-----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, F8gOedtg6J015tYfi0fdlhi9Gn5tf5o1Cm909fl2hUCaca4Wzk99uGg03F1l6VuF TJxGENQNZ5Hkvt0ZM78eqQ== 0000914760-02-000187.txt : 20021114 0000914760-02-000187.hdr.sgml : 20021114 20021114122257 ACCESSION NUMBER: 0000914760-02-000187 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021114 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: 02823145 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 a32381_q302.txt SEPTEMBER 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 SEPTEMBER 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 November 14, 2002, 4,958,081 shares of the Registrant's Common Stock were outstanding. ================================================================================ ARLINGTON HOSPITALITY, INC. FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 INDEX PART I: Financial Information Page ----------------------------- ---- Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 4 Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2002 and 2001 6 Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001 7 Notes to Consolidated Financial Statements 9 Item 2. Management's Discussion and Analysis 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 26 Item 4. Controls and Procedures 26 PART II: Other Information -------------------------- Item 4. Submission of Matters to a Vote of Securities Holders 27 Item 6. Exhibits and Reports on Form 8-K 27 Signatures and Certifications 28 PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ---------------------------- ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
================================================================================================================== September 30, December31, 2002 2001 --------------- ---------------- ASSETS Current assets: Cash and cash equivalents $ 2,379,390 $ 4,748,156 Accounts receivable, less an allowance of $150,000 at September 30, 2002 and December 31, 2001 (including approximately $210,000 and $126,000 from related parties) 2,111,700 2,343,423 Notes receivable, current portion 15,000 518,499 Prepaid expenses and other current assets 458,837 998,559 Refundable income taxes 914,482 - Costs and estimated earnings in excess of billings on uncompleted contracts with related parties 1,187,821 1,079,137 --------------- -------------- Total current assets 7,067,230 9,687,774 --------------- -------------- Investments in and advances to unconsolidated hotel joint ventures (Note 8) 6,598,715 5,404,744 --------------- -------------- Property and equipment: Land 13,914,819 12,454,360 Buildings 81,716,449 68,095,453 Furniture, fixtures and equipment 27,083,778 24,189,969 Construction in progress 2,925,966 5,973,890 Leasehold improvements 2,781,336 2,899,179 Assets held for sale - 2,187,822 --------------- -------------- 128,422,348 115,800,673 Less accumulated depreciation and amortization 26,650,860 22,905,635 --------------- -------------- 101,771,488 92,895,038 --------------- -------------- Notes receivable, less current portion 435,000 1,000,000 Deferred income taxes (Note 5) 2,104,000 3,247,000 Other assets, net of accumulated amortization of $1,153,000 and $986,000 2,736,907 2,939,900 --------------- -------------- 5,275,907 7,186,900 $ 120,713,340 $ 115,174,456 =============== ============== (continued) ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) ================================================================================================================== September 30, December 31, 2002 2001 --------------- ---------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,526,392 $ 2,467,704 Bank line-of-credit 5,981,287 6,793,702 Accrued payroll and related expenses 910,249 784,533 Accrued real estate and other taxes 2,323,781 1,952,875 Other accrued expenses and current liabilities 409,722 452,086 Current portion of long-term debt 7,584,938 2,110,652 Income taxes payable - 286,670 --------------- -------------- Total current liabilities 19,736,369 14,848,222 --------------- -------------- Long-term debt, net of current portion 70,884,468 70,088,269 --------------- -------------- Deferred income (Note 9) 10,457,758 10,714,735 --------------- -------------- Commitments and contingencies Minority interests 346,264 456,631 --------------- -------------- 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 September 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 6,529,536 6,307,533 19,725,356 19,503,474 Less: Stock subscriptions receivable (436,875) (436,875) 19,288,481 19,066,599 $ 120,713,340 $ 115,174,456 =============== ============== See notes to consolidated financial statements.
