominal Carrying Value Interest Rate -------------- ------------- Operating line of credit - variable rate $ 6,793,702 5.50% Mortgage debt - fixed rate $ 30,810,118 7.41% Mortgage debt - variable rate $ 41,388,803 5.33%
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements filed as part of this Form 10-K are included under "Exhibits, Financial Statements and Reports on Form 8-K" under Item 14. Selected quarterly financial data is presented in Note 16 to the consolidated financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no disagreements with KPMG on accounting and financial disclosure matters which are required to be described by Item 304 of Regulation S-K. -32- PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Company's executive officers and directors are: Name Age Position ---- --- -------- Michael P. Holtz 45 Chairman of the Board of Directors, President and Chief Executive Officer James B. Dale 38 Senior Vice President of Finance, Secretary, Treasurer and Chief Financial Officer Russell J. Cerqua 45 Director Reno J. Bernardo 70 Director Salomon J. Dayan 56 Director Jon K. Haahr 48 Director Thomas J. Romano 49 Director 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. In 1999, in addition to his other responsibilities, Mr. Holtz was elected Chairman of the Board of Directors. Mr. Holtz is responsible for development and implementation of all Company operations including hotel development, finance and management. Mr. Holtz has over 22 years experience in the operation, development and management of hotel properties. James B. Dale was promoted to Chief Financial Officer in 1998, in addition to his responsibilities as Senior Vice President of Finance. Mr. Dale began his employment with the Company in May 1994 as the Company's first Corporate Controller. He has been responsible for overseeing all aspects of the Company's property and corporate accounting departments, including preparation of all SEC filings. In 1999, Mr. Dale was elected Secretary by the Board of Directors. Prior to joining the Company, Mr. Dale was an Audit Manager with an international public accounting firm, with nearly nine years of experience in auditing, financial reporting and taxation. Mr. Dale is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and the Illinois CPA Society. Russell J. Cerqua served as the Executive Vice President of Finance, Chief Financial Officer, Treasurer and Secretary of the Company from 1987 through 1998, where his primary responsibilities included internal and external financial reporting, corporate financing, development of financial management systems, and financial analysis. Mr. Cerqua is currently the President and Chief Financial Officer of Datavations LLC, a software development and consulting company, and was previously Chief Financial Officer of Metro Technologies, LLC. Prior to joining the Company, Mr. Cerqua was an audit manager with Laventhol & Horwath, the Company's former independent certified public accountants. 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. 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 -33- 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., a physician certified in internal and geriatric medicine, was formerly the Chief Executive Officer of Salomon J. Dayan Ltd., a multi-specialty medical group he founded which was dedicated to the care of the elderly in hospital, nursing home and outpatient settings. Dr. Dayan was the Medical Director and Executive Director of Healthfirst, a corporation which he started in 1986 which operated multiple medical ambulatory facilities in the Chicago, Illinois area. Since 1994 he has been an Assistant Professor of Medicine at Rush Medical Center in Chicago. Dr. Dayan is currently the Chairman of the Board of Directors of J. D. Financial, a bank holding company owning Pan American Bank. Additionally, Dr. Dayan also has numerous investments in residential and commercial real estate. Mr. Haahr's background includes fifteen years as an investment banker and more than 20 years of capital markets experience. He is co-founder and Managing Principal of Silver Portal Capital, an investment/merchant banking and investment advisory firm. He directs a team that provides services in the areas of capital formation, strategic advice and portfolio sales to a focused group of private and public real estate clients owning commercial, healthcare and lodging assets. Prior to founding Silver Portal, Mr. Haahr was Co-head and Managing Director of Real Estate Investment Banking for First Union Securities from 1999-2000, where he was instrumental in re-engineering the group's business strategy. Mr. Haahr also founded and ran the same industry group for EVEREN Securities from 1991 until joining First Union. He originally joined the Investment Banking Department of Kemper Securities (EVEREN'S predecessor firm) in 1987 and, prior to establishing the Real Estate Group, provided banking expertise to corporate finance clients in the financial services sector and in the area of closed-end funds. Mr. Haahr is a member of the Board of Directors of the Center for Urban Land Economics Research at the University of Wisconsin Real Estate School, and speaks regularly at a variety of real estate industry events. Thomas J. Romano is currently an Executive Vice President for the Bridgeview Bank Group. Mr. Romano is a member of the Executive Management Committee and is responsible for all lending activities for a significant loan portfolio. His experience includes nineteen years with First of America Bank where his responsibilities included the management of commercial lending functions and numerous branch locations. Mr. Romano is currently a member of the Lake County Muscular Dystrophy Association and a member of Robert Morris Associates. Mr. Romano is a member of the Board of Directors for both Laserage Technology Corporation and Bridgeview Bank Oklahoma City, N.A. 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, 2001, 2000 and 1999, of those persons who were, at December 31, 2001: The chief executive officer and the other executive officer of the Company (the "Named Officers"). See "Compensation of Directors" under Item 11. SUMMARY COMPENSATION TABLE
Long-Term Compensation Annual Compensation ------------------------------ ----------------------------- Restricted Securities Name and Principal Stock Underlying All Other Position Year Salary Bonus Awards Options(#)(1) Compensation(2) - ------------------------ ------ -------- ---------- ------ -------------- --------------- Michael P. Holtz 2001 325,000 - - 100,000 23,422 Chairman of the Board, President 2000 325,000 36,500 - 100,000 17,500 and Chief Executive Officer 1999 325,000 20,000 - - 17,500 James B. Dale 2001 132,115 9,000 - 21,000 2,214 Senior Vice President Finance, 2000 125,000 5,000 - 21,000 1,300 Secretary, Treasurer, and 1999 120,000 5,500 - 20,500 1,251 Chief Financial Officer -34- (1) All options were fully vested as of December 31, 2001, except for 50,000 options held by Mr. Holtz and 21,000 options held by Mr. Dale. (2) Represents life and disability insurance premiums paid by the Company on behalf of the Named Officers and the Company's 401(k) matching contributions of $2,625, $2,500 and $2,500 for Mr. Holtz, and $1,764, $1,300 and $1,251 for Mr. Dale, for 2001, 2000 and 1999, respectively.
STOCK OPTIONS The following table summarizes the number and terms of stock options granted to each of the Named Officers during the year ended December 31, 2001. OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term ---------------------------------------------------------- ----------------------------- % of Total Options Granted to Exercise or Options Employees in Base Price Expiration Name Granted(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($) - -------------------- ------------- --------------- ------------ ------------ ---------- ----------- Michael P. Holtz 100,000 54.4% $2.938 Jan. 2011 30,428 201,064 James B. Dale 21,000 11.4% $3.74 May 2011 - 33,143
The following table provides information concerning the exercise of stock options during 2001, and the year-end value of unexercised options for each of the Named Officers and Directors of the Company. OPTION EXERCISES AND YEAR-END VALUE TABLE
Number of Unexercised Value of Unexercised Options Held at in-the-Money Options at Shares December 31, 2001 December 31, 2001 (1) Acquired Value --------------------------- -------------------------- Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable - -------------------- ----------- -------- ----------- ------------- ----------- ------------- Michael P. Holtz - - 876,100 50,000 $ 27,938 $ - James B. Dale - - 59,500 21,000 - - Russell J. Cerqua - - 203,458 3,500 8,730 - Reno J. Bernardo - - 7,500 3,500 - - Salomon J. Dayan - - 70,000 3,500 - - Jon K. Haahr - - 4,500 3,500 - - Thomas J. Romano - - 3,500 3,500 - - (1) The closing sale price of the Company's Common Stock on such date on the Nasdaq National Market was $2.09.
