-----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, Vy0VfmXbAC7RLjNQa3GOthg6m11czCvxjG3OG2ft4yjDCPp3WlCXA7kVFMfwXI+i UhkPMPwzO7SoY+M+Ht4PWA== 0000914760-02-000140.txt : 20020814 0000914760-02-000140.hdr.sgml : 20020814 20020814111518 ACCESSION NUMBER: 0000914760-02-000140 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15291 FILM NUMBER: 02732496 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-Q 1 a32381q602.txt JUNE 30, 2002 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended JUNE 30, 2002 --------------------- 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 ROAD, SUITE 400, ARLINGTON HEIGHTS, ILLINOIS 60005 - ---------------------------------------------------------------------- ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 228-5400 -------------- 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 -- -- As of August 13, 2002, 4,958,056 shares of the Registrant's Common Stock were outstanding. ================================================================================ ARLINGTON HOSPITALITY, INC. FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 2002 INDEX PART I: Financial Information Page ----------------------------- ---- Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001 4 Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001 6 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II: Other Information -------------------------- Item 6. Exhibits and Reports on Form 8-K 24 Signatures 24 Page 2 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ---------------------------- Page 3 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
================================================================================================================== June 30, December 31, 2002 2001 --------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 3,415,730 $ 4,748,156 Accounts receivable, less an allowance of $150,000 at June 30, 2002 and December 31, 2001 (including approximately $106,000 and $126,000 from related parties) 1,975,083 2,343,423 Notes receivable, current portion 518,499 518,499 Prepaid expenses and other current assets 454,277 998,559 Refundable income taxes 1,122,853 - Costs and estimated earnings in excess of billings on uncompleted contracts with related parties 1,738,937 1,079,137 --------------- -------------- Total current assets 9,225,379 9,687,774 --------------- -------------- Investments in and advances to unconsolidated hotel joint ventures (Note 8) 5,849,430 5,404,744 --------------- -------------- Property and equipment: Land 13,911,841 12,454,360 Buildings 81,589,861 68,095,453 Furniture, fixtures and equipment 26,247,133 24,189,969 Construction in progress 2,286,988 5,973,890 Leasehold improvements 2,772,836 2,899,179 Assets held for sale - 2,187,822 --------------- -------------- 126,808,659 115,800,673 Less accumulated depreciation and amortization 25,407,549 22,905,635 --------------- -------------- 101,401,110 92,895,038 --------------- -------------- Notes receivable, less current portion 993,279 1,000,000 Deferred income taxes (Note 5) 2,302,000 3,247,000 Other assets, net of accumulated amortization of $1,072,000 and $986,000 2,782,243 2,939,900 --------------- -------------- 6,077,522 7,186,900 $ 122,553,441 $ 115,174,456 =============== ============== (continued) Page 4 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) ================================================================================================================== June 30, December 31, 2002 2001 --------------- ---------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,941,621 $ 2,467,704 Bank line-of-credit 7,156,287 6,793,702 Accrued payroll and related expenses 786,717 784,533 Accrued real estate and other taxes 2,384,376 1,952,875 Other accrued expenses and current liabilities 352,924 452,086 Current portion of long-term debt 6,382,654 2,110,652 Income taxes payable - 286,670 --------------- -------------- Total current liabilities 20,004,579 14,848,222 --------------- -------------- Long-term debt, net of current portion 73,289,190 70,088,269 --------------- -------------- Deferred income (Note 9) 10,335,945 10,714,735 --------------- -------------- Commitments and contingencies Minority interests 380,933 456,631 --------------- -------------- Shareholders' equity: Preferred stock, no par value; authorized 100,000 shares; none issued - - Common stock, $.005 par value; authorized 25,000,000 shares; issued and outstanding 4,958,056 shares at June 30, 2002 and 4,958,081 shares at December 31, 2001 24,790 24,790 Additional paid-in capital 13,171,030 13,171,151 Retained earnings 5,783,849 6,307,533 --------------- -------------- 18,979,669 19,503,474 Less: Stock subscriptions receivable (436,875) (436,875) --------------- -------------- 18,542,794 19,066,599 --------------- -------------- $ 122,553,441 $ 115,174,456 =============== ============== See notes to consolidated financial statements.
Page 5 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, (UNAUDITED)
================================================================================================================== Three Months Ended June 30, Six Months Ended June 30, ---------------------------------- ---------------------------------- 2002 2001 2002 2001 --------------- ---------------- --------------- ---------------- Revenue: Hotel operations: AmeriHost Inn hotels $ 11,685,235 $ 12,251,152 $ 20,845,162 $ 22,117,815 Other hotels 2,976,625 2,963,923 5,233,178 5,138,261 Development and construction 3,154,027 42,018 5,219,310 107,175 Hotel sales and commissions 1,540,451 93,373 4,748,348 5,858,068 Management services 262,772 242,090 496,709 471,898 Employee leasing 867,814 1,370,134 1,720,175 2,730,016 Other 156,318 - 317,988 - --------------- --------------- --------------- --------------- 20,643,242 16,962,690 38,580,870 36,423,233 --------------- --------------- --------------- --------------- Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 7,824,102 8,507,534 15,403,551 16,692,558 Other hotels 2,504,103 2,098,862 5,099,282 4,274,177 Development and construction 2,626,326 211,256 4,623,893 587,424 Hotel sales and commissions 1,497,732 - 3,528,680 3,717,468 Management services 184,297 159,455 338,827 351,912 Employee leasing 856,165 1,341,867 1,676,802 2,696,781 Other 28,798 - 45,621 - --------------- --------------- --------------- --------------- 15,521,523 12,318,974 30,716,656 28,320,320 --------------- --------------- --------------- --------------- 5,121,719 4,643,716 7,864,214 8,102,913 Depreciation and amortization 1,406,141 1,148,002 2,729,830 2,269,348 Leasehold rents - hotels 1,336,840 1,705,280 2,818,652 3,461,139 Corporate general and administrative 386,435 411,804 773,594 1,025,432 --------------- --------------- --------------- --------------- Operating income 1,992,303 1,378,630 1,542,138 1,346,994 Other income (expense): Interest expense (1,451,102) (1,389,474) (2,874,776) (2,797,047) Interest income 134,392 122,163 258,222 270,029 Other income (22,650) 63,143 37,360 106,388 Gain on sale of property - 275,207 327,076 590,445 Equity in net income and (losses) of affiliates (208,551) (159,767) (121,583) (272,540) --------------- --------------- --------------- --------------- Income (loss) before minority interests and income taxes 444,392 289,902 (831,563) (755,731) Minority interests in (income) loss of consolidated subsidiaries and partnerships (50,324) (34,306) (37,121) (30,791) --------------- --------------- --------------- --------------- Income (loss) before income taxes 394,068 255,596 (868,684) (786,522) Income tax expense (benefit) 160,000 103,000 (345,000) (319,000) --------------- --------------- --------------- --------------- Net income (loss) $ 234,068 $ 152,596 $ (523,684) $ (467,522) =============== =============== =============== =============== Net income (loss) per share - Basic $ 0.05 $ 0.03 $ (0.11) $ (0.09) Net income (loss) per share - Diluted $ 0.05 $ 0.03 $ (0.11) $ (0.10) See notes to consolidated financial statements.