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
================================================================================================================== Three Months Ended September 30, Nine Months Ended September 30, --------------------------------- ------------------------------- 2002 2001 2002 2001 --------------- --------------- --------------- ---------------- Revenue: Hotel operations: AmeriHost Inn hotels $ 12,737,246 $ 12,939,843 $ 33,582,408 $ 35,057,658 Other hotels 3,242,781 3,121,609 8,475,959 8,259,870 Development and construction 1,060,605 847,745 6,279,915 954,920 Hotel sales and commissions - 4,231,045 4,748,348 10,089,113 Management services 266,931 257,808 763,640 729,706 Employee leasing 929,164 1,157,587 2,649,339 3,887,603 Other 153,254 - 471,242 - --------------- --------------- --------------- --------------- 18,389,981 22,555,637 56,970,851 58,978,870 --------------- --------------- --------------- --------------- Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 8,271,494 8,505,417 23,675,045 25,197,975 Other hotels 2,534,850 2,392,241 7,634,132 6,666,418 Development and construction 944,824 251,607 5,568,717 839,031 Hotel sales and commissions - 3,118,210 3,528,680 6,835,678 Management services 165,628 195,742 504,455 547,654 Employee leasing 916,318 1,152,710 2,593,120 3,849,491 Other 71,297 1,618 116,918 1,618 --------------- --------------- --------------- --------------- 12,904,411 15,617,545 43,621,067 43,937,865 --------------- --------------- --------------- --------------- 5,485,570 6,938,092 13,349,784 15,041,005 Depreciation and amortization 1,324,173 1,129,657 4,054,003 3,399,005 Leasehold rents - hotels 1,305,386 1,611,347 4,124,038 5,072,486 Corporate general and administrative 755,036 451,520 1,528,630 1,476,952 --------------- --------------- --------------- --------------- Operating income 2,100,975 3,745,568 3,643,113 5,092,562 Other income (expense): Interest expense (1,446,107) (1,207,437) (4,320,883) (4,004,484) Interest income 151,538 233,891 409,760 503,920 Other income 452,170 507,836 489,530 614,224 Gain on sale of property and equipment - 295,893 327,076 886,338 Equity in net income and (losses) of affiliates 61,697 (122,329) (59,886) (394,869) --------------- --------------- --------------- --------------- Income before minority interests and income taxes 1,320,273 3,453,422 488,710 2,697,691 Minority interests in (income) loss of consolidated subsidiaries and partnerships (55,586) (304,300) (92,707) (335,091) --------------- --------------- --------------- --------------- Income before income taxes 1,264,687 3,149,122 396,003 2,326,600 Income tax expense 519,000 1,292,000 174,000 973,000 --------------- --------------- --------------- --------------- Net income $ 745,687 $ 1,857,122 $ 222,003 $ 1,389,600 =============== =============== =============== =============== Net income per share - Basic $ 0.15 $ 0.37 $ 0.04 $ 0.28 Net income per share - Diluted $ 0.14 $ 0.35 $ 0.04 $ 0.25 See notes to consolidated financial statements.
ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED)
================================================================================================================== 2002 2001 --------------- ---------------- Cash flows from operating activities: Cash received from customers $ 58,211,613 $ 60,044,114 Cash paid to suppliers and employees (44,903,006) (42,230,699) Interest received 446,142 543,012 Interest paid (4,339,151) (4,004,818) Income taxes paid (232,152) (305,936) --------------- --------------- Net cash provided by operating activities 9,183,446 14,045,673 --------------- --------------- Cash flows from investing activities: Distributions, and collections on advances, from affiliates 954,088 978,021 Purchase of property and equipment (14,054,498) (12,907,470) Purchase of investments in, and advances to, minority owned affiliates (1,418,212) (2,412,326) Acquisitions of partnership interests, net of cash acquired (Note 7) (796,786) (795,384) (Advances) collections on notes receivable (18,279) 188,057 Proceeds from sale of assets (6,700) 2,500 --------------- --------------- Net cash used in investing activities (15,340,387) (14,946,602) --------------- --------------- Cash flows from financing activities: Proceeds from issuance of long-term debt 9,660,858 8,435,866 Principal payments on long-term debt (4,856,883) (7,732,627) Net (repayments) proceeds from line of credit (812,415) 3,387,569 Distributions to minority interest (203,074) (90,255) (Purchase) issuance of common stock (311) 13,141 Other - 117,000 --------------- --------------- Net cash provided by financing activities 3,788,175 4,128,694 --------------- --------------- Net (decrease) increase in cash (2,368,766) 3,227,766 Cash and cash equivalents, beginning of year 4,748,156 1,728,869 --------------- --------------- Cash and cash equivalents, end of period $ 2,379,390 $ 4,956,635 =============== =============== (continued) ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, (UNAUDITED) ================================================================================================================== 2002 2001 --------------- ---------------- Reconciliation of net income to net cash provided by operating activities: Net income $ 222,003 $ 1,389,600 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,054,003 3,399,004 Equity in net (income) loss of affiliates and amortization of deferred income 59,886 394,869 Interest from unconsolidated joint ventures (62,910) - Minority interests in net income of subsidiaries 92,707 335,091 Amortization of deferred gain (801,320) (714,955) Deferred income taxes 1,143,000 45,000 Issuance of common stock 190 - Gain on sale of property and equipment (327,076) (886,338) Proceeds from sale of hotels 4,830,870 9,039,507 Income from sale of hotels (927,401) (2,141,769) Changes in assets and liabilities, net of effects of acquisition: Decrease (increase) in accounts receivable 46,573 (522,207) Decrease in prepaid expenses and other current assets 579,255 683,254 (Increase) decrease in refundable income taxes (1,201,152) 622,064 (Increase) decrease in costs and estimated earnings in excess of billings (108,684) 13,222 Increase in other assets (177,903) (161,511) Increase in accounts payable 35,048 162,571 Increase in accrued payroll and other accrued expenses and current liabilities 441,752 483,109 Decrease in accrued interest (18,268) (335) Increase in deferred income 1,302,873 1,905,498 --------------- ---------------- Net cash provided by operating activities $ 9,183,446 $ 14,045,673 =============== ================ See notes to consolidated financial statements.
ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 30, 2002 and December 31, 2001, and the results of its operations for the three and nine months ended September 30, 2002 and 2001, and cash flows for the nine months ended September 30, 2002. The results of operations for the three and nine months ended September 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 controlling 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 and we do not believe any of our properties meet all of the criteria necessary to classify assets as held for sale as of September 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 September 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. The calculations of basic and diluted earnings (loss) per share are as follows: ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 ================================================================================ 4. EARNINGS (LOSS) PER SHARE (CONTINUED): -------------------------------------- Three Months Ended September 30, Nine Months Ended September 30, --------------------------------- --------------------------------- 2002 2001 2002 2001 ------------- ------------- -------------- --------------- Net income $ 745,687 $ 1,857,122 $ 222,003 $ 1,389,600 Impact of convertible partnership interests 9,248 (18,385) (6,695) (76,389) ------------- ------------- -------------- -------------- Net income available to common shareholders $ 754,935 $ 1,838,737 $ 215,308 $ 1,313,211 ============= ============= ============== ============== Weighted average common shares outstanding 4,958,056 4,980,731 4,958,072 4,979,844 Dilutive effect of: Common stock equivalents 199,974 53,947 69,847 54,098 Convertible partnership interests 84,975 168,100 84,975 168,100 ------------- ------------- -------------- -------------- Dilutive common shares outstanding 5,243,005 5,202,778 5,112,894 5,202,042 ============= ============= ============== ============== Net income per share - Basic $ 0.15 $ 0.37 $ 0.04 $ 0.28 ============= ============= =============== =============== Net income per share - Diluted $ 0.14 $ 0.35 $ 0.04 $ 0.25 ============= ============= =============== ===============
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 during 2002, based on the final determination of the appropriate tax treatment for certain fees. The income tax expense (benefit) for the three and nine months ended September 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 September 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. The aggregate purchase price for the remaining two leased hotels was approximately $7,000,000 as of September 30, 2002. ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 September 18, 2000, the Company finalized the terms of an agreement to purchase the remaining ownership interests in these partnerships at a specified price. 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 April 30, 2003 for approximately $800,000. 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 ============= ============= The Company has provided approximately $16.7 million in guarantees as of September 30, 2002 on mortgage loan obligations for ten joint ventures in which the Company holds a minority equity interest, which expire at various dates through March 2021. Other partners have also guaranteed portions of the same obligations. The partners of one of the partnerships have entered into a cross indemnity agreement whereby each partner has agreed to indemnify the others for any payments made by any partner in relation to the guarantee in excess of their ownership interest. The Company has provided additional loan guarantees for joint ventures in which the Company holds a minority equity interest in the amount of $3.1 million during 2002, and has been released from approximately $1.6 million in loan guarantees during 2002 as a result of the sale of the related hotel property by the joint venture. During the second quarter of 2002, one of the Company's hotel joint ventures wrote down its hotel asset by $100,000, to its estimated realized value as it was determined to be permanently impaired. This adjustment was included in equity in net income and (losses) of affiliates in the accompanying consolidated financial statements. The Company exchanged a note and related interest receivable from the principals of Diversified Innkeepers, Inc. in the amount of approximately $1.2 million on September 1, 2002, for a 50% ownership interest in a hotel joint venture. This transaction was accounted for at fair value resulting in no gain or loss recognized. The remaining 50% ownership interest is 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. 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 ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 ================================================================================ 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 September 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. 9. SALE/LEASEBACK OF HOTELS (CONTINUED): ------------------------------------- The REIT sold one of its hotels to an unrelated third party during the nine months ended September 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. 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 three and nine months ended September 30, 2002 and 2001, for each business segment, which is the information utilized by the Company's decision makers in managing the business: Three months ended September 30, Nine months ended September 30, Revenues 2002 2001 2002 2001 -------- --------------- ------------ ------------- ------------- Hotel operations $ 15,980,027 $ 16,061,452 $ 42,058,367 $ 43,317,528 Hotel development and construction 1,060,605 847,745 6,279,915 954,920 Hotel sales and commissions - 4,231,045 4,748,348 10,089,113 Hotel management 266,931 257,808 763,640 729,706 Employee leasing 929,164 1,157,587 2,649,339 3,887,603 Other (office building) 153,254 - 471,242 - ------------ ---------------- ------------- ------------- $ 18,389,981 $ 22,555,637 $ 56,970,851 $ 58,978,870 ============ ================ ============= ============= Operating costs and expenses Hotel operations $ 10,806,344 $ 10,897,658 $ 31,309,177 $ 31,864,393 Hotel development and construction 944,824 251,607 5,568,717 839,031 Hotel sales and commissions - 3,118,210 3,528,680 6,835,678 Hotel management 165,628 195,742 504,455 547,654 Employee leasing 916,318 1,152,710 