EMPLOYMENT AGREEMENT The Company's President and Chief Executive Officer, Michael P. Holtz, provides services to the Company under the terms of an employment agreement dated January 1, 1995, amended February 4, 1997, amended November 23, 1999 and amended August 3, 2000. Pursuant to Amendment No. 3 dated November 23, 1999, the agreement renewed for an additional three-year period ending December 31, 2003. Pursuant to Amendment No. 3, Mr. Holtz receives 100,000 options each year, with 50,000 vesting 90 days from the date of issuance and 50,000 vesting only if the Company attains certain financial performance criteria. Amendment No. 3 also provides for a cash bonus based upon financial performance and hotel operation performance. In 2001, the Company did not meet the financial performance criteria, therefore 50,000 of the options issued to Mr. Holtz in 2001 did not vest, and Mr. Holtz did not receive a cash bonus. Under the terms of the amended employment agreement, stock awards were eliminated as a component of annual compensation. -35- The employment agreement entitles the executive officer to receive severance payments, equal to two years' compensation, 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. Pursuant to Amendment No. 4 dated August 3, 2000, for purposes of the employment agreement, a change in control shall be defined as any simultaneous change in the Company's Board of Directors such that a majority of the Board is composed of members who were not members of the Board on the date of this Amendment No. 4. In addition, a change of control means 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. The executive officer is also entitled to severance payments, equal to one year's compensation, if he voluntarily terminates his employment with the Company for a reason other than a "good reason" and provides appropriate notice of such resignation. COMPENSATION OF DIRECTORS Each nonemployee Director of the Company received an annual retainer fee of $9,000 ($750 per month) in 2001. 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. Non-employee Directors may elect to receive their retainer fee in restricted common stock of the Company. Each nonemployee Director of the Company receives an option to purchase 1,000 shares of Common Stock annually, pursuant to the 1996 Stock Option Plan for Nonemployee Directors. In addition, beginning in 2000, each nonemployee Director receives 2,500 options annually which vest only if the Company meets certain performance criteria, including earnings per share, EBITDA or net operating income, as defined. The performance options issued in 2001 were terminated in 2002, since the Company did not meet the financial performance criteria in 2001. All Director stock options are priced at the market price on the date of issuance. 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 25, 2002, 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 25, 2002 ------------------------- Name Number Percent - ------------------------------------------- -------------------- ----------- Michael P. Holtz 1,144597 (1) 19.5% Wellington Management Company 615,000 (2) 12.4 Kenneth M. Fell 451,420 (3) 9.1 Massachusetts Financial Services Company 400,000 (4) 8.1 H. Andrew Torchia 411,132 (5) 8.1 Dimensional Fund Advisors, Inc. 397,100 (6) 8.0 Raymond and Liliane R. Dayan 388,988 (7) 7.9 Salomon J. Dayan 381,862 (1) 7.5 Richard A. D'Onofrio 342,319 (5) 6.7 Russell J. Cerqua 261,913 (1) 5.1 James B. Dale 67,775 (1) 1.4 Reno J. Bernardo 40,112 (1) 0.8 Thomas J. Romano 13,500 (1) 0.3 Jon K. Haahr 12,129 (1) 0.2 ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (7 PERSONS) 1,921,888 30.4% ========= ==== -36- (1) Includes shares subject to options exercisable presently or within 60 days as follows: Mr. Holtz, 926,100 shares, Dr. Dayan, 154,050 shares, Mr. Cerqua, 203,458 shares, Mr. Dale, 66,500 shares, Mr. Bernardo, 7,500 shares, Mr. Romano, 3,500 shares, and Haahr, 4,500 shares. (2) Based upon information provided in its Schedule 13G dated December 31, 2001, Wellington Management Company ("WMC"), in its capacity as investment advisor, may be deemed beneficial owner of 615,000 shares of the Company which are owned by numerous investment counseling clients. Of the shares shown above, WMC has shared voting power for 615,000 shares and shared investment power for 615,000 shares. (3) Based upon information provided in his Schedule 13D dated November 3, 2000, Mr. Fell owns 451,420 shares of the Company. Mr. Fell has sole voting and investment power for these shares. (4) Based upon information provided in its Schedule 13G dated December 31, 2001, Massachusetts Financial Services Company ("MFS"), in its capacity as investment manager, may be deemed beneficial owner of 400,000 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 400,000 shares. (5) Based upon information provided in a 13D joint filing dated October 15, 1999. Includes 65,543 and 4,400 shares owned directly by Messrs. Torchia and D'Onofrio, respectively, and 150,000 options each owned by Messrs. Torchia and D'Onofrio which are currently exercisable. In addition, it includes 383,508 shares owned by Urban 2000 Corp. Mr. Torchia is the 51% stockholder of Urban 2000 Corp. and disclaims beneficial ownership of all but an aggregate of 195,589 shares owned directly, or indirectly, by Urban 2000 Corp. Mr. D'Onofrio is the 49% stockholder of Urban 2000 Corp. and disclaims beneficial ownership of all but an aggregate of 187,919 shares owned directly, or indirectly by Urban 2000 Corp. (6) Based upon information provided in its Schedule 13G dated January 30, 2001, Dimensional Fund Advisors, Inc. ("DFA"), in its capacity as investment advisor, may be deemed beneficial owner of 397,100 shares of the Company which are owned by numerous investment counseling clients. Of the shares shown above, DFA has sole voting and investment power for 397,100 shares. (7) Based upon information provided in their Schedule 13D dated October 23, 2000, Mr. and Mrs. Dayan beneficially own 388,988 shares of the Company. Of the shares shown above, Mr. and Mrs. Dayan have sole voting and investment power for 388,988 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 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, Dr. Dayan, a director of the Company, has invested approximately $1.6 million in seven joint ventures since 1988. In two joint ventures, the partners, including Dr. Dayan, have been guaranteed minimum annual distributions by the Company equal to 10% of their original capital contribution, and also have the right to convert their existing partnership interests into shares of the Company's common stock, under certain conditions. 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. Dr. Dayan is also the owner and Chairman of the Board of Directors of the company that owns Pan American Bank. Pan American Bank has provided mortgage financing to the Company in the amount of $756,000 at December 31, 2001, and mortgage financing to a joint venture in which the Company is a partner, in the amount of $948,000 at December 31, 2001. Mr. Romano is an executive officer of Bridgeview Bank & Trust, which was the bank that maintained the Company's operating line-of-credit until February 19, 2002, at which time the Company transferred the line-of-credit to another lender. The Company currently maintains several demand deposit accounts at Bridgeview Bank & Trust, however expects to transfer these accounts to the bank which is now providing the Company's line-of-credit. -37- 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, 2001. (a)(1) Financial Statements: Independent Auditors' Report............................. F-1 Consolidated Balance Sheets at December 31, 2001 and 2000................................................ F-3 Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and1999................... F-5 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999... F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999................. F-7 Notes to Consolidated Financial Statements............... F-9 (a)(2) Financial Statement Schedules: No financial statement schedules are submitted as part of this report because they are not applicable or are not required under regulation S-X or because the required information is included in the financial statements or notes thereto. (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 Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) 3.2 By-laws of Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) 4.2 Specimen Common Stock Purchase Warrant for Employees -38- 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 Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) and Michael P. Holtz 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 ----------- ----------- 10.9 Amendment of Employment Agreement between Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) and Michael P. Holtz The following exhibit was included in the Registrant's Report on Form 10-K filed March 30, 1999: Exhibit No. Description - ----------- ----------- 10.5 Agreement of Purchase and Sale between PMC Commercial Trust and Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.), including exhibits thereto The following exhibit was included in the Registrant's Report on Form 10-K filed March 23, 2000: Exhibit No. Description - ----------- ----------- 10.6.1 Amendment No. 3 of Employment Agreement between Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) and Michael P. Holtz The following exhibits were included in the Registrant's Report on Form 10-Q filed November 7, 2000: Exhibit No. Description - ----------- ----------- 10.10 Asset Purchase Agreement 10.11 Royalty Sharing Agreement 10.12 Development Agreement -39- The following exhibit was included in this Report on Form 10-K filed March 19, 2001: Exhibit No. Description - ----------- ----------- 10.12.1 Amendment No. 4 of Employment Agreement between Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) and Michael P. Holtz The following exhibits are included