Page 6 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, (UNAUDITED)
================================================================================================================= 2002 2001 --------------- --------------- Cash flows from operating activities: Cash received from customers $ 39,145,568 $ 37,508,895 Cash paid to suppliers and employees (30,134,918) (28,816,393) Interest received 281,545 101,262 Interest paid (2,893,044) (2,798,308) Income taxes paid (119,523) (276,353) --------------- --------------- Net cash provided by operating activities 6,279,628 5,719,103 --------------- --------------- Cash flows from investing activities: Distributions, and collections on advances, from affiliates 263,836 475,409 Purchase of property and equipment (12,066,782) (5,569,952) Purchase of investments in, and advances to, minority owned affiliates (1,268,212) (1,847,326) Acquisitions of partnership interests, net of cash acquired (Note 7) (796,786) (795,384) Collections on notes receivable 6,721 13,089 Proceeds from sale of assets (6,700) - --------------- --------------- Net cash used in investing activities (13,867,923) (7,724,164) --------------- --------------- Cash flows from financing activities: Proceeds from issuance of long-term debt 9,660,858 3,500,162 Principal payments on long-term debt (3,654,444) (4,266,789) Net proceeds from line of credit 362,585 3,185,569 Distributions to minority interest (112,819) - (Purchase) issuance of common stock (311) 13,711 Other - 117,000 --------------- --------------- Net cash provided by financing activities 6,255,869 2,549,653 --------------- --------------- Net increase (decrease) in cash (1,332,426) 544,592 Cash and cash equivalents, beginning of year 4,748,156 1,728,869 --------------- --------------- Cash and cash equivalents, end of period $ 3,415,730 $ 2,273,461 =============== =============== (continued) Page 7 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, (UNAUDITED) ================================================================================================================= 2002 2001 --------------- --------------- Reconciliation of net loss to net cash provided by operating activities: Net loss $ (523,684) $ (467,522) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 2,729,830 2,269,348 Equity in net (income) loss of affiliates and amortization of deferred income 121,583 272,540 Interest from unconsolidated joint ventures (43,053) - Minority interests in net income of subsidiaries 37,121 30,791 Amortization of deferred gain (527,304) (431,588) Deferred income taxes 360,000 314,000 Issuance of common stock 190 - Gain on sale of property and equipment (327,076) (590,445) Proceeds from sale of hotels 4,456,081 4,724,468 Income from sale of hotels (927,401) (986,189) Changes in assets and liabilities, net of effects of acquisition: Decrease (increase) in accounts receivable 366,110 (255,169) Decrease (increase) in prepaid expenses and other current assets 570,756 (23,008) Increase in refundable income taxes (824,523) (909,353) (Increase) decrease in costs and estimated earnings in excess of billings (659,800) 286,057 Increase in other assets (141,615) (292,228) Increase in accounts payable 450,277 569,250 Increase in accrued payroll and other accrued expenses and current liabilities 322,016 261,026 Decrease in accrued interest (18,268) (1,261) Increase in deferred income 858,388 948,386 --------------- --------------- Net cash provided by operating activities $ 6,279,628 $ 5,719,103 =============== ================ See notes to consolidated financial statements.
Page 8 ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 ================================================================================ 1. BASIS OF PREPARATION: --------------------- The financial statements included herein have been prepared by the Company, without audit. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments, which consist only of recurring adjustments necessary to present fairly the financial position of Arlington Hospitality, Inc. and subsidiaries as of June 30, 2002 and December 31, 2001, and the results of its operations for the three and six months ended June 30, 2002 and 2001, and cash flows for the six months ended June 30, 2002. The results of operations for the three and six months ended June 30, 2002, are not necessarily indicative of the results to be expected for the full year. It is suggested that the accompanying consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's 2001 Annual Report on Form 10-K. Certain reclassifications have been made to the 2001 financial statements in order to conform with the 2002 presentation. 2. PRINCIPLES OF CONSOLIDATION: ---------------------------- The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and entities in which the Company has a majority ownership interest. Significant intercompany accounts and transactions have been eliminated. 3. CRITICAL ACCOUNTING POLICIES: ----------------------------- We defined critical accounting policies as those accounting policies that require our management to exercise subjective and complex judgment. Our critical accounting policies are described in our 2001 Form 10-K. On January 1, 2002 we adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). The statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 requires a long-lived asset to be sold to be classified as "held for sale" in the period in which certain criteria are met, including that the sale of the asset within one year is probable. Based on historical experience and our business strategy, we generally do not assess a sale as probable before the transaction closes. We do not believe any of our properties meet all of the criteria necessary to classify assets as held for sale as of June 30, 2002. SFAS 144 also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported in discontinued operations if the operations and cash flows of the component have been or will be eliminated from our ongoing operations. We do not include the sales or operations of AmeriHost Inn hotels in discontinued operations because we retain ongoing royalty fees from those hotels after their sale. The operations of all other long-lived assets sold or classified as held for sale are reflected as discontinued operations. As of June 30, 2002, we have no identifiable discontinued operations. 4. EARNINGS (LOSS) 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 of 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 in all periods presented and excluded the impact of a convertible partnership interest for the three months ended June 30, 2002 as its effect was also anti-dilutive. The calculations of basic and diluted earnings (loss) per share are as follows: Page 9 ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 ================================================================================ 4. EARNINGS (LOSS) PER SHARE (CONTINUED): -------------------------------------- Three Months Ended June 30, Six Months Ended June 30, ---------------------------- ------------------------------- 2002 2001 2002 2001 ------------- ------------- -------------- --------------- Net income (loss) $ 234,068 $ 152,596 $ (523,684) $ (467,522) Impact of convertible partnership interests - (18,391) (15,943) (58,681) ------------- ------------- -------------- -------------- Net income (loss) available to common shareholders $ 234,068 $ 134,205 $ (539,627) $ (526,203) ============= ============= ============== ============== Weighted average common shares outstanding 4,958,077 4,980,484 4,958,079 4,979,953 Dilutive effect of convertible partnership interests and common stock equivalents 75,514 248,771 84,975 168,100 ------------- ------------- -------------- -------------- Dilutive common shares outstanding 5,033,591 5,229,255 5,043,054 5,148,053 ============= ============= ============== ============== Net income (loss) per share - Basic $ 0.05 $ 0.03 $ (0.11) $ (0.09) ============= ============= ============== ============== Net income (loss) per share - Diluted $ 0.05 $ 0.03 $ (0.11) $ (0.10) ============= ============= ============== ==============
5. INCOME TAXES: ------------- Deferred income taxes are provided on the differences in the bases of the Company's assets and liabilities determined for tax and financial reporting purposes and relate principally to depreciation of property and equipment and deferred income. 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. Approximately $595,000 was reclassified into refundable income taxes from deferred income taxes at June 30, 2002, based on the final determination of the appropriate tax treatment for certain fees. The income tax expense (benefit) for the three and six months ended June 30, 2002 and 2001 was based on the Company's estimate of the effective tax rate expected to be applicable for the full year. The Company expects the effective tax rate to approximate the Federal and state statutory rates. 6. HOTEL LEASES: ------------- The Company leases 24 hotels as of June 30, 2002 (including 22 sale/leaseback hotels - Note 9), the operations of which are included in the Company's consolidated financial statements. All of these leases are triple net and provide for monthly base rent payments ranging from $14,000 to $27,000. The leases expire through March 2014. Two of these leases 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. During the three months ended June 30, 2002, the Company exercised its option to purchase one leased hotel from a partnership in which the Company has an ownership interest for $4.5 million. The aggregate purchase price for the remaining two leased hotels was approximately $7,000,000 as of June 30, 2002. Page 10 ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 ================================================================================ 7. LIMITED PARTNERSHIP GUARANTEED DISTRIBUTIONS: --------------------------------------------- The Company was a general partner in two partnerships where the Company had 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 May 10, 2002, the Company acquired the remaining ownership interest in one of the joint ventures for $815,000 and anticipates completing the acquisition of the second joint venture on or before December 31, 2002. 8. INVESTMENTS: ------------ Effective January 1, 2001, the Company acquired the remaining ownership interest in one hotel joint venture. Effective May 1, 2002, the Company acquired the remaining ownership interest in another hotel joint venture. The following is a summary of these acquisitions: 2002 2001 ------------- ------------- Property and equipment acquired $ 2,279,309 2,100,058 Other assets acquired 38,400 37,023 Long-term debt assumed (1,466,510) (1,238,763) Other liabilities assumed (54,413) (102,934) ------------- ------------- Cash paid, net of cash acquired $ 796,786 $ 795,384 ============= ============= During the second quarter of 2002, one of the Company's hotel joint ventures wrote down its hotel asset by $100,000 based upon its estimated realized value. This adjustment was included in equity in net income and (losses) of affiliates in the accompanying consolidated financial statements. 