2,593,120 3,849,491 Other (office building) 71,297 1,618 116,918 1,618 ------------ ---------------- ------------- ------------- $ 12,904,411 $ 15,617,545 $ 43,621,067 $ 43,937,865 ============ ================ ============== ============= Operating income Hotel operations $ 2,646,155 $ 2,448,040 $ 2,850,798 $ 3,083,336 Hotel development and construction 114,440 595,775 706,852 102,743 Hotel sales and commissions - 1,112,836 1,219,668 3,253,435 Hotel management 88,284 49,479 219,576 140,664 Employee leasing 12,277 4,103 54,467 35,744 Other (office building) 41,506 (1,618) 236,253 (1,618) Corporate (801,687) (463,047) (1,644,501) (1,521,742) ------------ ---------------- ------------- ------------- $ 2,100,975 $ 3,745,568 $ 3,643,113 $ 5,092,562 ============ ================ ============= ============= ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 ================================================================================ 10. BUSINESS SEGMENTS (CONTINUED): ------------------------------ Capital expenditures Hotel operations $ 1,966,237 $ 7,309,159 $ 13,754,704 $ 12,783,412 Hotel development and construction - - - 5,975 Hotel management 1,813 18,781 9,811 62,503 Employee leasing - - - - Other (office building) 17,933 - 273,605 - Corporate 1,733 9,578 16,378 55,580 ------------ ---------------- ------------- ------------- $ 1,987,716 $ 7,337,518 $ 14,054,498 $ 12,907,470 ============ ================ ============= ============= Depreciation/Amortization Hotel operations $ 1,222,142 $ 1,104,407 $ 3,774,354 $ 3,297,312 Hotel development and construction 1,341 361 4,346 13,147 Hotel management 13,019 12,588 39,609 41,388 Employee leasing 568 774 1,752 2,368 Other (office building) 40,451 - 118,071 - Corporate 46,652 11,527 115,871 44,790 ------------ ---------------- ------------- ------------- $ 1,324,173 $ 1,129,657 $ 4,054,003 $ 3,399,005 ============ ================ ============= =============
September 30,September 30, Identifiable assets 2002 2001 ------------------- ------------- ------------- Hotel operations $ 105,445,693 $ 98,148,598 Hotel development and construction 2,034,119 1,299,724 Hotel management 241,122 (689,533) Employee leasing (228,958) 103,536 Other (office building) 6,752,250 - Corporate 6,469,114 7,376,704 ------------- ------------- $ 120,713,340 $ 106,239,029 ============= =============
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. ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 ================================================================================ 12. PRESIDENT/CEO SEVERANCE: ------------------------ On August 15, 2002, the Company's President/Chief Executive Officer delivered six months' advance notice of intent to resign, to be effective February 15, 2003. The President/Chief Executive Officer's employment agreement provided for certain benefits upon resignation with a six-month notice. On November 7, 2002, the Company agreed to pay the President/Chief Executive Officer a severance of $325,000, plus certain expenses, in full satisfaction of the severance obligations under the employment agreement. As a provision of the severance agreement, the President/Chief Executive Officer has also agreed to provide consulting services for a period of one year for which he will be paid the cash equivalent value of certain fringe benefits currently available under his employment (including health, life, dental and disability insurance). As of September 30, 2002, the Company has accrued $383,000 for these severance benefits, which has been included in corporate general and administrative expense in the accompanying consolidated financial statements. In connection with the severance, the President/Chief Executive Officer has formed affiliates which have entered into agreements to purchase two hotels from the Company for a total purchase price of approximately $5.2 million, to close no later than February 15, 2003. The sale of the hotels is expected to close in December 2002, and is contingent upon satisfactory appraisals demonstrating sale of the hotels at a price not less than appraised value, financing commitments, and the successful transfer of a land lease on one of the hotels. The Company expects to record pretax income from the sale of these hotels of approximately $550,000 upon closing. In addition, the Company will be entitled to a five-year contingent purchase price participation in a percentage of the appreciation of the hotels above certain pre-determined break points, which would be triggered on sale or certain refinancing of the hotels, or if not yet sold, in all events based on appraised value on the fifth anniversary of the closing; provided however, under certain circumstances, the hotel purchasers can prepay this participation amount for $340,000 if prepaid prior to the five year anniversary of the closing. The Company will also be entitled to a fee from Cendant Finance Holding Corporation pursuant to their Development Agreement dated September 30, 2000 upon the closing of the hotel sales. The closing of the severance agreement and other agreements referenced above is contingent upon the successful closing of the hotel sale transactions. If the hotel sale transactions do not close by February 15, 2003, the severance agreements will be void. In the event the transactions close prior to February 15, 2003, the President/Chief Executive Officer will also receive additional severance and fringe benefits based upon his current salary from the closing through February 15, 2003. At closing the parties will deliver mutual releases (save for those actions for which indemnification would not be permitted under Delaware law) and the President/Chief Executive Officer will immediately resign as an officer and director of the Company. There can be no assurance that these hotel sale transactions, and the severance agreement, will be consummated. ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 ================================================================================ 13. LONG-TERM DEBT: --------------- Approximately $7.6 million is classified as current portion of long-term debt, including three 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 is currently under contract to sell one of these hotels with an outstanding mortgage balance of $2.7 million as of September 30, 2002. The remaining two mortgages bear interest at the fixed rates of 8.23% and 7.24% per annum. The Company expects to refinance these mortgages at similar interest rates. ARLINGTON HOSPITALITY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 ================================================================================ 14. FIRE LOSS: ---------- On July 4, 2002, a hotel under construction caught fire and completely burned down. At the time of the fire, the Company had recorded approximately $1.7 million in construction in progress. The Company has submitted a claim to its insurance provider which is currently being reviewed. The Company has received $1.5 million from the insurance company as a partial settlement, which ws recorded as a reduction of construction in progress. Upon final settlement, the Company expects to receive a total amount at least equal to the total construction cost incurred on the project. 15. SUPPLEMENTAL CASH FLOW DATA: ---------------------------- The following represents the supplemental schedule of noncash investing and financing activities for the nine months ended September 30: 2002 2001 ----------------- ----------------- Liabilities assumed in connection with acquisition of hotel partnership interests $ 1,520,923 $ 1,341,697 ================= ================== Exchange of note receivable and accrued interest for an investment in a hotel partnership $ 1,214,087 ================= Reclassification of deferred gain against basis of acquired assets (Note 9) $ 347,989 $ 511,943 ================= ==================
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 September 30, 2002, the Company had 65 AmeriHost Inn hotels open, of which 54 were wholly-owned or leased, one was majority-owned, and 10 were minority-owned. The Company opened three AmeriHost Inn hotels during the past twelve months. The Company intends to use the AmeriHost Inn brand when expanding its hotel operations segment. As of September 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 5.6% during the third quarter of 2002, compared to the third quarter of 2001, attributable to a 9.4% increase in occupancy, partially offset by a decrease of $2.05 in average daily rate. These results relate to the 60 AmeriHost Inn hotels that were operating for at least thirteen full months during the three months ended September 30, 2002. The table below sets forth information regarding the hotels at September 30, 2002. Open Under Hotels Construction Total ---------------- ---------------- --------------- Hotels Rooms Hotels Rooms Hotels Rooms ------ ----- ------ ----- ------ ----- 100% or majority owned or leased: AmeriHost Inn hotels 55 3,544 3 230 58 3,774 Other brands 8 1,051 - - 8 1,051 ------- ------ ------ ------- ------ ------ 63 4,595 3 230 66 4,825 ------- ------ ------ ------- ------ ------ Minority ownership interest: AmeriHost Inn hotels 10 684 1 96 11 780 Other brands 3 350 - - 3 350 ------- ------ ------ ------- ------ ------ 13 1,034 1 96 14 1,130 ------- ------ ------ ------- ------ ------ Totals: AmeriHost Inn hotels 65 4,228 4 326 69 4,554 Other brands 11 1,401 - - 11 1,401 ------- ------ ------ ------- ------ ------ 76 5,629 4 326 80 5,955 ======= ====== ====== ======= ====== ======
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 1.6% and 4.2% to $12.7 million and $33.6 million during the three and nine months ended September 30, 2002, from revenues of $12.9 million and $35.1 million during the three and nine months ended September 30, 2001 respectively, due primarily to the sale of hotels to franchisees, offset by increases in same room revenues. Same room revenues for all Consolidated AmeriHost Inn hotels owned and operated by the Company increased approximately 5.0% during the third quarter of 2002, compared to the third quarter of 2001, attributable to a 9.5% increase in occupancy, partially offset by a decrease of $2.49 in average daily rate. These results relate to the 51 Consolidated AmeriHost Inn hotels that were operating for at least thirteen full months during the three months ended September 30, 2002. Same room revenues for all Consolidated AmeriHost Inn hotels owned and operated by the Company increased approximately 3.7% during the first nine months of 2002, compared to the first nine months of 2001, attributable to a 7.9% increase in occupancy, partially offset by a decrease of $2.20 in average daily rate. These results relate to the 54 Consolidated AmeriHost Inn hotels that were operating for at least thirteen full months during the nine months ended September 30, 2002. Revenues from the development segment increased 25.1% and 558% to $1.1 million and $6.3 million during the three and nine months ended September 30, 2002, from $847,745 and $954,920 for the three and nine months ended September 30, 2001, respectively, due to the increase in hotel development activity for minority owned and third party entities. Revenues from hotel sales and commissions was $4.7 million during the nine months ended September 30, 2002, as a result of the sale of three AmeriHost Inn hotels. Revenues from hotel management and employee leasing segments decreased by 15.5% and 26.1% in total during the three and nine months ended September 30, 2002, respectively, due primarily to the sale or termination of hotels under management contracts. Revenues from Consolidated non-AmeriHost Inn hotels increased 3.9% and 2.6% during the three and nine months ended September 30, 2002, respectively, compared to 2001, as a result primarily of the consolidation of one hotel which was previously accounted for by the equity method. Total revenues decreased 18.5% and 3.4% to $18.4 million and $57.0 million during the three and nine months ended September 30, 2002, from $22.6 million and $59.0 million during the three and nine months ended September 30, 2001. The Company recorded net income of $745,687 for the third quarter of 2002, or $0.14 per diluted share, compared to net income of approximately $1.9 million or $0.35 per diluted share in 2001. The Company recorded net income of $222,003 for the nine months ended September 30, 2002, or $0.04 per diluted share, compared to net income of approximately $1.4 million, or $0.25 per diluted share, for the nine months ended September 30, 2001. The third quarter of 2002 included a pretax charge of $383,000 for severance benefits in connection with the resignation of the Company's President/CEO. 