in this Report on Form 10-K filed March 28, 2002: Exhibit No. Description - ----------- ----------- 3.1(a) Sixth Certificate of Amendment of the Restated Certificate of Incorporation of Amerihost Properties, Inc. 21.1 Subsidiaries of the Registrant 23.1 Consent of KPMG LLP 23.2 Consent of BDO LLP Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended December 31, 2001. -40- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARLINGTON HOSPITALITY, INC. By: /s/ Michael P. Holtz ------------------------ Michael P. Holtz Chief Executive Officer By: /s/ James B. Dale ------------------------ James B. Dale Chief Financial Officer March 25, 2002 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/ Michael P. Holtz /s/ Reno J. Bernardo - -------------------------------------- -------------------------------- Michael P. Holtz, Director Reno J. Bernardo, Director March 25, 2002 March 25, 2002 /s/ Russell J. Cerqua /s/ Jon K. Haahr - -------------------------------------- -------------------------------- Russell J. Cerqua, Director Jon K. Haahr, Director March 25, 2002 March 25, 2002 /s/ Salomon J. Dayan /s/ Thomas Romano - -------------------------------------- -------------------------------- Salomon J. Dayan, Director Thomas Romano, Director March 25, 2002 March 25, 2002 -41- INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Arlington Hospitality, Inc. We have audited the accompanying consolidated balance sheets of Arlington Hospitality, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Arlington Hospitality, Inc. and subsidiaries at December 31, 2001 and 2000, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. KPMG LLP Chicago, Illinois March 5, 2002 F-1 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Board of Directors of Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) We have audited the accompanying consolidated statements of operations, shareholders' equity, and cash flows of Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) and subsidiaries for the year ended December 31, 1999. 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 audit. We conducted our audit 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 audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated changes in shareholders' equity, results of operations, and cash flows of Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) and subsidiaries for the year ended December 331, 1999 in conformity with generally accepted accounting principles. BDO Seidman, LLP Chicago, Illinois March 8, 2000 F-2 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
=================================================================================================================== December 31, December 31, 2001 2000 --------------- ----------------- ASSETS Current assets: Cash and cash equivalents $ 4,748,156 $ 1,728,869 Accounts receivable, less an allowance of $150,000 and $100,000 at December 31, 2001 and 2000, respectively (including approximately $126,000 and $361,000 from related parties) 2,343,423 2,663,825 Notes receivable, current portion (Note 2) 518,499 618,485 Prepaid expenses and other current assets 998,559 1,013,053 Costs and estimated earnings in excess of billings on uncompleted contracts with related parties (Note 3) 1,079,137 375,780 --------------- -------------- Total current assets 9,687,774 6,400,012 --------------- -------------- Investments in and advances to unconsolidated hotel joint ventures (Notes 4 and 6) 5,404,744 7,031,982 --------------- --------------- Property and equipment (Notes 6, 7 and 13): Land 12,454,360 11,226,664 Buildings 68,095,453 60,122,758 Furniture, fixtures and equipment 24,189,969 21,393,936 Construction in progress 5,973,890 850,238 Leasehold improvements 2,899,179 2,875,379 Assets held for sale 2,187,822 - --------------- -------------- 115,800,673 96,468,975 Less accumulated depreciation and amortization 22,905,635 18,666,279 --------------- -------------- 92,895,038 77,802,696 --------------- -------------- Notes receivable, less current portion (Note 2) 1,000,000 801,346 Deferred income taxes (Note 9) 3,247,000 3,402,000 Other assets, net of accumulated amortization of $1,035,000 and $885,000 (Note 5) 2,939,900 2,704,679 --------------- -------------- 7,186,900 6,908,025 $ 115,174,456 $ 98,142,715 =============== ==============
F-3 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
================================================================================================================== December 31, December 31, 2001 2000 --------------- ----------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,467,704 $ 2,313,640 Bank line-of-credit (Note 6) 6,793,702 3,408,133 Accrued payroll and related expenses 784,533 775,714 Accrued real estate and other taxes 1,952,875 1,937,415 Other accrued expenses and current liabilities 452,086 306,146 Current portion of long-term debt (Note 7) 2,110,652 1,698,538 Income taxes payable 286,670 132,420 --------------- --------------- Total current liabilities 14,848,222 10,572,006 --------------- -------------- Long-term debt, net of current portion (Note 7) 70,088,269 56,905,152 --------------- -------------- Deferred income (Note 13) 10,714,735 12,196,330 --------------- -------------- Commitments and contingencies (Notes 4, 8, 12 and 13) Minority interests 456,631 203,449 --------------- -------------- 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 4,958,081 shares at December 31, 2001, and 4,979,244 shares at December 31, 2000 24,790 24,896 Additional paid-in capital 13,171,151 13,125,324 Retained earnings 6,307,533 5,552,433 --------------- -------------- 19,503,474 18,702,653 Less: Stock subscriptions receivable (Note 8) (436,875) (436,875) 19,066,599 18,265,778 --------------- -------------- $ 115,174,456 $ 98,142,715 =============== ============== See notes to consolidated financial statements.
F-4 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
====================================================================================================================== 2001 2000 1999 ----------------- --------------- ----------------- Revenue (Note 10): Hotel operations: AmeriHost Inn hotels $ 45,081,431 $ 49,228,661 $ 49,508,745 Other hotels 11,301,017 12,123,035 12,587,253 Development and construction 1,933,882 6,982,678 6,431,995 Hotel sales and commissions 12,922,459 - - Management services 1,066,645 1,251,107 1,315,212 Employee leasing 4,678,189 5,979,363 5,992,580 Other 169,612 586,276 222,187 -------------- ------------- ------------- 77,153,235 76,151,120 76,057,972 -------------- ------------- ------------- Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 32,919,678 34,811,649 34,866,053 Other hotels 9,194,835 9,858,175 10,260,074 Development and construction 1,479,947 6,901,617 5,398,384 Hotel sales and commissions 9,621,536 - - Management services 716,802 806,959 809,061 Employee leasing 4,564,508 5,868,189 5,747,351 Other 2,958 489,064 786,658 -------------- ------------- ------------- 58,500,264 58,735,653 57,867,581 -------------- ------------- ------------- 18,652,971 17,415,467 18,190,391 Depreciation and amortization 4,676,069 4,542,461 4,567,030 Leasehold rents - hotels (Note 13) 6,510,436 6,524,930 7,306,691 Corporate general and administrative 1,907,742 1,694,611 1,537,052 -------------- ------------- ------------- Operating income 5,558,724 4,653,465 4,779,618 Other income (expense): Interest expense (5,153,590) (5,605,550) (6,031,759) Interest income 821,839 786,806 877,194 Other income 525,880 381,868 555,749 Equity in net income and (losses) from unconsolidated joint ventures (925,654) (101,872) (160,837) Gain on sale of property 886,338 6,663,124 553,298 -------------- ------------- ------------- Income before minority interests and income taxes 1,713,537 6,777,841 573,263 Minority interests in operations of consolidated subsidiaries and partnerships (343,437) (60,939) (212,672) -------------- ------------- ------------- Income before income taxes 1,370,100 6,716,902 360,591 Income tax expense (Note 9) (615,000) (2,707,000) (160,000) -------------- ------------- ------------- Net income $ 755,100 $ 4,009,902 $ 200,591 ============== ============= ============= Net income per share - Basic $ 0.15 $ 0.81 $ 0.04 Net income per share - Diluted $ 0.13 $ 0.74 $ 0.02 See notes to consolidated financial statements.
F-5 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
=================================================================================================================================== Stock Common stock subscrip- ----------------------- Additional tions Total paid-in Retained and notes shareholders' Shares Amount capital earnings receivable equity --------- ---------- ------------ ------------ ------------ ------------- BALANCE AT JANUARY 1, 1999 6,089,550 $ 30,488 $ 17,380,295 $ 1,341,940 $ (436,875) $ 18,315,808 Acquisition of common stock (Note 8) (1,121,002) (5,606) (4,330,558) -- -- (4,336,164) Shares issued for compensation 125 1 332 -- -- 333 Net income for the year ended December 31, 1999 -- -- -- 200,591 -- 200,591 --------- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 1999 4,968,673 $ 24,843 $ 13,050,069 $ 1,542,531 $ (436,875) $ 14,180,568 Shares issued for compensation 10,571 53 75,255 -- -- 75,308 Net income for the year ended December 31, 2000 -- -- -- 4,009,902 4,009,902 --------- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2000 4,979,244 $ 24,896 $ 13,125,324 $ 5,552,433 $ (436,875) $ 18,265,778 Acquisition of common stock (Note 8) (26,100) (131) (84,984) -- -- (85,115) Shares and options issued for compensation and investment 4,937 25 130,811 -- -- 130,836 Net income for the year ended December 31, 2001 -- -- -- 755,100 -- 755,100 --------- ------------ ------------ ------------ ------------ ------------ BALANCE AT DECEMBER 31, 2001 4,958,081 $ 24,790 $ 13,171,151 $ 6,307,533 $ (436,875) $ 19,066,599 ========= ============ ============ ============ ============ ============ See notes to consolidated financial statements.