9. SALE/LEASEBACK OF HOTELS: ------------------------- In 1998 and 1999, the Company completed the sale of 30 AmeriHost Inn hotels to a Real Estate Investment Trust ("REIT") for $73 million. Upon the 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. The Company has deferred the gain on the sale of these hotels pursuant to sale/leaseback accounting. The deferred gain is being recognized on a straight-line basis over the remaining term of the lease, as extended, as a reduction of leasehold rent expense. In January 2001, the Company amended the master lease with the REIT to provide for the sale of eight hotels by 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 an unrelated third party or to the Company by the dates specified. As of June 30, 2002, the Company is obligated under the terms of the amendment to either facilitate the sale to a third party, or purchase from the REIT, one hotel prior to June 5, 2003, or the 0.25% rent increase becomes effective. The REIT sold one of its hotels to an unrelated third party during the six months ended June 30, 2002. Consequently, the Company has terminated the lease with the REIT for this hotel and recognized a commission from the sale of this hotel, which is classified as hotel sales and commissions in the accompanying consolidated financial statements. The unamortized deferred gain related to the initial sale of this hotel was recognized upon termination of the respective lease. Page 11 ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 ================================================================================ 10. 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 controlling ownership or leasehold interest, (2) hotel development and construction, 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, as of and for the six months ended June 30, 2002 and 2001, for each business segment, which is the information utilized by the Company's decision makers in managing the business: Revenues 2002 2001 -------- ------------- ------------- Hotel operations $ 26,078,340 $ 27,256,076 Hotel development and construction 5,219,310 107,175 Hotel sales and commissions 4,748,348 5,858,068 Hotel management 496,709 471,898 Employee leasing 1,720,175 2,730,016 Other (office building) 317,988 - ------------- ------------- $ 38,580,870 $ 36,423,233 ============= ============= Operating costs and expenses ---------------------------- Hotel operations $ 20,502,833 $ 20,966,735 Hotel development and construction 4,623,893 587,424 Hotel sales and commissions 3,528,680 3,717,468 Hotel management 338,827 351,912 Employee leasing 1,676,802 2,696,781 Other (office building) 45,621 - ------------- ------------- $ 30,716,656 $ 28,320,320 ============= ============= Operating income ---------------- Hotel operations $ 204,643 $ 635,297 Hotel development and construction 592,411 (493,034) Hotel sales and commissions 1,219,668 2,140,600 Hotel management 131,292 91,185 Employee leasing 42,190 31,641 Other (office building) 194,747 - Corporate (842,813) (1,058,695) ------------- ------------- $ 1,542,138 $ 1,346,994 ============= ============= Page 12 ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 ================================================================================ 10. BUSINESS SEGMENTS (CONTINUED): ------------------------------ Identifiable assets 2002 2001 ------------------- ------------- ------------- Hotel operations $ 105,567,673 $ 96,073,082 Hotel development and construction 2,176,523 534,644 Hotel management 52,689 (167,925) Employee leasing (99,161) 176,593 Other (office building) 6,694,182 - Corporate 8,161,535 5,463,475 ------------- ------------- $ 122,553,441 $ 102,079,869 ============= ============= Capital expenditures -------------------- Hotel operations $ 11,788,467 $ 5,474,253 Hotel development and construction - 5,975 Hotel management 7,998 43,722 Employee leasing - - Other (office building) 255,672 - Corporate 14,645 46,002 ------------- ------------- $ 12,066,782 $ 5,569,952 ============= ============= Depreciation/Amortization ------------------------- Hotel operations $ 2,552,212 $ 2,192,905 Hotel development and construction 3,005 12,786 Hotel management 26,590 28,800 Employee leasing 1,184 1,594 Other (office building) 77,620 - Corporate 69,219 33,263 ------------- ------------- $ 2,729,830 $ 2,269,348 ============= =============
11. BANK LINE OF CREDIT: --------------------- At December 31, 2001, the Company had a $7,500,000 bank operating line-of-credit. 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, was subject to interest at an annual rate equal to the bank's base lending rate plus one-half of one percent, and matured February 28, 2002. 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. The Company was not in compliance with the maximum leverage ratio covenant as of June 30, 2002; however, the lender has waived this violation and adjusted the covenant for future periods. Page 13 ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 ================================================================================ 12. SUBSEQUENT EVENT: ----------------- The Company anticipates exchanging a note receivable from the principals of Diversified Innkeepers, Inc. in the amount of $1,136,779 at June 30, 2002, for a 50% ownership interest in a hotel joint venture. The remaining 50% ownership interest will be held by the principals of Diversified Innkeepers, Inc. Under the terms of the partnership agreement, the Company is entitled to preferred operating distributions, as well as a preferred distribution upon the sale or refinancing of the hotel. Page 14 ITEM 2. 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 June 30, 2002, the Company had 65 AmeriHost Inn hotels open, of which 53 were wholly-owned or leased, one was majority-owned, and 11 were minority-owned. The Company opened four 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 June 30, 2002, 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 5.3% during the second quarter of 2002, compared to the second quarter of 2001, attributable to a 9.5% increase in occupancy, partially offset by a decrease of $2.24 in average daily rate. These results relate to the 60 AmeriHost Inn hotels that were operating for at least thirteen full months during the six months ended June 30, 2002. 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 4.6% and 5.8% to $11.7 million and $20.8 million during the three and six months ended June 30, 2002, from revenues of $12.3 million and $22.1 million during the three and six months ended June 30, 2001, respectively, due primarily to the sale of hotels. Revenues from the development segment increased to $3.2 million and $5.2 million during the three and six months ended June 30, 2002, from $42,018 and $107,175 for the three and six months ended June 30, 2001, respectively, due to the increase in hotel development activity for minority-owned and third party entities. Revenues from hotel sales and commissions decreased 18.9% to $4.7 million during the six months ended June 30, 2002, from $5.9 million for the six months ended June 30, 2001, as a result of the sale of three AmeriHost Inn hotels during the first six months of 2002, including one in the second quarter, versus the sale of five AmeriHost Inn hotels during the first six months of 2001. Revenues from hotel management and employee leasing segments decreased by 29.9% and 30.8% in total during the three and six months ended June 30, 2002, respectively, due primarily to the sale or termination of hotels under management contracts. Revenues from Consolidated non-AmeriHost Inn hotels increased 0.4% and 1.8% during the three and six months ended June 30, 2002, respectively, compared to 2001, as a result primarily of the acquisition of one non-AmeriHost Inn hotel during December 2001. Total revenues increased 21.7% and 5.9% to $20.6 million and $38.6 million during the three and six months ended June 30, 2002, from $17.0 million and $36.4 million during the three and six months ended June 30, 2001. The Company recorded net income of $234,068 for the second quarter of 2002, or $0.05 per diluted share, compared to net income of $152,596 or $0.03 per diluted share in 2001. The Company recorded a net loss of ($523,684) for the six months ended June 30, 2002, or ($0.11) per diluted share, compared to net loss of ($467,522), or ($0.10) per diluted share, for the six months ended June 30, 2001. On September 30, 2000, the Company sold the AmeriHost Inn and AmeriHost Inn & Suites brand names and franchising rights to Cendant Corporation. The agreement with Cendant 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 Page 15 necessary for an understanding of the 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, increased 26.1% and 22.4% to $1.6 million and $2.2 million during the three and six months ended June 30, 2002, from $1.3 million and $1.8 million during the three and six months ended June 30, 2001. Excluding hotels under construction, the Company had an ownership interest in 75 hotels at June 30, 2002, versus 77 hotels at June 30, 2001. 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 Cendant franchisees. Total Consolidated hotels decreased slightly to 62 hotels at June 30, 2002, versus 63 hotels at June 30, 2001. CRITICAL ACCOUNTING POLICIES We define critical accounting policies as those accounting policies that require our management to exercise subjective and complex judgment. Our critical accounting policies are described in our 2001 Form 10-K. In addition, on January 1, 2002 we adopted Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). The statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 144 requires a long-lived asset to be sold to be classified as "held for sale" in the period in which certain criteria are met, including that the sale of the asset within one year is probable. Based on historical experience and our business strategy, we generally do not assess a sale as probable before the transaction closes. We do not believe any of our properties meet all of the criteria necessary to classify assets as held for sale as of June 30, 2002. SFAS 144 also requires that the results of operations of a component of an entity that either has been disposed of or is classified as held for sale be reported in discontinued operations if the operations and cash flows of the component have been or will be eliminated from our ongoing operations. We do not include the sales or operations of AmeriHost Inn hotels in discontinued operations because we retain ongoing royalty fees from those hotels after their sale. The operations of all other long-lived assets sold or classified as held for sale are reflected as discontinued operations. As of June 30, 2002, we have no identifiable discontinued operations. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 Revenues increased 21.7% and 5.9% to $20.6 million and $38.6 million during the three and six months ended June 30, 2002, respectively, from $17.0 million and $36.4 million during the three and six months ended June 30, 2001. The increase in revenue was primarily due to increases in hotel development revenues during 2002 and hotel sales and commissions during the three months ended June 30, 2002. Hotel operations revenue decreased 3.6% and 4.3% to $14.7 million and $26.1 million during the three and six months ended June 30, 2002, respectively, from $15.2 million and $27.3 million during the three and six months ended June 30, 2001. Revenues from Consolidated AmeriHost Inn hotels decreased 4.6% and 5.8% to $11.7 million and $20.8 million during the three and six months ended June 30, 2002, respectively, from $12.3 million and $22.1 million during the three and six months ended June 30, 2001. These decreases were attributable primarily to the sale of seven Consolidated AmeriHost Inn hotels to Cendant franchisees, partially offset by the opening of four newly constructed AmeriHost Inn hotels. Revenues from Consolidated other brand hotels increased 0.4% and 1.8% to $3.0 million and $5.2 million during the three and six months ended June 30, 2002, respectively. These increases were primarily the result of the acquisition of one non-AmeriHost Inn Consolidated hotel during December 2001. The hotel operations segment included the operations of 62 Consolidated hotels (including 54 AmeriHost Inn hotels) comprising 4,535 rooms at June 30, 2002, compared to 63 Consolidated hotels (including 57 AmeriHost Inn hotels) comprising 4,446 rooms at June 30, 2001. 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 Page 16 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 to $3.2 million and $5.2 million during the three and six months ended June 30, 2002, respectively, from $42,018 and $107,175 during the three and six months ended June 30, 2001. Hotel development revenues are directly related to the number of hotels being developed and constructed for minority-owned entities or unrelated third parties. The Company was constructing two hotels for minority-owned entities or unrelated third parties during the first six months of 2002, compared to none during the first six months of 2001. However, the Company also had several additional projects in various stages of pre-construction development during both six-month periods. In addition, Cendant pays 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. The Company received approximately $535,000 and $771,000 in development incentive fees from the sale of AmeriHost Inn hotels during the second quarter and first six months of 2002, respectively. These fees are deferred and recognized as revenue over a 76-month period. Approximately $91,000 and $162,000 was recognized as hotel development revenue in the second quarter and first six months of 2002. Cendant also pays 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 recorded approximately $50,000 and $87,000 in royalty sharing payments during the second quarter and first six months of 2002, respectively. The Company generally records this royalty sharing fee as hotel development segment revenue when the related royalty fee is received. The Company recorded $1.5 million and $4.7 million in hotel sales and commission revenue during the three and six months ended June 30, 2002, respectively, compared to $93,373 and $5.9 million during the three and six months ended June 30, 2001. The Company and the REIT which owns certain of the Company's leased hotels, closed on the sale of three AmeriHost Inn hotels during the first six months of 2002, including one in the second quarter of 2002, versus five AmeriHost inn hotels during the first six months of 2001, including one during the second quarter of 2001. The Company intends to continue to build and sell AmeriHost Inn hotels in order to maximize the value inherent in the Cendant transaction while enhancing net income and cash flow. The AmeriHost Inn hotel that was sold during the second quarter of 2001 was owned by the REIT; therefore, the revenues from this segment only included a commission on the sale of this hotel. Hotel management revenue increased 8.5% and 5.3% to $262,772 and $496,709 during the three and six months ended June 30, 2002, respectively, from $242,090 and $471,898 during the three and six months ended June 30, 2001. The number of hotels managed for third parties and minority-owned entities was 15 hotels, representing 1,212 rooms, at June 30, 2002, versus 16 hotels, representing 1,318 rooms, at June 30, 2001. The decrease from the elimination of management fees from a minority-owned hotel upon its consolidation during the fourth quarter of 2001, was offset by the increase in same room revenues, which is the basis for the management fee revenue. Employee leasing revenue decreased 36.7% and 37.0% to $867,814 and $1.7 million during the three and six months ended June 30, 2002, respectively, from $1.4 million and $2.7 million during the three and six months ended June 30, 2001, due primarily to the reduction in rooms managed for minority-owned entities and unrelated third parties as described above, a concerted effort to decrease payroll costs which is the basis for the employee leasing revenue, and the treatment of workers compensation insurance cost in 2002. Other revenue, consisting of leasing revenue from the Company's office building was $156,318 and $317,988 during the three and six months ended June 30, 2002. 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. Total operating costs and expenses increased 26.0% and 8.5% to $15.5 million (75.2% of total revenues) and $30.7 million (79.6% of total revenues) during the three and six months ended June 30, 2002, respectively, from $12.3 million (72.6% of total revenues) and $28.3 million (77.8% of total revenues) during the three and six months ended June 30, 2001, primarily due to increases in operating costs and expenses from the hotel development and sale of hotel segments as described below. Operating costs and expenses in the hotel operations segment decreased 2.6% and 2.2% to $10.3 million and $20.5 million during the three and six months ended June 30, 2002, respectively. A decrease in Page 17 operating costs associated with the fewer number of hotels included in this segment (62 hotels at June 30, 2002, versus 63 hotels at June 30, 2001), and the decrease in energy costs during the first six months of 2002 compared to 2001, were partially offset by the acquisition of one non-AmeriHost Inn hotel and the consolidation of another non-AmeriHost Inn hotel which was previously accounted for by the equity method. Hotel operations segment operating costs and expenses as a percentage of segment revenue increased to 70.4% and 78.6% during the three and six months ended June 30, 2002, from 69.7% and 76.9% during the three and six months ended June 30, 2001. Operating costs and expenses as a percentage of revenues for the Consolidated AmeriHost Inn hotels decreased to 67.0% and 73.9% during the three and six months ended June 30, 2002, from 69.4% and 75.5% during the three and six months ended June 30, 2001. Operating costs and expenses as a percentage of revenues from the other Consolidated hotels increased to 84.1% and 97.4% during the three and six months ended June 30, 2002, from 70.8% and 83.2% during the three and six months ended June 30, 2001, due primarily to the acquisition and consolidation of the two non-AmeriHost Inn hotels and the associated operating costs therefrom. Operating costs and expenses for the hotel development segment increased to $2.6 million and $4.6 million during the three and six months ended June 30, 2002, from $211,256 and $587,424 during the three and six months ended June 30, 2001, consistent with increase in hotel development revenues for the three and six months ended June 30, 2002. Operating costs and expenses in the hotel development segment as a percentage of segment revenue decreased during the three and six month periods ended June 30, 2002 due to the increase in hotel construction activity from third parties and minority-owned entities. Hotel management segment operating costs and expenses increased 15.6% and decreased 3.7% to $184,297 and $338,827 during the three and six months ended June 30, 2002, respectively, from $159,445 and $351,912 during the three and six months ended June 30, 2001. These decreases were primarily due to the decrease in the number of hotel rooms operated and managed for unrelated third parties and minority-owned entities. Employee leasing operating costs and expenses decreased 36.2% and 37.8% to $856,165 and $1.7 million during the three and six months ended June 30, 2002, respectively, from $1.3 million and $2.7 million during the three and six months ended June 30, 2001, which is consistent with the 36.7% and 37.0% decrease in segment revenue for the three and six months ended June 30, 2002. Other operating costs and expenses of $28,798 and $45,621 during the three and six months ended June 30, 2002, consisted of expenses related to the management of the Company's office building. On October 1, 2001, the Company purchased the office building in which its headquarters is located and assumed the landlord duties for the other tenants. Depreciation and amortization expense increased 22.5% and 20.3% to $1.4 million and $2.7 million during the three and six months ended June 30, 2002, respectively, from $1.1 million and $2.3 million during the three and six months ended June 30, 2001. The increases were primarily attributable to the acquisition of the office building, the opening of newly constructed hotels, and the acquisition or consolidation of existing hotels, offset by the sale of consolidated hotels during the last twelve months. Leasehold rents - hotels decreased 21.6% and 18.6% to $1.3 million and $2.8 million during the three and six months ended June 30, 2002, respectively, compared to $1.7 million and $3.5 million during the three and six months ended June 30, 2001. The decrease was due to the sale of five leased AmeriHost Inn hotels during the last 18 months, and the acquisition of three hotels pursuant to lease-purchase options during the past twelve months. Corporate general and administrative expense decreased 6.2% and 24.6% to $386,435 and $773,594 during the three and six months ended June 30, 2002, respectively, from $411,804 and $1.0 million during the three and six months ended June 30, 2001, and can be attributed primarily to the expense related to stock options issued to consultants and transitional accounting fees incurred during the first quarter of 2001. The Company's operating income increased 44.5% and 14.5% to $2.0 million and $1.5 million during the three and six months ended June 30, 2002, respectively, from $1.4 million and $1.3 million during the three and six months ended June 30, 2001. 