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 both short-term and long-term incentives to the Company as the AmeriHost Inn brands are expanded, including (i) for the 25 year term of the agreement, favorable royalty payment terms on any AmeriHost Inn hotels owned/leased and operated by the Company, including hotels owned through joint ventures with prior approval from Cendant, (ii) for the 25 year term of the agreement, the sharing of royalties received by Cendant from all AmeriHost Inn franchisees (excluding those owned/leased and operated by the Company), and (iii) for the 15 year term of the agreement, a hotel development incentive fee each time an AmeriHost Inn hotel owned/leased and operated by the Company is sold to an operator who becomes a Cendant franchisee. Excluding hotels under construction, the Company had an ownership interest in 76 hotels at September 30, 2002, versus 75 hotels at September 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 increased slightly to 63 hotels at September 30, 2002, versus 61 hotels at September 30, 2001. CRITICAL ACCOUNTING POLICIES Critical accounting policies are defined as those accounting policies that require management to exercise subjective and complex judgment. The Company's critical accounting policies are described in its 2001 Form 10-K. In addition, on January 1, 2002 the Company 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 the Company's business strategy, the Company does not generally assess a sale as probable before the transaction closes, and does not believe any of its properties meet all of the criteria necessary to classify assets as held for sale as of September 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. The Company does not include the sales or operations of AmeriHost Inn hotels in discontinued operations because it retains 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 September 30, 2002, there were no identifiable discontinued operations. RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 COMPARED TO THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 Revenues decreased 18.5% and 3.4% to $18.4 million and $57.0 million during the three and nine months ended September 30, 2002, respectively, from $22.6 million and $59.0 million during the three and nine months ended September 30, 2001. The decrease in revenue was primarily due to decreases in revenues from the sale of AmeriHost Inn hotels and hotel operating revenues, partially offset by an increase in hotel development and construction revenues. Hotel operations revenue decreased 0.5% and 2.9% to $16.0 million and $42.1 million during the three and nine months ended September 30, 2002 respectively, from $16.1 million and $43.3 million during the three and nine months ended September 30, 2001. Revenues from Consolidated AmeriHost Inn hotels decreased 1.6% and 4.2% to $12.7 million and $33.6 million during the three and nine months ended September 30, 2002, respectively, from $12.9 million and $35.1 million during the three and nine months ended September 30, 2001. These decreases were attributable primarily to the sale of nine Consolidated AmeriHost Inn hotels during 2001 and three Consolidated AmeriHost Inn hotels during 2002, offset by increases of 5.0% and 3.7% in Consolidated AmeriHost Inn hotel same room revenues during the three and nine months ended September 30, 2002. Revenues from Consolidated other brand hotels increased 3.9% and 2.6% to $3.2 million and $8.5 million during the three and nine months ended September 30, 2002, respectively. These increases were primarily the result of the consolidation beginning in the fourth quarter of 2001 of one non-AmeriHost Inn hotel which was previously accounted for by the equity method. The hotel operations segment included the operations of 63 Consolidated hotels (including 55 AmeriHost Inn hotels) comprising 4,595 rooms at September 30, 2002, compared to 61 Consolidated hotels (including 55 AmeriHost Inn hotels) comprising 4,329 rooms at September 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 in certain markets. Nevertheless, same room revenues for all AmeriHost Inn hotels owned and operated by the Company, including minority owned hotels, increased approximately 5.6% and 5.4% during the third quarter and first nine months of 2002, compared to the same periods in 2001. During the third quarter of 2002, same room occupancy increased 9.4%, while same room average daily rate decreased by $2.05, compared to the same period in 2001. During the first nine months of 2002, same room occupancy increased 9.3% while same room average daily rate decreased by $2.01, compared to the same period in 2001. In addition, the Company typically builds new hotels in growing markets where it anticipates a certain level of additional hotel development. The Company believes that as the number of AmeriHost Inn hotels operated by both the Company and others increases, the greater the benefits will be at all AmeriHost Inn locations from marketplace recognition and repeat business. In addition, as the revenue increases from AmeriHost Inn hotels not operated by the Company, the Company's royalty stream from Cendant is also enhanced. Hotel development revenue increased 25.1% and 558% to $1.1 million and $6.3 million during the three and nine months ended September 30, 2002, respectively, from $847,745 and $954,920 during the three and nine months ended September 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 not constructing any hotels for minority-owned entities or unrelated third parties during the first nine months of 2001, however was close to breaking ground on two such projects at the end of the third quarter. During the first nine months of 2002, two hotels were being constructed for minority-owned entities, including one which was completed during the third quarter and one which was started during the third quarter. In addition, the Company built an AmeriHost Inn hotel for an operator who was referred to the Company by Cendant, the franchisor of the AmeriHost Inn brand, which was completed during the second quarter of 2002. The Company also had several additional projects in various stages of pre-construction development during both nine-month periods. The Company recorded $0 and $4.7 million in hotel sales and commission revenue during the three and nine months ended September 30, 2002, respectively. The Company and the REIT which owns certain of the Company's leased hotels, closed on the sale of four AmeriHost Inn hotels during the first nine months of 2001, including one in the third quarter. The Company and the REIT closed on the sale of three AmeriHost Inn hotels during the first nine months of 2002. 