F-6 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
======================================================================================================================= 2001 2000 1999 ---------------- ---------------- ---------------- Cash flows from operating activities: Cash received from customers $ 78,329,783 $ 77,110,459 $ 80,716,593 Cash paid to suppliers and employees (57,792,786) (69,503,958) (76,876,079) Interest received 870,945 883,422 729,089 Interest paid (5,194,741) (5,679,212) (6,076,002) Income taxes (paid) refunds received (305,750) (1,592,704) 621,319 --------------- --------------- --------------- Net cash provided by (used in) operating activities 15,907,451 1,218,007 (885,080) --------------- --------------- --------------- Cash flows from investing activities: Distributions, and collections on advances, from affiliates 1,183,012 2,712,840 967,465 Purchase of property and equipment (25,399,733) (10,433,566) (2,102,832) Purchase of investments in, and advances to, minority owned affiliates (2,687,328) (2,715,495) (3,124,618) Acquisitions of partnership interests, net of cash acquired (804,613) - (260,648) Collection on notes receivable 201,332 91,315 138,876 Proceeds from sale of assets and franchising rights 2,500 13,072,813 16,726,198 --------------- --------------- --------------- Net cash (used in) provided by investing activities (27,504,830) 2,727,907 12,344,441 --------------- --------------- --------------- Cash flows from financing activities: Proceeds from issuance of long-term debt 20,612,595 4,696,807 7,203,482 Principal payments on long-term debt (9,206,128) (6,442,369) (20,328,540) Net (repayments) borrowings of line of credit 3,385,569 (4,152,081) 5,599,002 Distributions to minority interests (90,255) (85,725) (324,985) Common stock repurchases (85,115) - (4,336,164) Other - - 333 --------------- --------------- --------------- Net cash provided by (used in) financing activities 14,616,666 (5,983,368) (12,186,872) --------------- --------------- --------------- Net increase (decrease) in cash and cash equivalents 3,019,287 (2,037,454) (727,511) Cash and cash equivalents, beginning of year 1,728,869 3,766,323 4,493,834 --------------- --------------- --------------- Cash and cash equivalents, end of year $ 4,748,156 $ 1,728,869 $ 3,766,323 =============== =============== ===============
F-7 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
================================================================================================================== 2001 2000 1999 ------------- ------------- -------------- Reconciliation of net income to net cash provided by (used in) operating activities: Net income $ 755,100 $ 4,009,902 $ 200,591 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 4,676,069 4,542,461 4,567,030 Equity in net (income) loss and interest income from unconsolidated joint ventures and amortization of deferred income 1,174,630 101,872 160,837 Minority interests in operations of consolidated subsidiaries and partnerships 343,437 60,939 212,672 Amortization of deferred interest and loan discount - - 34,045 Bad debt expense (recoveries) 50,000 192,351 (150,000) Issuance of common stock and common stock options 130,836 75,308 - Gains on sale of assets and franchising rights (886,338) (6,663,124) (528,297) Deferred income taxes 155,000 925,000 (423,000) Amortization of deferred gain (966,232) (1,487,118) (1,462,096) Proceeds from sale of hotels 11,511,336 - - Income from sale of hotels (2,189,256) - - Changes in assets and liabilities, net of effects of acquisitions: Decrease in accounts receivable 255,675 95,439 156,910 Decrease (increase) in prepaid expenses and other current assets 99,344 (41,217) (211,565) Decrease in refundable income taxes 154,250 189,296 1,204,318 (Increase) decrease in costs and estimated earnings in excess of billings (703,357) 459,040 (184,962) Increase in other assets (413,336) (72,303) (358,890) Increase in assets held for sale - - (959,002) Increase (decrease) in accounts payable 23,530 (309,750) (3,035,113) Increase (decrease) in accrued payroll and other accrued expenses and current liabilities 165,246 (905,846) (37,645) Decrease in accrued interest (41,151) (73,852) (78,288) Increase in deferred income 1,612,668 119,609 7,375 ------------- ------------- -------------- Net cash provided by (used in) operating activities $ 15,907,451 $ 1,218,007 $ (885,080) ============= ============= ============== See notes to consolidated financial statements.
F-8 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization and Business: -------------------------- Arlington Hospitality, Inc. and its subsidiaries (collectively, where appropriate, "Arlington," or the "Company") was incorporated under the laws of Delaware on September 19, 1984. The Company is engaged in the development, construction and sale of AmeriHost Inn hotels, and the ownership, operation and management of both AmeriHost Inn hotels and other hotels (Note 15). The AmeriHost Inn brand is used by the Company to provide for the consistent, cost-effective development and operation of mid-price hotels in various markets. All AmeriHost Inn hotels are designed and developed using a 60 to 120 room, interior corridor and indoor pool prototype design and are located in tertiary and secondary markets. The Company's operations are 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. Principles of consolidation: ---------------------------- The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and entities in which the Company has a majority or controlling ownership interest. All significant intercompany accounts and transactions have been eliminated. Construction accounting: ------------------------ Development fee revenue from construction/renovation projects with unaffiliated third parties or entities in which the Company has a minority ownership interest is recognized using the percentage-of-completion method. Construction fee revenue from construction/renovation projects with unaffiliated third parties or entities in which the Company has a minority ownership interest is recognized on the percentage-of-completion method, generally based on the ratio of costs incurred to estimated total contract costs. Revenue from contract change orders is recognized to the extent costs incurred are recoverable. Profit recognition begins when construction reaches a progress level sufficient to estimate the probable outcome. Provision is made for anticipated future losses in full at the time they are identified. 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. F-9 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 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, 2001 and 2000 reasonably approximate the fair values for cash and cash equivalents, accounts and contracts receivable and payable, and variable rate long-term debt. The carrying value of the note receivable approximates its fair value based upon the estimated fair value of the underlying collateral (Note 2). The Company estimates that the fair value of its fixed rate long-term debt at December 31, 2001 approximates the carrying value considering the property specific nature of the notes. In making such assessments, the Company considered the current rate at which the Company could borrow funds with similar remaining maturities and discounted cash flow analyses as appropriate. Investments: ------------ Investments in entities in which the Company has a non-majority, non-controlling ownership interest are accounted for using the equity method, under which method the original investment is increased (decreased) for the Company's share of the joint venture's net income (loss), increased by contributions made, and reduced by distributions received. Property and equipment: ----------------------- Property and equipment are stated at cost. Repairs and maintenance are charged to expense as incurred and renewals and betterments are capitalized. Depreciation is being provided for assets placed in service, principally by use of the straight-line method over their estimated useful lives. Leasehold improvements are being amortized by use of the straight-line method over the term of the lease. Construction period interest in the amount of $336,748, $100,275 and $121,238 was capitalized in 2001, 2000 and 1999, 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 3-28 years The Company sells hotel assets in the ordinary course of business as part of its hotel development strategy. However, due to the uncertainties associated with pending sales, the Company does not specifically identify hotel assets as held for sale, unless they are actively marketed and expected to sell within one year. Due to the Company's limited history in selling hotels in 1999 and 2000, the Company has classified the net gain from the sale of hotels as gain on sale of assets in the accompanying consolidated financial statements during these years. Other assets: ------------- Deferred lease costs: Deferred lease costs 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. F-10 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Deferred loan costs: Deferred loan costs represent the costs incurred in issuing mortgage notes. These costs are being amortized by use of the interest method over the life of the debt. Initial franchise fees: Initial franchise fees paid by the Company to franchisors for certain hotels are capitalized and amortized