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 19.8% and 48.3% to $1.7 million and $1.2 million during the three and six months ended June 30, 2002, respectively, from $1.5 million and $782,398 during the three and six months ended June 30, 2001. These increases in operating income were due to the increase in same room revenues and decreases in certain hotel operating expenses including energy Page 18 costs. Operating income from the hotel development segment increased to $526,343 and $592,411 during the three and six months ended June 30, 2002, from ($175,630) and ($493,034) during the three months ended June 30, 2001. The increases in hotel development operating income were due to the increase in hotels developed and constructed for third parties and minority-owned entities during the second quarter and first six months of 2002, compared with the second quarter and first six months of 2001. Operating income from hotel sales and commissions decreased to $42,719 and $1.2 million during the three and six months ended June 30, 2002, from $93,373 and $2.1 million during the three and six months ended June 30, 2001. These decreases were due to the sale of three AmeriHost Inn hotels during the first six months of 2002, versus the sale of five during the six months ended June 30, 2001. The hotel management segment had operating income of $65,394 and $131,292 during the three and six months ended June 30, 2002, compared to operating income of $68,235 and $91,185 during the three and six months ended June 30, 2001. The increase during the six months ended June 30, 2002, was due primarily to a reduction in hotel management operating expenses. Employee leasing operating income decreased to $11,081 during the three months ended June 20, 2002, from $27,470 during the three months ended June 30, 2001, and increased to $42,190 during the six months ended June 30, 2002, from $31,641 during the six months ended June 30, 2001, due primarily to the decrease in employee leasing operating expenses. Other operating income of $86,465 and $194,747 during the three and six months ended June 30, 2002, was attributable to the acquisition in 2001 of the office building in which the Company's headquarters is located. Interest expense increased slightly to $1.5 million and $2.9 million during the three and six months ended June 30, 2002, respectively, from $1.4 million and $2.8 million during the three and six months ended June 30, 2001. The decrease attributable to sale of AmeriHost Inn hotels, whereby the Company does not incur any interest expense on sold hotels after the sale dates, the decrease from lower interest on floating rate debt, and the reduction of fixed interest rates pursuant to loan modifications executed in 2001, was offset by the mortgage financing of newly constructed or acquired Consolidated hotels. The Company capitalizes interest expense incurred during the pre-opening construction period of a Consolidated hotel project, as part of the total development cost. The amount capitalized includes both interest charges from a direct construction loan, plus interest computed at the Company's incremental borrowing rate on the total costs incurred to date in excess of the construction loan funding. The Company's share of equity in income (loss) of affiliates decreased to ($208,551) during the three months ended June 30, 2002, from ($159,767) during the three months ended June 30, 2001. The Company's share of equity in income (loss) of affiliates increased to ($121,583) during the six months ended June 30, 2002, from ($272,540) during the six months ended June 30, 2001. The fluctuations in equity of affiliates during the second quarter and first six months of 2002, compared to 2001, were primarily attributable to the write down to net realizable value of property in a hotel partnership by $100,000 during the second quarter of 2002, and the recognition of the Company's share of the operations in excess of the Company's ownership interest as a result of its position as general partner. Distributions from affiliates were $10,310 during the six months ended June 30, 2002, compared to $10,059 during the six months ended June 30, 2001. The Company anticipates exchanging a note receivable from the principals of Diversified Innkeepers, Inc. in the amount of $1,136,779 at June 30, 2002, for a 50% ownership interest in a hotel joint venture. The remaining 50% ownership interest will be held by the principals of Diversified Innkeepers, Inc. Under the terms of the partnership agreement, the Company is entitled to preferred operating distributions, as well as a preferred distribution upon the sale or refinancing of the hotel. The Company recorded gains from the sale of assets of $0 and $327,076 during the three and six months ended June 30, 2002, compared to $275,207 and $590,445 during the three and six months ended June 30, 2001. These gains were comprised primarily of the unamortized deferred gains remaining from the original sale of these hotels to the REIT, which were recognized upon the consummation of the sales of these hotels by the REIT to unrelated third parties and the simultaneous termination of the Company's leases with the REIT. Two hotels were sold by the REIT during the first six months of 2001, and one hotel was sold by the REIT during the first six months of 2002. The Company expects to continue recognizing the unamortized deferred gain from the future sale of REIT owned hotels. The Company recorded income tax expense of $160,000 and $103,000 during the three and six months ended June 30, 2002 and 2001, respectively, and an income tax benefit of $345,000 and $319,000 during the three and six months ended June 30, 2002 and 2001, respectively, which are directly related to the pre-tax income during the second quarter of 2002 and 2001, and the pre-tax losses incurred during the first six months of 2002 and 2001. Page 19 The Company reported a net income of $234,068 and $152,596 during the three months ended June 30, 2002 and 2001, respectively, and a net loss of ($523,684) and ($467,522) during the first six months of 2002 and 2001, 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 hotel development incentive fees and royalty sharing pursuant to the Cendant transaction, (iii) revenues from the sale of hotel assets; (iv) fees from management contracts; and (v) fees from employee leasing services. Cash from hotel operations is typically received at the time the guest checks out of the hotel. Approximately 10% of the Company's hotel operations revenues is generated through other businesses and contracts and is usually paid within 30 to 45 days from billing. Fees from development, construction and renovation projects are typically received within 15 to 45 days from billing. Due to the procedures in place for processing its construction draws, the Company typically does not pay its contractors until the Company receives its draw from the equity or lending source. Management fee revenues typically are received by the Company within five working days from the end of each month. Cash from the Company's employee leasing segment typically is received as of or prior to the pay date. The Company typically receives an earnest money deposit from the buyer of a hotel when a sales contract is executed. The remaining proceeds from the sale of hotel assets are received at the time of closing. 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 the first six months of 2002, the Company provided cash from operations of $6.3 million, compared to $5.7 million the first six months of 2001, or an increase in cash provided by operations of approximately $560,000. The increase in cash flow from operations during the first six months of 2002, when compared to 2001, can be attributed primarily to the increase in hotel development activity for a third party and a minority-owned entity and the increase in operating income from AmeriHost Inn hotels. The Company invests cash in three principal areas: (i) the purchase of property and equipment through the construction and renovation of Consolidated hotels; (ii) the purchase of equity interests in hotels; and (iii) the making of loans to affiliated and non-affiliated hotels for the purpose of construction, renovation and working capital. 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 from the REIT 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 their corresponding choice at this time. If the Company and the REIT are not successful in selling the REIT's choice, 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 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 purchased the REIT's second choice during the second quarter of 2002, using approximately $700,000 in cash, plus mortgage financing already committed from an affiliate of the REIT. The Company must facilitate the sale or purchase the REIT's third choice by June 5, 2003. 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, one was completed during the second quarter of 2002 using approximately $800,000, and the remaining one must be completed before December 31, 2002. The Company expects to use approximately $800,000 for the purchase of the remaining joint venture interests. Page 20 During the first six months of 2002, the Company used $13.9 million in investing activities compared to using $7.7 million during the first six months of 2001. During the first six months of 2002, the Company bought out the partners' interests in one joint venture for $796,786, used $12.1 million to purchase property and equipment for Consolidated AmeriHost Inn hotels, and used $1.0 million for investments in and advances to affiliates, net of distributions and collections on advances from affiliates. During the first six months of 2001, the Company bought out the partners' interests in one joint venture for $795,384, used $5.6 million to purchase property and equipment for Consolidated AmeriHost Inn hotels, and used $1.4 million for investments in and advances to affiliates, net of distributions and collections on advances from affiliates. Cash provided by financing activities was $6.3 million during the first six months of 2002 compared to $2.5 million during the first six months of 2001. In 2002, the primary factors were $9.7 million in proceeds from the mortgage financing of Consolidated hotels and net proceeds of $362,585 on the Company's operating line-of-credit, offset by principal repayments of $3.7 million on the mortgage financing of Consolidated hotels, including the repayment of mortgages in connection with the sale of hotels. In 2001, the contributing factors were $3.5 million in proceeds from the issuance of long-term debt, and $3.2 million in net proceeds from the Company's operating line-of-credit, offset by principal repayments of $4.3 million on the mortgage financing of Consolidated hotels, including the repayment of mortgages in connection with the sale of hotels. Approximately $6.4 million is classified as current portion of long-term debt, including two mortgages which are due within the next twelve months. The Company expects these loans to be repaid through the sale of the hotels or refinanced prior to maturity. 