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. Hotel management revenue increased 3.5% and 4.7% to $266,931 and $763,640 during the three and nine months ended September 30, 2002, respectively, from $257,808 and $729,706 during the three and nine months ended September 30, 2001. The number of hotels managed for third parties and minority-owned entities was 16 hotels, representing 1,318 rooms, at September 30, 2001 versus 13 hotels, representing 1,034 rooms, at September 30, 2002. The increase in revenues was primarily due to the addition of two minority-owned AmeriHost Inn hotels, partially offset by the termination of two management contracts as a result of the consolidation or buyout of minority owned AmeriHost Inn hotels. In addition, one minority-owned AmeriHost Inn hotel was sold, and another management agreement was terminated later in the third quarter which will impact future revenues for this segment. Employee leasing revenue decreased 19.7% and 31.9% to $929,164 and $2.6 million during the three and nine months ended September 30, 2002, respectively, from $1.2 million and $3.9 million during the three and nine months ended September 30, 2001, due primarily to the reduction in rooms managed for minority-owned entities and unrelated third parties as described above, and the associated decrease in payroll costs which is the basis for the employee leasing revenue. Other revenue, consisting of leasing revenue from the Company's office building was $153,254 and $471,242 during the three and nine months ended September 30, 2002. On October 1, 2001, the Company purchased the office building in which its headquarters is located. The office building contained approximately 50,000 rentable square feet when acquired, and has been subsequently increased to approximately 56,000 rentable square feet through various building improvements. 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 decreased 17.4% and 0.7% to $12.9 million (70.2% of total revenues) and $43.6 million (76.6% of total revenues) during the three and nine months ended September 30, 2002, respectively, from $15.6 million (69.2% of total revenues) and $43.9 million (74.5% of total revenues) during the three and nine months ended September 30, 2001, primarily due to decreases in operating costs and expenses from the hotel operations and sale of hotel segments as described below, offset by an increase in operating costs from hotel development. Operating costs and expenses in the hotel operations segment decreased 0.8% and 1.7% to $10.8 million and $31.3 million during the three and nine months ended September 30, 2002, respectively. An increase in operating costs associated with the greater number of hotels included in this segment (63 hotels at September 30, 2002, versus 61 hotels at September 30, 2001), was offset by the sale of AmeriHost Inn hotels and decreases in energy costs. Hotel operations segment operating costs and expenses as a percentage of segment revenue decreased to 67.6% during the three months ended September 30, 2002, from 67.8% during the same period in 2001, and increased to 74.4% during the nine months ended September 30, 2002, from 73.6% during the same period in 2001. Operating costs and expenses as a percentage of revenues for the Consolidated AmeriHost Inn hotels decreased to 64.9% and 70.5% during the three and nine months ended September 30, 2002, from 65.7% and 71.9% during the three and nine months ended September 30, 2001. Operating costs and expenses for the hotel development and construction segment increased 276%, to $944,824 during the three months ended September 30, 2002, from $251,607 during the three months ended September 30, 2001, as a result of increased hotel construction activity for minority owned entities during the third quarter of 2002 compared to the third quarter of 2001. Operating costs and expenses for the hotel development and construction segment increased 564%, to $5.6 million during the nine months ended September 30, 2002, from $839,031 during the nine months ended September 30, 2002, consistent with the 558% increase in hotel development revenues for the nine months ended September 30, 2002. Operating costs and expenses in the hotel development segment as a percentage of segment revenue increased during the three and nine months ended September 30, 2002, due to the increase in hotel construction activity. Hotel management segment operating costs and expenses decreased 15.4% and 7.9% to $165,628 and $504,455 during the three and nine months ended September 30, 2002, respectively, from $195,742 and $547,654 during the three and nine months ended September 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 20.5% and 32.6% to $916,318 and $2.6 million during the three and nine months ended September 30, 2002, respectively, from $1.2 million and $3.8 million during the three and nine months ended September 30, 2001, which is consistent with the 19.7% and 31.9% decrease in segment revenue for the three and nine months ended September 30, 2002. Other operating costs and expenses of $71,297 and $116,918 during the three and nine months ended September 30, 2002, consisted of expenses related to the management of the Company's office building which was purchased on October 1, 2001. Depreciation and amortization expense increased 17.2% and 19.3% to $1.3 million and $4.1 million during the three and nine months ended September 30, 2002, respectively, from $1.1 million and $3.4 million during the three and nine months ended September 30, 2001. The increases were primarily attributable to the opening or acquisition of five hotels during 2001, and three hotels during 2002, offset by the sale of three owned consolidated hotels that closed in 2002. Leasehold rents - hotels decreased 19.0% and 18.7% to $1.3 million and $4.1 million during the three and nine months ended September 30, 2002, respectively, compared to $1.6 million and $5.1 million during the three and nine months ended September 30, 2001. The decreases were primarily attributable to the termination of six leased hotels during 2001 and the first nine months of 2002 as a result of the lessor selling these hotels, offset by the extension of the hotel leases with a REIT. Corporate