by use of the straight-line method over the terms of the franchise licenses, ranging from 10 to 20 years. Deferred income: ---------------- Deferred income includes the gain from the sale of 24 hotels in 1998 and 1999 which were simultaneously leased-back (Note 13). This gain is being recognized on a straight-line basis over the 15-year term of the lease, as amended, as an adjustment to leasehold rent expense. Deferred income includes incentive fees received in connection with the sale of AmeriHost Inn hotels. These fees are recognized on a straight-line basis over a 76-month period in which the unamortized portion of the fees may be considered refundable under certain conditions. Deferred income also includes that portion of development, construction and renovation fees earned from entities in which the Company holds an ownership interest. The portion of fees deferred is equal to the Company's proportional ownership interest in the entity and is being recognized in income over the life of the operating assets. The balance of the fees are recorded in income as earned. Income taxes: ------------- Deferred income taxes are provided on the differences in the bases of the Company's assets and liabilities as determined for tax and financial reporting purposes and relate principally to depreciation of property and equipment and deferred income. Earnings per share: ------------------- Basic earnings per share ("EPS") is calculated by dividing the income (loss) available to common shareholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS gives effect to all dilutive potential common shares outstanding for the period. The Company excluded stock options which had an anti-dilution effect on the EPS computations. F-11 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): The calculation of basic and diluted earnings per share for each of the three years ended December 31 is as follows: 2001 2000 1999 ------------- ------------- -------------- Net income $ 755,100 $ 4,009,902 $ 200,591 Impact of convertible partnership interests (78,178) (117,028) (88,117) ------------- ------------- -------------- Net income available to common shareholders - diluted $ 676,922 $ 3,892,874 $ 112,474 ============= ============= ============== Weighted average common shares outstanding 4,974,821 4,976,236 5,566,957 Dilutive effect of: Convertible partnership interests 168,100 249,350 249,350 Stock options 38,650 46,266 40,373 ------------- ------------- -------------- Dilutive common shares outstanding 5,181,571 5,271,852 5,856,680 ============= ============= ============== Net income per share - Basic $ 0.15 $ 0.81 $ 0.04 ============= ============= ============== Net income per share - Diluted $ 0.13 $ 0.74 $ 0.02 ============= ============= ==============
Advertising: ------------ The costs of advertising, promotion and marketing programs are charged to operations in the year incurred. These costs were approximately $1,389,000, $1,418,000 and $1,514,000 for the years ended December 31, 2001, 2000 and 1999. Use of Estimates: ----------------- The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and reported amounts of revenue and expenses during the reported periods. Actual results may differ from those estimates. 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 an impairment exists. If an impairment exists, the Company would determine the fair value by using quoted market prices, if available for such assets, or if quoted market prices are not available, the Company would discount the expected future cash flows of such assets. During 2000, the Company reduced the carrying value of an investment in a joint venture by approximately $110,000 in connection with such review. The adjustment is reflected in the equity in income of unconsolidated joint ventures line in the accompanying consolidated financial statements. F-12 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 2. NOTES RECEIVABLE: Notes receivable consists of: 2001 2000 ----------- ----------- Diversified Innkeepers, Inc. $ 1,093,499 $ 1,069,831 Other notes 425,000 350,000 ----------- ----------- 1,518,499 1,419,831 Less current portion 518,499 618,485 ----------- ----------- Notes receivable, less current portion $ 1,000,000 $ 801,346 =========== =========== In connection with the purchase of management contracts from Diversified Innkeepers, Inc. ("Diversified") in a prior year, the Company accepted notes to provide financing to the shareholders of Diversified, 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 personal guarantees by the shareholders. The notes provide for monthly payments of $16,250, including interest at the rate of 10% per annum, and were due September 30, 2000. The Company currently has an agreement with the shareholders of Diversified whereby the current portion of this note will be repaid in 2002 upon the sale of a hotel owned by the shareholders of Diversified, with the remaining balance to be converted to an investment in another hotel owned by the shareholders of Diversified. The Company will have a preferred position with respect to the new partnership interest. Management believes that the entire balance is collectible. 3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS: Information regarding contracts-in-progress is as follows at December 31, 2001 and 2000: 2001 2000 ----------- --------- Costs incurred on uncompleted contracts $ 512,270 $ 206,108 Estimated earnings 852,872 169,672 ----------- --------- 1,365,142 375,780 Less billings to date 286,005 - ----------- --------- Costs and estimated earnings in excess of billings on uncompleted contracts $ 1,079,137 $ 375,780 =========== ========= 4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES: The Company has non-controlling ownership interests, ranging from 1% to 37.2%, 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 15 hotels at December 31, 2001, with a total balance of ($1,621,631), and 17 hotels at December 31, 2000 with a total balance of ($1,462,234). The Company is secondarily liable for the obligations and liabilities of the limited partnerships in which it holds a general partnership interest. F-13 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES (CONTINUED): The Company advances funds to hotels in which the Company has a minority ownership interest for working capital and construction purposes. The advances bear interest ranging from the prime rate to 10% per annum and are due on demand. The Company expects the partnerships to repay these advances through cash flow generated from hotel operations and mortgage financing. The advances were $7,026,375 and $8,494,216 at December 31, 2001 and 2000, respectively, and are included in investments in and advances to unconsolidated hotel joint ventures on the accompanying consolidated balance sheets. Effective January 1, 2001, the Company acquired the remaining ownership interest in one hotel joint venture, resulting in this hotel being 100% owned by the Company subsequent to the acquisition date. In addition, the Company began consolidating a minority-owned joint venture as of September 1, 2001, when the Company guaranteed certain underlying debt and assumed control of the joint venture, in connection with a mortgage refinancing. The following is a summary of the acquisition and consolidation: Property and equipment $ 3,038,557 Other assets 131,478 Long-term debt (2,188,764) Other liabilities (176,658) ------------- Cash paid $ 804,613 ============= The following represents condensed financial information for all of the Company's investments in affiliated companies accounted for under the equity method at December 31, 2001, 2000 and 1999. 2001 2000 1999 ------------- ------------- ------------- Current assets $ 581,390 $ 787,037 $ 1,211,864 Noncurrent assets 29,215,768 32,703,002 35,420,633 Current liabilities 6,049,363 4,550,271 5,240,776 Long-term debt 26,095,565 31,282,189 31,494,212 Equity (deficit) (2,347,770) (2,342,421) (102,491) Gross revenue 12,173,902 14,253,813 15,210,884 Gross operating profit 3,716,282 3,944,469 4,853,626 Depreciation and amortization 1,824,408 2,201,762 2,422,002 Net loss (1,680,699) (100,027) (1,586,557)
The Company has provided approximately $15.6 million in guarantees as of December 31, 2001 on mortgage loan obligations for eleven joint ventures in which the Company holds a minority equity interest, which expire at various dates through March 2021. Other partners have also guaranteed portions of the same obligations. The partners of one of the partnerships have entered into a cross indemnity agreement whereby each partner has agreed to indemnify the others for any payments made by any partner in relation to the guarantee in excess of their ownership interest. F-14 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 5. OTHER ASSETS: Other assets, net of accumulated amortization, at December 31, 2001 and 2000 are comprised of the following: 2001 2000 ------------- -------------- Deposits, franchise fees and other assets $ 1,693,912 $ 1,406,444 Deferred loan costs 1,067,816 1,072,616 Deferred lease costs 178,172 225,619 ------------- -------------- Total $ 2,939,900 $ 2,704,679 ============= ==============