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 June 30, 2002, these joint ventures had $32.5 million outstanding under mortgage loan agreements. Approximately $7.5 million of this amount has been included in the Company's consolidated financial statements as of June 30, 2002 since it is from joint ventures in which the Company has a majority or controlling ownership interest, leaving approximately $24.9 million in off balance sheet mortgage debt with unconsolidated joint ventures. Of this amount, the Company has also provided approximately $13.9 million in guarantees to the lenders. Other partners have also guaranteed portions of this amount. One unconsolidated joint venture mortgage loan in the amount of $1.6 million at June 30, 2002, matures in 2002. The hotel owned by this joint venture is currently under contract for sale. The Company expects this loan to be repaid from the sale proceeds or refinanced prior to its maturity. One unconsolidated joint venture mortgage loan in the amount of $1.8 million at June 30, 2002 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 $7.2 million at June 30, 2002, 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. These financial covenants are typically measured annually, based upon the Company's fiscal year end. The Company is not aware of any covenant violations as of June 30, 2002. At June 30, 2002, the Company had $7.2 million outstanding under its operating line-of-credit. The 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, plus a spread adjusted quarterly based on the Company' leverage ratio, ranging from zero to 0.5% (if prime based) or 3.0% (if LIBOR based), and matures February 19, 2003. The 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 Company was not in compliance with the maximum leverage ratio covenant as of June 30, 2002; however, the lender has waived this violation and adjusted the covenant for future periods. Page 21 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 On April 30, 2002, the FASB issued Statement of Financial Accounting Standards No. 145 ("SFAS 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections." The rescission of SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," and SFAS no. 64 "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements," which amended SFAS No. 4, will affect income statement classification of gains and losses from extinguishment of debt. SFAS No. 4 requires that gains and losses from extinguishment of debt be classified as an extraordinary item, if material. Under SFAS No. 145, extinguishment of debt is now considered a risk management strategy by the reporting enterprise and the FASB does not believe it should be considered extraordinary under the criteria in AP B Opinion No. 30, "Reporting the Results of Operations-Reporting he Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," unless the debt extinguishment meets the unusual in nature and infrequency of occurrence criteria in APB Opinion No. 30. SFAS 145 will be effective for fiscal years beginning after May 15, 2002. Upon adoption extinguishments of debt shall be classified under the criteria in APB Opinion No. 30. The Company does not believe the adoption of SFAS 145 will have a material effect on its financial statements. 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. Page 22 ITEM 3. 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 June 30, 2002. The carrying amounts reflected approximate the estimated fair values. As the table incorporates only those exposures that existed as of June 30, 2002, 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. Average Nominal Carrying Value Interest Rate -------------- ------------- Operating line of credit - variable rate $ 7,156,287 5.50% Mortgage debt - fixed rate $ 34,074,599 7.55% Mortgage debt - variable rate $ 45,597,246 6.38% Page 23 PART II: OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ----------------------------------------- (a) Reports on Form 8-K: There were no reports on Form 8-K filed during this period covered by this report. (b) Exhibits: The following are included as exhibits to this report on Form 10-Q: Exhibit No. Description ----------- ----------- 3.2 By-laws of Arlington Hospitality, Inc. (as amended June 27, 2002) 99.1 Certification pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Signatures Pursuant to the requirements 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. --------------------------- Registrant Date: August 13, 2002 By: /s/ James B. Dale ----------------------------- James B. Dale Chief Financial Officer Page 24 EX-3.2 3 a32381x3602.txt BY-LAWS (AS AMENDED) BY-LAWS OF AMERIHOST PROPERTIES, INC. (a Delaware corporation) ARTICLE I --------- OFFICES ------- Section 1. The registered office shall be in the City of Wilmington, County of New Castle, State of Delaware. Section 2. The corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II ---------- MEETING OF STOCKHOLDERS ----------------------- Section 1. All meetings of the stockholders for the election of directors shall be held in the City of Des Plaines, State of Illinois, at such place as may be fixed from time to time by the Board of Directors, or at such other place either within or without the State of Delaware as shall be designated from time to time by the Board of Directors and stated in the notice of meeting. Meetings of stockholders for any other purposes may be held at such time and place, within or without the State of Delaware, as shall be stated in the notice of the meeting or in a duly executed waiver of notice thereof. Section 2. Annual meetings of stockholders, commencing with the year 1989, shall be held on the first Tuesday in August, 1989, if not a legal holiday, and if a legal holiday, then on the next secular day following, at 10:00 A.M., or at such other date and time as shall be designated from time to time by the Board of Directors and stated in the notice of the meeting, at which they shall elect by plurality vote a Board of Directors, and transact such other business as may properly by brought before the meeting. Section 3. Written notice of the annual meeting stating the place, date and hour of the meeting shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than sixty days before the date of the meeting. Section 4. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 5. Special meetings of the stockholders, for any purpose or purposes, unless otherwise prescribed by statute or by the certificate of incorporation, may be called by the president and shall be called by the Chairman of the Board of Directors, president or secretary at the request in writing of the Chairman of the Board of Directors or a majority of the Board of Directors, or at the request in writing of the stockholders owning a majority in amount of the entire capital stock of the corporation issued and outstanding and entitled to vote. Such request shall state the purpose or purposes of the proposed meeting. Section 6. Written notice of a special meeting stating the place, date and hour of the meeting and the purpose or purposes for which the meeting is called, shall be given not less than ten nor more than sixty days before the date of meeting, to each stockholder entitled to vote at such meeting. Section 7. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice. Section 8. The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except at otherwise provided by statute or by the Certificate of Incorporation. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. Section 9. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Certificate of Incorporation, a different vote is required in which case such express provision shall govern and control the decision of such question. Section 10. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder, but no proxy shall be voted on after three years from its date, unless the proxy provides for a longer period. Section 11. Unless otherwise provided in the Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III ----------- DIRECTORS --------- Section 1. The number of directors which shall constitute the whole Board shall be not less than five nor more than eleven. The exact number of directors shall be determined by resolution of the Board of Directors or by the stockholders at the annual meeting. The directors shall be elected at the annual meeting of the stockholders, except as provided in Section 2 of this Article, and each director elected shall hold office until his successor is elected and qualified. Directors need not be stockholders. Section 2. The number of directors may be increased by amendment of these By-laws by the affirmative vote of a majority of the directors, though less than a quorum, or, by the affirmative vote of a majority in interest of the stockholders, at the annual meeting or at a special meeting called for that purpose, and by like vote the additional directors may be chosen at such meeting to hold office until the next annual election and until their successors are elected and qualify. Section 3. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no directors in office, then an election of directors may be held in the manner provided by statute. If, at the time of filling any vacancy or any newly created directorship, the directors then in office shall constitute less than a majority of the whole Board (as constituted immediately prior to any such increase), the Court of Chancery may, upon application of any stockholder or stockholders holding at least ten percent of the total number of the shares at the time outstanding having the right to vote for such directors, summarily order an election to be held to fill any such vacancies or newly created directorships, or to replace the directors chosen by the directors then in office. Section 4. The business of the corporation shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these by-laws directed or required to be exercised or done by the stockholders. MEETINGS OF THE BOARD OF DIRECTORS Section 5. The Board of Directors of the corporation may hold meetings, both regular and special, either within or without the State of Delaware. Section 6. The first meeting of each newly elected Board of Directors shall follow the annual stockholders' meeting or shall be held at such other time as the Board of Directors shall decide and no notice of such meeting shall be necessary to the newly elected directors in order legally to constitute the meeting, provided a quorum shall be present. In the event of the failure of the stockholders to fix the time or place of such first meeting of the newly elected Board of Directors, or in the event such meeting is not held at the time and place so fixed by the stockholders, the meeting may be held at such time and place as shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by all of the directors. Section 7. Regular meetings of the Board of Directors may be held without notice at such time and at such place as shall from time to time be determined by the Board. Section 8. Special meetings of the Board of Directors may be called by the Chairman of the Board or President on two days notice to each director, which notice does not have to specify the purpose of the meeting, either personally, by mail, by telegram or by facsimile; special meetings shall be called by the Chairman of the Board or President or Secretary in like manner and on like notice on the written request of two directors unless the Board consists of only one director; in which case, special meetings shall be called by the President or Secretary in like manner and on like notice on the written request of the sole director. Section 9. At all meetings of the Board, a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 11. Unless otherwise restricted by the Certificate of Incorporation or these by-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 12. Unless otherwise restricted by the Certificate of Incorporation or these by-laws, members of the Board of Directors, or any committee designated by the Board of Directors, or any committee, may participate in a meeting of the Board of Directors or any committee, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. COMMITTEES OF DIRECTORS Section 12. The Board of Directors may, by resolution passed by a majority of the whole Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one of more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Certificate of Incorporation, adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of a dissolution, or amending the by-laws of the corporation; and, unless the resolution or the Certificate of Incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board of Directors. Section 13. Each committee shall keep regular minutes of its meetings and report the same to the Board of Directors when required. COMPENSATION OF DIRECTORS Section 14. Unless otherwise restricted by the Certificate of Incorporation or these by-laws, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. REMOVAL OF DIRECTORS Section 15. Unless otherwise restricted by the Certificate of Incorporation or by law, (i) any director or the entire Board of Directors may be removed, with or without cause, by the holders of a majority or shares entitled to vote at an election of directors, and (ii) any director may be removed for cause by a majority of the directors then in office. A director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing to remove him. ARTICLE IV ---------- NOTICES ------- Section 1. Whenever, under the provisions of the statutes or of the Certificate of Incorporation or of these by-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given by telegram. Section 2. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation or of these by-laws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. ARTICLE V --------- OFFICERS -------- Section 1. The officers of the corporation shall be chosen by the Board of Directors and shall be a chairman of the board of directors, a president, an executive vice-president, a secretary and a treasurer. The Board of Directors may also choose additional vice-presidents, a vice-chairman of the board of directors and one or more assistant secretaries and assistant treasurers. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide. Section 2. The Board of Directors at its first meeting after each annual meeting of stockholders shall choose a chairman of the board, a president, one or more vice-presidents, one of which shall be an executive vice-president, a secretary, a treasurer, and such assistant officers and a vice chairman of the board of directors if and as the Board of Directors deem desirable. Section 3. The Board of Directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. Section 4. The salaries of all officers and agents of the corporation shall be fixed by the Board of Directors. Section 5. The officers of the corporation shall hold office until their successors are chosen and qualify. Any officer elected or appointed by the Board of Directors may be removed at any time without cause, and without notice by the affirmative vote of a majority of the Board of Directors. Any vacancy occurring in any office of the corporation shall be filled by the Board of Directors. THE CHAIRMAN OF THE BOARD OF DIRECTORS Section 6. The Chairman of the Board of Directors shall be the ultimate decision-making officer of the corporation. He shall have general supervisory powers but not day to day responsibility for (i) the active management of the business, property and affairs of the corporation, and (ii) the direction and supervision of the other officers. He shall preside at all meetings of the stockholders, of the Board of Directors, and of the Executive Committee, if any, and shall designate the acting secretary for such meetings to take the minutes thereof, for delivery to the Secretary. He may sign, with the Secretary, any Assistant Secretary, Treasurer or any Assistant Treasurer, certificates for shares of the corporation and may sign any policies, contracts, deeds, mortgages, bond, or other instruments which the Board of Directors has authorized to be executed, except in cases where the signing and execution thereof shall be expressly delegate by the Board of Directors or by these By-Laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed; appoint and discharge agents and employees of the corporation. The Chairman of the Board shall be ex-officio a member of all committees. In the absence of the President and the Executive Vice-President, or in the event of their inability or refusal to act, the Chairman of the Board shall perform the duties of President and, when so acting shall have all of the powers of, and be subject to all restrictions upon the President. THE PRESIDENT Section 7. The President shall be the chief executive officer of the corporation and on a day to day basis shall be in charge of (i) the active management of the business, property, operations and affairs of the corporation, (ii) the direction and supervision of the other officers. He shall also assume an active role in planning and policy making for the corporation. He shall assume such other duties as the Board of Directors may assign to him from time to time. The President shall taken an active role in planning and policy making and shall present plans to the Board of Directors. He shall in the absence or incapacity of the Chairman of the Board of Directors perform all the duties and functions of the Chairman of the Board. He may sign, with the Secretary, any Assistant Secretary, Treasurer or any Assistant Treasurer, certificates for shares of the corporation, and may sign any policies, contracts, deeds, mortgages, bonds, or other instruments which the Board of Directors have authorized to be executed, except in those cases where the signing and execution thereof shall be expressly delegated by the Board of Directors or by these By-Laws to some other officer or agent of the corporation, or shall be required by law to be otherwise signed or executed; appoint and discharge agents and employees of the corporation and, in general, shall perform all duties incident to the office of president. The President shall be ex officio a member of all committees. THE EXECUTIVE VICE PRESIDENT Section 8. The Executive Vice President shall assist the Chairman of the Board and the President in the discharge of their duties as they may direct and shall perform such other duties as from time to time may be assigned by the Board of Directors. The Executive Vice President shall assist the President in the direction and supervision of other officers and in corporate planning and policy making. In the absence of the President or in the event of his inability or refusal to act, the Executive Vice President shall perform the duties of the President, and when so acting, shall have the powers of and be subject to all the restrictions upon the President. Except in those instances in which the authority to execute is expressly delegated to another officer or agent of the corporation or a different mode of execution is expressly prescribed by the Board of Directors or these By-Laws, the Executive Vice President may execute for the corporation certificates for its shares and any policies, contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, and he may accomplish such execution either under or without the seal of the corporation and either individually or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors, according to the requirements of the form of the instrument. THE VICE PRESIDENTS Section 9. The Vice President (or in the event there be more than one Vice President, each of the Vice Presidents) shall assist the Chairman of the Board, the President and the Executive Vice President in the discharge of their duties as they may direct and shall perform such other duties as from time to time may be assigned by the Chairman of the Board, the President and the Executive Vice President or by the Board of Directors. In the absence of the President, the Executive Vice President and the Chairman of the Board or in the event of their inability or refusal to act, the Vice President (or in the event there be more than one Vice President, the Vice Presidents in the order designated by the Board of Directors, or by the President if the Board of Directors has not made such a designation, or in the absence of any designation, then in the order of seniority of tenure as vice president) shall perform the duties of the President, and when so acting, shall have the powers of and be subject to all the restrictions upon the President. Solely in those instances in which the authority to execute is expressly delegated to the Vice President (or each of them if there are more than one), the Vice President (or each of them if there are more than one) may execute for the corporation any policies, contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, and he may accomplish such execution either under or without the seal of the corporation and either individually or with the Secretary, any Assistant Secretary, or any other officer thereunto authorized by the Board of Directors, according to the requirements of the form of the instrument. THE TREASURER Section 10. The Treasurer shall be the principal accounting and chief financial officer of the corporation. He shall: (a) have charge of and be responsible for the maintenance of adequate books of account for the corporation; (b) have charge and custody of all funds and securities of the corporation, and be responsible therefor and for the receipt and disbursement thereof; and (c) perform all the duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the Chairman of the Board, the President or by the Board of Directors. If required by the Board of Directors, the Treasurer shall, at the corporation's expense, give a bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of Directors may determine. THE SECRETARY Section 11. The Secretary shall: (a) record the minutes of the stockholders' and of the Board of Directors' meetings in one or more books provided for that purpose; (b) see that all notices are duly given in accordance with the provisions of these By-Laws or as required by law; (c) be custodian of the corporate records and of the seal of the corporation; (d) keep a register of the post office address of each stockholder which shall be furnished to the Secretary by such stockholder; (e) sign with the President or the Executive Vice President, or any other officer thereunto authorized by the Board of Directors, certificates for shares of the corporation, the issue of which shall have been authorized by the Board of Directors, and any policies, contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, according to the requirements of the form of the instrument, except when a different mode of execution is expressly prescribed by the Board of Directors or these By-Laws; (f) have general charge of the stock transfer books of the corporation; (g) perform all duties incident to the office of Secretary and such other duties as from time to time may be assigned to him by the President or by the Board of Directors. VICE CHAIRMAN, ASSISTANT VICE PRESIDENTS, ASSISTANT TREASURERS, AND ASSISTANT SECRETARIES Section 12. The Vice Chairman, Assistant Vice Presidents, Assistant Treasurers, and Assistant Secretaries shall perform such duties as shall be assigned to them by the Chairman of the Board of Directors, the Executive Vice President, Vice Presidents, Treasurer or the Secretary, respectively, or by the President or the Board of Directors. The Assistant Secretaries may sign with the Chairman of the Board of Directors, the President, the Executive Vice President, or a Vice President, or any other officer thereunto authorized by the Board of Directors, certificates for shares of the corporation, the issue of which shall have been authorized by the Board of Directors, and any contracts, deeds, mortgages, bonds or other instruments which the Board of Directors has authorized to be executed, according to the requirements of the form of the instrument, except when a different mode of execution is expressly prescribed by the Board of Directors or these By-Laws. The Assistant Treasurers shall, if required by the Board of Directors and at the corporation's expense, give bonds for the faithful discharge of their duties in such sums and with such sureties as the Board of Directors shall determine. ARTICLE VI ---------- CERTIFICATE OF STOCK -------------------- Section 1. Every holder of stock in the corporation shall be entitled to have a certificate, signed by, or in the name of the corporation by, the Chairman of the Board of Directors, or the President, or the Executive Vice President or any other officer thereunto authorized by the Board of Directors and the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the corporation, certifying the number of shared owned by him in the corporation. Section 2. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. LOST CERTIFICATES Section 3. The Board of Directors or the transfer agent may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors or the transfer agent may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate of certificates, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. TRANSFER OF STOCK Section 4. Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the other certificate and record the transaction upon its books. FIXING RECORD DATE Section 5. In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Director may fix, in advance, a record date, which shall not be more than sixty nor less than ten days before the date of such meeting, nor more than sixty days prior to any other action. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. REGISTERED STOCKHOLDERS Section 6. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII ----------- GENERAL PROVISIONS ------------------ DIVIDENDS Section 1. Dividends upon the capital stock of the corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Certificate of Incorporation. Section 2. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. CHECKS Section 3. All checks or demand for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. FISCAL YEAR Section 4. The fiscal year of the corporation shall be fixed by resolution of the Board of Directors. SEAL Section 5. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal, Delaware." The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. INDEMNIFCATION Section 7. The corporation shall indemnify and advance its officers, directors, employees and agents to the fullest extent permitted by the General Corporation Law of Delaware, as amended (the "Act"), provided, however, the indemnification and advancement of expenses provided by or granted pursuant to the Act shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any by-law, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in his or her official capacity and as to action in any other capacity while holding such office. The indemnification and advancement of expenses shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. ARTICLE VIII ------------ AMENDMENTS ---------- Section 1. These by-laws may be altered, amended or repealed or new by-laws may be adopted by the stockholders or by the Board of Directors, when such power is conferred upon the Board of Directors by the Certificate of Incorporation at any regular meeting of the stockholders or of the Board of Directors or at any special meeting of the stockholders or of the Board of Directors if, in the event of a stockholders' meeting, notice of such alteration, amendment, repeal or adoption of new by-laws be contained in the notice of such special meeting. If the power to adopt, amend or repeal by-laws is conferred upon the Board of Directors by the Certificate of Incorporation, it shall not divest or limit the power of the stockholders to adopt, amend or repeal by-laws. AMENDMENT TO BYLAWS OF ARLINGTON HOSPITALITY, INC. ADOPTED BY THE BOARD OF DIRECTORS ON JUNE 27, 2002 -------------------------------------------------- - -------------------------------------------------------------------------------- CORPORATE GOVERNANCE PROVISIONS - ------------------------------- 1. At least two-thirds of the members of the board of directors (the "Board") shall be independent. For purposes of any action of the Board, at least one-half of the directors present and eligible to vote must be independent. An independent director means a person who: (a) has not been an employee of the Company or any of its subsidiaries for the previous three years; (b) is not affiliated with a significant customer or supplier of the Company ("significant" means more than 1% of annual sales); (c) is not employed by an entity and has not had, during the past two years, any interest in any significant transaction with the Company and/or any executive officer, or any business or financial relationship with the Company and/or any executive officer, or an affiliate of the Company (other than service as a director) for which the Company has been required to make disclosure under Regulation S-K of the Securities and Exchange Commission; (d) is not a relative of an executive officer or director of the Company; (e) receives no compensation from the Company other than director's fees; (f) does not personally receive and is not an employee, director, or trustee of a foundation, university, or other institution that receives grants or endowments from the Company that are material to the Company or to either the recipient and/or the foundation, university or institution; or, (g) is not employed by an entity of which (i) an executive officer of the Company serves as a director or trustee, or (ii) a director of the Company serves in a senior executive capacity. 2. There shall be an Audit Committee of the Board, composed entirely of independent directors, which shall oversee the Company's financial reporting process and internal controls, review compliance with laws and accounting standards, recommend the appointment of public accountants, and provide a direct channel of communication to the Board for public accountants, internal auditors and finance officers. This Committee will be required to meet at least four times per year. 3. There shall be a Compensation Committee of the Board, composed entirely of independent directors, which shall be responsible for (a) ensuring that senior management will be accountable to the Board through the effective application of compensation policies, and (b) monitoring the effectiveness of senior management. The Compensation Committee shall establish compensation policies applicable to the Company's executive officers. A fair summary of such policies and the relationship of corporate performance to executive compensation, including the factors and criteria upon which the Chief Executive Officer's compensation was based, shall be disclosed to shareholders in the Company's proxy statement for the annual meeting. This Committee will be required to meet at least two times per year and conduct written reviews of at least the CEO and the CFO (with respect to Board performance). 4. There shall be a Corporate Governance Committee of the Board, composed entirely of independent directors, which shall be responsible for: I. Reviewing all related-party transactions involving the Company, and considering and making recommendations to the full Board with respect to all proposals involving (a) a change in control, or (b) the purchase or sale of assets constituting more than 10% of the Company's total assets. Additionally, this Committee shall be responsible for reviewing all transactions or proposed transactions that trigger the Company's shareholders' rights plan, if any. The Committee will then make a recommendation to the full Board. II. Evaluation and nomination of all new prospective Board members. Any interested party should be directed to this Committee for evaluation and review. This Committee will then recommend to the full Board for their approval any nominee to serve as a Director of the Company. III. Review all disclosed related party transactions between Board members. Any Board member that desires to do business with any other Board member must first submit to this Committee a detailed plan of the proposed business dealing. This Committee will be responsible to analyze the proposed business dealing, explain it to the full Board and make a recommendation to the full Board. IV. Create the format to review each of the Board members. The reviews will be conducted on a yearly basis in accordance with the format that this committee designs. The results of the reviews will be distributed to all Board members for their review and consideration. This Committee will be required to meet at least four times per year. Any existing Board member, excluding management of the Company, will be deemed to be independent until December 31, 2004, at which time they must qualify under these provisions. 5. The foregoing provisions are adopted as part of the Bylaws of the Company and cannot be amended or repealed without either (a) approval by the stockholders of the Company, or (b) approval by a two-thirds majority of all the directors of the Company. Any inconsistent provisions of the Bylaws are hereby modified to be consistent with these provisions. The foregoing provisions, insofar as they establish eligibility to serve as a director or as a committee member, shall not have the effect of removing any director or committee member from office but shall be given effect at the next election of directors and the next selection of committee members, as the case may be. The foregoing provisions shall not be construed to limit or restrict the effective exercise of statutory cumulative voting rights by any shareholder, but the Corporate Governance Committee shall not nominate candidates for election to the Board except as may be consistent with such provisions, and no corporate funds may be expended for the solicitation of proxies which are inconsistent with the foregoing provisions. [END] Page 2 of 2 EX-99.1 4 a32381x99602.txt CERTIFICATION EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Arlington Hospitality, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned Chief Executive Officer and Chief Financial Officer of the Company hereby certify, pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002 that based on our knowledge, (1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the periods covered in the Report. /s/Michael P. Holtz ----------------------------------------- Michael P. Holtz, Chief Executive Officer /s/ James B. Dale ----------------------------------------- James B. Dale, Chief Financial Officer August 13, 2002 -----END PRIVACY-ENHANCED MESSAGE-----