6. BANK LINE-OF-CREDIT: The Company had a $7,500,000 bank operating line-of-credit, of which $6,793,702 and $3,408,133 was outstanding at December 31, 2001 and 2000, respectively. The operating line-of-credit was collateralized by a security interest in certain of the Company's assets, including its interests in various joint ventures, bore interest at an annual rate equal to the bank's base lending rate (5.0% at December 31, 2001) plus one-half of one percent, and matured February 28, 2002. The line-of-credit note contained financial covenants, requiring a minimum net worth, a maximum debt to net worth ratio, and a minimum debt service coverage ratio. The Company was in compliance with these covenants as of December 31, 2001. Prior to its expiration in February 2002, the Company replaced its line-of-credit with another lender. The new operating line-of-credit has a limit of $8.5 million, is collateralized by substantially all the assets of the Company, subject to first mortgages from other lenders on hotel assets, bears interest at a rate based on either the prime rate or LIBOR as chosen quarterly by the Company, plus a spread adjusted quarterly based on the Company's leverage ratio, ranging from zero to 0.5% (if Prime based) or 3.0% (if LIBOR based), and matures February 19, 2003. The new line-of-credit agreement also provides for the maintenance of certain financial covenants, including minimum tangible net worth, a maximum leverage ratio, and a minimum debt service coverage ratio. 7. LONG-TERM DEBT: Long-term debt consists of: 2001 2000 ------------- --------------- Mortgage notes maturing 2002 through 2021, with a weighted average interest rate of 6.57% $ 72,177,428 $ 58,581,769 Other 21,493 21,921 ------------- -------------- 72,198,921 58,603,690 Less current portion 2,110,652 1,698,538 ------------- -------------- $ 70,088,269 $ 56,905,152 ============= ==============
The mortgage notes are collateralized by certain hotel properties and the Company's office building. The notes provide for monthly payments of principal and interest, with interest on the fixed rate notes ranging from 7.25% to 9.25% (weighted average interest rate of 7.41% at December 31, 2001), and interest on the floating rate notes ranging from LIBOR plus 2.25% to prime plus 1.0% (weighted average interest rate of 5.33% at December 31, 2001). F-15 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 7. LONG-TERM DEBT (CONTINUED): In February 2001, the Company secured a $20 million new construction loan facility with a lender who also holds the mortgage on two existing hotels owned by the Company. This facility provides for both construction financing as well as long-term permanent mortgage financing as the projects open. The Company has until March 31, 2002 to utilize this loan facility, subject to lender's approval of each project. The lender has indicated that this facility will be extended for a one-year period. As of December 31, 2001 approximately $5.7 million has been utilized, and is included in long-term debt in the accompanying financial statements. Certain of the hotel mortgage notes, as well as the office building mortgage, provide for financial covenants, principally minimum net worth requirements, debt to equity ratios, and minimum debt service coverage ratios. At December 31, 2001, the Company was not in compliance with the minimum debt service coverage ratio contained in one mortgage loan aggregating approximately $1.6 million, however the Company has obtained a waiver with respect to the violation. In addition, one joint venture where the Company has guaranteed the mortgage debt was not in compliance with the minimum debt service coverage ratio covenant contained in the mortgage loan. The joint venture has obtained a waiver from the lender regarding this violation. The aggregate maturities of long-term debt are approximately as follows: Year Ending December 31, Amount ------------------------ --------------- 2002 $ 2,110,652 2003 14,808,979 2004 7,562,016 2005 1,851,855 2006 4,947,081 Thereafter 40,918,338 ------------ $ 72,198,921 ============ 8. SHAREHOLDERS' EQUITY: Authorized shares: ------------------ The Company's corporate charter authorizes 25,000,000 shares of Common Stock with a par value of $0.005 per share and 100,000 shares of Preferred Stock 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. Non-employee stock options and warrants: ---------------------------------------- The Company has issued options to acquire shares of the Company's common stock to certain of its partners in various hotel joint ventures referred to in Note 4. At December 31, 2001, options to purchase 125,000 shares of common stock are outstanding with an exercise price of $3.794 per share and are exercisable through October 2005. The Company has accounted for these options in accordance with FASB Statement No. 123. In connection with this issuance, the Company cancelled previously issued options to purchase 60,000 shares of common stock. F-16 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 8. SHAREHOLDERS' EQUITY (CONTINUED): Limited partnership conversion rights: -------------------------------------- The Company is a general partner in two partnerships where the limited partners, including a Director of the Company, have the right at certain times and under certain conditions to convert their limited partnership interests into 168,100 shares of the Company's common stock. These conversion rights will expire in 2002 as the Company acquires these limited partner interests (Note 13). Stock subscriptions receivable: ------------------------------- In connection with the Diversified transaction (Note 2), 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, collateralized by the 125,000 shares of common stock issued upon the exercise of the options and limited partnership interests. The total principal balance is due the earlier of the date the stock is sold or the related management contracts are terminated. This note receivable has been classified as a reduction of shareholders' equity on the accompanying consolidated balance sheets. 9. TAXES ON INCOME: The provision for income taxes in the consolidated statements of operations is as follows: 2001 2000 1999 -------------- ------------- --------------- Current $ 460,000 $ 1,782,000 $ 583,000 Deferred 155,000 925,000 (423,000) Income tax expense $ 615,000 $ 2,707,000 $ 160,000 ============== ============= ==============
The following reconciles income tax expense for 2001 at the federal statutory tax rate with the effective rate: 2001 2000 1999 -------------- ------------- --------------- Income taxes at the federal statutory rate 34.0% 34.0% 34.0% State taxes, net of federal tax benefit 10.9% 6.3% 10.4% ------------- ------------- -------------- Effective tax rate 44.9% 40.3% 44.4% ============= ============= ==============
F-17 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 9. TAXES ON INCOME (CONTINUED): Temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes that give rise to a net deferred income tax asset relate to the following: 2001 2000 ------------- --------------- Deferred income recognized for tax purposes and deferred for financial reporting purposes $ 1,402,000 $ 420,000 Gain on sale/leaseback transaction recognized for tax purposes and deferred for financial reporting purposes 3,612,000 4,581,000 Start-up costs capitalized for tax purposes and expensed for financial reporting purposes 104,000 192,000 Differences in the basis of investments, property and equipment from partner acquisitions and due to majority owned partnerships consolidated for financial reporting purposes but not for tax purposes 841,000 (612,000) ------------- -------------- 5,959,000 4,581,000 Cumulative depreciation differences (2,712,000) (1,179,000) ------------- -------------- Net deferred income tax asset $ 3,247,000 $ 3,402,000 ============= ==============
A valuation allowance has not been recorded to reduce the deferred tax assets, as the Company expects to realize all components of the deferred tax asset in future periods. 10. RELATED PARTY TRANSACTIONS: The following table summarizes related party revenue recorded in 2001, 2000, and 1999 from various unconsolidated partnerships in which the Company has an ownership interest: 2001 2000 1999 -------------- ------------- --------------- Development revenue $ 652,815 $ 6,982,678 $ 1,173,054 Hotel management revenue 709,631 1,025,632 1,005,201 Employee leasing revenue 2,830,719 4,275,476 4,001,188 Other - 586,276 41,313 Interest income 530,035 516,511 601,477
The Company eliminates its proportionate ownership interest in these revenues in consolidation. F-18 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 11. BUSINESS SEGMENTS: The Company's business is primarily involved in five 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 of hotels for unconsolidated joint ventures and unrelated third parties, (3) hotel sales and commissions, resulting from the sale of AmeriHost Inn hotels, (4) hotel management, consisting of hotel management activities, and (5) 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, which is the information utilized by the Company's decision makers in managing the business: Revenues 2001 2000 1999 -------- -------------- ------------- -------------- Hotel operations $ 56,382,448 $ 61,351,696 $ 62,095,998 Hotel development and construction 1,933,882 6,982,678 6,431,995 Hotel sales and commissions 12,922,459 - - Hotel management 1,066,645 1,251,107 1,315,212 Employee leasing 4,678,189 5,979,363 5,992,580 Other 169,612 586,276 222,187 -------------- ------------- --------------- $ 77,153,235 $ 76,151,120 $ 76,057,972 ============== ============= ============== Operating costs and expenses ---------------------------- Hotel operations $ 42,114,513 $ 44,669,824 $ 45,126,127 Hotel development and construction 1,479,947 6,901,617 5,398,384 Hotel sales and commissions 9,621,536 - - Hotel management 716,802 806,959 809,061 Employee leasing 4,564,508 5,868,189 5,747,351 Other 2,958 489,064 786,658 -------------- ------------- --------------- $ 58,500,264 $ 58,735,653 $ 57,867,581 ============== ============= ============== Operating income ---------------- Hotel operations $ 3,229,462 $ 5,737,820 $ 5,249,019 Hotel development and construction 445,952 62,871 1,009,720 Hotel sales and commissions 3,300,922 - - Hotel management 295,356 399,771 448,710 Employee leasing 110,642 108,812 242,309 Other 130,831 92,812 (566,857) Corporate (1,954,441) (1,748,621) (1,603,283) -------------- ------------- -------------- $ 5,558,724 $ 4,653,465 $ 4,779,618 ============== ============= ============== F-19 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 11. BUSINESS SEGMENTS (CONTINUED): Identifiable assets 2001 2000 1999 -------------------- -------------- ------------- -------------- Hotel operations $ 99,086,728 $ 92,406,355 $ 94,606,864 Hotel development and construction 1,467,116 660,620 1,272,184 Hotel sales and commissions - - - Hotel management 119,236 (42,842) 674,489 Employee leasing 70,584 329,833 494,806 Other (primarily the office building in 2001) 6,553,474 - 164,485 Corporate 7,877,318 4,788,749 5,895,339 -------------- ------------- -------------- $ 115,174,456 $ 98,142,715 $ 103,108,167 ============== ============= ============== Capital Expenditures -------------------- Hotel operations $ 18,874,420 $ 10,253,713 $ 1,920,734 Hotel development and construction 5,975 7,942 2,091 Hotel sales and commissions - - - Hotel management 52,173 34,161 69,697 Employee leasing - 5,831 - Other (primarily the office building in 2001) 6,411,585 17,422 29,335 Corporate 55,580 114,497 80,975 -------------- ------------- -------------- $ 25,399,733 $ 10,433,566 $ 2,102,832 ============== ============= ============== Depreciation/Amortization ------------------------- Hotel operations $ 4,528,036 $ 4,419,121 $ 4,414,161 Hotel development and construction 7,983 18,189 23,891 Hotel sales and commissions - - - Hotel management 54,487 44,377 57,441 Employee leasing 3,039 2,362 2,921 Other 35,822 4,400 2,387 Corporate 46,702 54,012 66,229 -------------- ------------- -------------- $ 4,676,069 $ 4,542,461 $ 4,567,030 ============== ============= ==============
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. 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. At December 31, 2001, options to purchase 830,100 shares of common stock are outstanding under the plans. F-20 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 12. STOCK BASED COMPENSATION (CONTINUED): The Company has granted to various key employees and directors, non-qualified options to purchase shares of common stock with exercise prices ranging from $3.25 to $6.50 per share. The exercise price is the market price on the date of grant. At December 31, 2001, options to purchase 1,054,333 shares of common stock are outstanding. These options are currently exercisable and expire through May 2011. 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. The following table summarizes the employee stock options granted, exercised and outstanding: Weighted Average Shares Exercise Price ------------ -------------------- Options outstanding January 1, 1999 1,605,558 4.71 Forfeitures (156,500) 5.30 Options granted 157,000 3.44 ----------- ------------- Options outstanding December 31, 1999 1,606,058 4.52 Forfeitures (80,000) 3.57 Options granted 238,500 3.23 ----------- ------------- Options outstanding December 31, 2000 1,764,558 4.39 Forfeitures (16,000) 3.23 Options granted 201,500 3.34 ----------- ------------- Options outstanding December 31, 2001 1,950,058 $ 4.29 =========== ============= Options exercisable December 31, 2001 1,781,891 $ 4.37 =========== =============
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: 2001 2000 1999 -------------- ------------- -------------- Grant-date fair value per share: Options issued at market $ 2.04 $ 1.67 $ 1.47 Weighted average exercise prices: Options issued at market $ 3.34 $ 3.38 $ 3.47 Significant assumptions (weighted-average): Risk-free interest rate at grant date 5.19% 6.50% 5.17% Expected stock price volatility 0.53 0.30 0.40 Expected dividend payout n/a n/a n/a Expected option life (years) (a) 7.91 8.28 6.00 Net income (loss): As reported $ 755,100 $ 4,009,902 $ 200,591 Pro forma $ 558,068 $ 3,757,451 $ (30,927) Net income (loss) per share - Basic: As reported $ 0.15 $ 0.81 $ 0.04 Pro forma $ 0.11 $ 0.76 $ (0.01) Net income (loss) per share - Diluted: As reported $ 0.13 $ 0.74 $ 0.02 Pro forma $ 0.09 $ 0.69 $ (0.02)
F-21 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ (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, 2001: 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 4.38 1,330,625 5.66 Years $3.43 1,162,458 $3.43 $ 5.75 to 7.81 619,433 5.71 6.15 619,433 6.15 -------------- ---------- ----- ----- --------- ------ $ 1.53 to 7.81 1,950,058 5.68 $4.29 1,781,891 $4.37 ============== ========= ===== ===== ========= =======
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: Sale/leaseback of hotels: ------------------------- On June 30, 1998, the Company completed the sale of 26 AmeriHost Inn hotels to a Real Estate Investment Trust ("REIT") for $62.2 million. The Company completed the sale of four additional AmeriHost Inn hotels to the same REIT in March 1999. Upon the respective sales to the REIT, the Company entered into agreements to lease back the hotels for an initial term of ten years, with two five year renewal options. The lease payments are fixed at 10% of the sale price for the first three years. Thereafter, the lease payments are subject to a CPI increase with a 2% annual maximum. In January 2001, the Company amended the master lease with the REIT to provide for the purchase of eight unidentified hotels from the lessor under specified terms, and to extend the initial lease term by five years. The amendment provides for four increases in rent payments of 0.25% each, if these hotels are not sold to a third party or purchased by the Company by the dates specified. As of December 31, 2001, the Company is obligated under the terms of the amendment to either facilitate the sale, or purchase from the REIT, one hotel prior to June 2, 2002, or the 0.25% rent increase becomes effective. In 2000, one hotel owned by the REIT was sold, and in 2001, four hotels owned by the REIT were sold. Accordingly, the leases with the REIT for these hotels were terminated, and the remaining unamortized gain of approximately $1.0 million and $402,000 was recognized in 2001 and 2000, respectively, as a gain on sale of property in the accompanying consolidated financial statements. In addition, the Company acquired one hotel owned by the REIT in 2001, in accordance with the terms of the amendment. Hotel leases: ------------- Including the hotels leased from the REIT, the Company leases 27 hotels as of December 31, 2001, the operations of which are included in the Company's consolidated financial statements. All of these leases are triple net and provide for monthly base rent payments ranging from $14,000 to $27,000. The Company subleases one of these hotels from a partnership in which the Company owns an equity interest of 16.33%. This lease also provides for additional rent payments of approximately 74,000 per annum, plus percentage rents computed on room revenues in excess of stipulated amounts. The leases expire through March 2014. F-22 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED): The three leases, other than the REIT leases, each provide for an option to purchase the hotel. The purchase prices are based upon a fixed amount approximating the fair value at the lease commencement, subject to increases in the CPI index. At December 31, 2001, the aggregate purchase price for these leased hotels was approximately $11,500,000. The Company intends to obtain a mortgage financing commitment and exercise the purchase option for one hotel in the amount of $4.5 million prior to April 30, 2002. Total rent expense for all operating leases was approximately $6,747,000, $6,892,000, and $7,542,000 in 2001, 2000, and 1999, respectively, including approximately $278,000, $686,000 and $811,000 in 2001, 2000, and 1999, respectively, to entities in which the Company has a minority ownership interest. Minimum future rent payments under all operating leases are as follows: Year Ending December 31, Amount ------------------------ ---------------- 2002 $ 6,383,000 2003 6,409,000 2004 6,359,000 2005 6,517,000 2006 6,642,000 Thereafter 47,187,000 ------------ $ 79,497,000 Limited partnership guaranteed distributions: --------------------------------------------- The Company is a general partner in two partnerships where the Company has guaranteed minimum annual distributions to the limited partners, including a Director of the Company, in the amount of 10% of their original capital contributions. On September 18, 2000, the Company finalized the terms of an agreement to purchase the remaining ownership interests from its partners in these joint ventures for a total of approximately $1.7 million. The two acquisitions must be completed on or before December 31, 2002. A third joint venture was previously acquired in January 2001 under the terms of this agreement. Construction in progress: ------------------------- As of December 31, 2001, the Company had entered into non-cancelable sub-contracts for approximately $5.9 million in connection with the construction of six hotels, representing a portion of the total estimated construction costs for these hotels. These commitments will be funded through construction and long-term mortgage financing currently in place. Employment agreements: ---------------------- The Company has entered into an employment agreement with an executive officer expiring December 31, 2003, providing for an annual base salary of $325,000. The employment agreement provides for a cash bonus based upon financial performance and hotel operations performance; stock options, a portion of which vest only if the Company achieves certain financial performance criteria; and severance pay should the officer be terminated without cause. F-23 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ 13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED): 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. The Company currently has a remaining receivable of approximately $113,000 in connection with the construction of a hotel. The Company has received a favorable court ruling with regard to this case and has previously received the majority of its claim. The Company believes the remaining funds will be collected in full. 14. SUPPLEMENTAL CASH FLOW DATA: The following represents the supplemental schedule of noncash investing and financing activities for the years ended December 31 (Note 4): 2001 2000 1999 ------------- ------------- -------------- Sale of assets and franchising rights: Cost basis of assets sold $ 8,200,961 Accumulated depreciation at sale (1,172,929) Deferred assets 83,747 Deferred income (402,090) Notes received, less $50,000 allowance (300,000) Gain on sale 6,663,124 ------------- Net cash proceeds $ 13,072,813 ============= Liabilities assumed in connection with acquisition and consolidation of hotel partnership interests $ 2,365,422 $ 1,655,422 ============= ============== Assets classified as held for sale $ 2,187,822 =============
15. SALE OF AMERIHOST INN BRAND NAMES AND FRANCHISING RIGHTS: Effective September 30, 2000, the Company completed the sale of the AmeriHost Inn and AmeriHost Inn & Suites brand names and franchising rights to Cendant Corporation ("Cendant"). The Company simultaneously entered into franchise agreements with Cendant for its AmeriHost Inn hotels. The Company received an initial payment of approximately $5.5 million upon closing and recorded a gain from this payment, net of closing costs of approximately $5.2 million. The agreement with Cendant also provides for additional incentives to the Company as the AmeriHost Inn and AmeriHost Inn & Suites brand names are expanded. In conjunction with this transaction, the Company began doing business as Arlington Hospitality, Inc. and legally changed the name at the 2001 shareholder meeting. 16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED): Selected quarterly financial data (in thousands, except per share amounts) for 2001 and 2000 is summarized below. The sum of the quarterly earnings (loss) per share amounts may not equal the annual earnings per share amounts due primarily to changes in the number of common shares and common share equivalents outstanding from quarter to quarter. F-24 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 ================================================================================ Three Months Ended ------------------------------------------------------ Year Ended 3/31 6/30 9/30 12/31 12/31 ---------- ---------- --------- ---------- ----------- 2001: Total revenue $ 19,461 $ 16,963 $ 22,556 $ 18,174 $ 77,153 Operating income (loss) (32) 1,379 3,746 454 5,547 Gains on sale of assets 315 275 296 - 886 Net income (loss) (620) 153 1,857 (635) 755 Net income (loss) per share: Basic $ (0.12) $ 0.03 $ 0.37 $ (0.13) $ 0.15 Diluted $ (0.13) $ 0.03 $ 0.35 $ (0.13) $ 0.13 2000: Total revenue $ 15,867 $ 21,805 $ 23,868 $ 14,612 $ 76,151 Operating income (loss) (651) 2,511 3,534 (741) 4,653 Gains on sale of assets and franchising rights 172 840 5,507 144 6,663 Net income (loss) (904) 1,206 4,642 (934) 4,010 Net income (loss) per share: Basic $ (0.18) $ 0.24 $ 0.93 $ (0.19) $ 0.81 Diluted $ (0.18) $ 0.23 $ 0.87 $ (0.19) $ 0.74
F-25 EX-3.1(A) 3 a32381x3.txt SIXTH CERTIFICATE OF AMENDMENT STATE OF DELAWARE SECRETARY OF STATE DIVISION OF CORPORATIONS FILED 09:00 AM 05/24/2001 010250072 - 2044441 SIXTH CERTIFICATE OF AMENDMENT OF THE RESTATED CERTIFICATE OF INCORPORATION OF AMERIHOST PROPERTIES, INC. AMERIHOST PROPERTIES, INC. (the "Corporation"), a corporation organized and existing under and by virtue of Title 8, Chapter 1 of the Delaware Code of 1953, DOES HEREBY CERTIFY: FIRST: The Board of Directors of the Corporation adopted a resolution proposing to amend the Corporation's Restated Certificate of Incorporation to change the name of the Corporation from Amerihost Properties, Inc. to Arlington Hospitality, Inc. SECOND: At the annual meeting of the shareholders held on May 24, 2001, upon notice in accordance with Section 222 of the Delaware General Corporation Law, a majority of the outstanding stock was voted in favor of the resolution of the Board of Directors. THIRD: The Restated Certificate of Incorporation of the Corporation is hereby amended by deleting Article First of the Restated Certificate of Incorporation in its entirety and substituting therefor the following new Article First: "Article First Name ---- The name of the Corporation is Arlington Hospitality, Inc." FOURTH: The foregoing amendment has been duly adopted in accordance with the provisions of Section 242 of the Delaware General Corporation Law. IN WITNESS WHEREOF, AMERIHOST PROPERTIES, INC. has caused this Certificate to be signed by its President and Secretary this 24th day of May, 2001 AMERIHOST PROPERTIES, INC. By: /s/ Michael P. Holtz ------------------------------ Michael P. Holtz, President ATTEST: By: /s/ James B. Dale ------------------------------ James B. Dale, Secretary EX-21.1 4 a32381x21.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21.1 ARLINGTON HOSPITALITY, INC., INC. LISTING OF SUBSIDIARIES State of Incorporation Ownership Entity or Organization Percentage - ---------------------------------- --------------- ---------- Arlington Hospitality Development, Inc. Illinois 100.00% Arlington Hospitality Management, Inc. Illinois 100.00% Arlington Hospitality Staffing, Inc. Illinois 100.00% Arlington Inns, Inc. Delaware 100.00% Arlington Inns of America, Inc. Delaware 100.00% Arlington Inns of Illinois, Inc. Illinois 100.00% Arlington Inns of Michigan, Inc. Michigan 100.00% Arlington Inns of Ohio, Inc. Ohio 100.00% Arlington Lodging Group, Inc. Delaware 100.00% Arlington Office Group, Inc. Illinois 100.00% AP Equities of Florida, Inc. Florida 100.00% AP Hotels of California, Inc. California 100.00% AP Hotels of Georgia, Inc. Georgia 100.00% AP Hotels of Illinois, Inc. Illinois 100.00% AP Hotels of Iowa, Inc. Iowa 100.00% AP Hotels of Michigan, Inc. Delaware 100.00% AP Hotels of Mississippi, Inc. Mississippi 100.00% AP Hotels of Missouri, Inc. Missouri 100.00% AP Hotels of Ohio, Inc. Delaware 100.00% AP Hotels of Oklahoma, Inc. Oklahoma 100.00% AP Hotels of Pennsylvania, Inc. Pennsylvania 100.00% AP Hotels of Texas, Inc. Delaware 100.00% AP Hotels of Wisconsin, Inc. Wisconsin 100.00% AP Hotels/Parkersburg, WV, Inc. West Virginia 100.00% AP Lodging of Ohio, Inc. Ohio 100.00% AP Properties of Mississippi, Inc. Mississippi 100.00% AP Properties of Ohio, Inc. Ohio 100.00% API of Indiana, Inc. Indiana 100.00% API/Athens, OH, Inc. Ohio 100.00% API/Columbia City, IN, Inc. Indiana 100.00% API/Hammond, IN, Inc. Indiana 100.00% API/Lancaster, OH, Inc. Ohio 100.00% API/Logan, OH, Inc. Ohio 100.00% API/Metropolis, IL, Inc. Illinois 100.00% API/Plainfield, Inc. Indiana 100.00% API/Washington C.H., OH, Inc. Ohio 100.00% Niles, Illinois Hotel Corporation Illinois 100.00% Shorewood Hotel Investments, Inc. Illinois 100.00% Shorewood Investors, Inc. Illinois 100.00% Metropolis, IL 1292 Limited Partnership Illinois 54.90% 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% EX-23.1 5 a32381x231.txt CONSENT OF KPMG LLP Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Arlington Hospitality, Inc.: We consent to the incorporation by reference in the registration statements on Form S-3 (no. 33-72742 and 33-32333) and on Form S-8 (no. 33-32331) of Arlington Hospitality, Inc. of our report dated March 5, 2002 relating to the consolidated balance sheets of Arlington Hospitality, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended, which report appears in the December 31, 2001 Annual Report on Form 10-K of Arlington Hospitality, Inc. KPMG LLP Chicago, Illinois March 25, 2002 EX-23.2 6 a32381x232.txt CONSENT OF BDO LLP Exhibit 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) Arlington Heights, 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 8, 2000 relating to the consolidated financial statements of Arlington Hospitality, Inc. (formerly Amerihost Properties, Inc.) appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2001. BDO Seidman, LLP Chicago, Illinois March 25, 2002 -----END PRIVACY-ENHANCED MESSAGE-----