general and administrative expense increased 67.2% and 3.5% to $755,036 and $1.5 million during the three and nine months ended September 30, 2002, respectively, from $451,520 and $1.5 million during the three and nine months ended September 30, 2001, and can be attributed primarily to the accrual of $383,000 in severance benefits in connection with the resignation of the Company's President/CEO during the third quarter of 2002, the overall growth of the Company, offset by the recognition of expenses during 2001 related to the issuance of stock options and transitional accounting fees. The Company's operating income decreased 43.9% and 28.5% to $2.1 million and $3.6 million during the three and nine months ended September 30, 2002, respectively, from $3.7 million and $5.1 million during the three and nine months ended September 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 8.5% and 18.9% to $2.4 million and $3.5 million during the three and nine months ended September 30, 2002, respectively, from $2.2 million and $3.0 million during the three and nine months ended September 30, 2001. These increases in operating income were due to an increase in same room revenues, and decreases in certain hotel operating expenses including energy costs. Operating income from the hotel development segment decreased to $114,440 during the three months ended September 30, 2002, from $595,776 during the three months ended September 30, 2001 and increased to $706,852 during the first nine months of 2002 from $102,743 during the first nine months of 2001. The fluctuations in hotel development operating income were due to the timing of hotels developed and constructed for third parties and minority-owned entities during the third quarter and first nine months of 2002, compared with the third quarter and first nine months of 2001, and the overall increase in the number of hotels developed and constructed for third parties and minority-owned entities during 2002. Operating income from the sale of AmeriHost Inn hotels was $0 and $1.2 million during the three and nine months ended September 30, 2002, compared to $1.1 million and $3.3 million during the three and nine months ended September 30, 2001, as a result of the sale of eight AmeriHost Inn hotels during the first nine months of 2001, including three during the third quarter, compared to the sale of three AmeriHost Inn hotels during the first nine months of 2002, with none during the third quarter. The hotel management segment had operating income of $88,284 and $219,576 during the three and nine months ended September 30, 2002, compared to operating income of $49,478 and $140,664 during the three and nine months ended September 30, 2001. These increases were due primarily to improvements in operational efficiencies. Employee leasing operating income increased to $12,277 during the three months ended September 30, 2002, from $4,103 during the three months ended September 30, 2001, and increased to $54,467 during the nine months ended September 30, 2002, from $35,744 during the nine months ended September 30, 2001, due primarily to operational efficiencies and the allocation of certain costs. Interest expense increased 19.8% and 7.9% to $1.4 million and $4.3 million during the three and nine months ended September 30, 2002, respectively, from $1.2 million and $4.0 million during the three and nine months ended September 30, 2001. These increases were primarily attributable to the overall increase in outstanding debt during this period from the mortgage financing of newly constructed Consolidated hotels, partially offset by the sale of hotels whereby the Company does not incur any interest expense on the sold hotels after the sale dates and the reduction of interest rates on certain floating rate loan agreements. The Company's share of equity in income (loss) of affiliates increased to $61,697 during the three months ended September 30, 2002, from ($122,329) during the three months ended September 30, 2001. The Company's share of equity in income (loss) of affiliates improved to ($59,886) during the nine months ended September 30, 2002, from ($394,869) during the nine months ended September 30, 2001. The increase in equity of affiliates during the third quarter and first nine months of 2001 was primarily attributable to the sale of a minority-owned property in the third quarter 2002 at a significant gain, offset by an impairment adjustment of $100,000 during the second quarter of 2002. The Company exchanged a note receivable from the principals of Diversified Innkeepers, Inc. in the amount of approximately $1.2 million at September 30, 2002, for a 50% ownership interest in a hotel joint venture. The Company had previously managed this hotel for Diversified Innkeepers, Inc. pursuant to a management contract. Since the Company does not control the major decisions of this joint venture, this investment has been accounted for by the equity method. Distributions from affiliates were $10,768 during the nine months ended September 30, 2002, compared to $14,173 during the nine months ended September 30, 2001. The Company recorded gains from the sale of assets of $0 and $327,076 during the three and nine months ended September 30, 2002, compared to $295,893 and $886,338 during the three and nine 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. Three hotels were sold by the REIT during the first nine months of 2001, and one hotel was sold by the REIT during the first nine 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 $519,000 and $174,000 during the three and nine months ended September 30, 2002, respectively, and income tax expense of $1,292,000 and $973,000 during the three and nine months ended September 30, 2001, respectively, which are directly related to the pre-tax income during the third quarter of 2002 and 2001, and the first nine months of 2002 and 2001. 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 (such as direct billings to local companies using the hotel and third party hotel room brokers) 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 simultaneous closing of the Company's sale of an AmeriHost Inn hotel and the execution by the buyer of a franchise agreement with Cendant, including all proper documentation. Royalty sharing payments from Cendant are received quarterly, based on the actual royalty payments received by Cendant from all AmeriHost Inn hotel franchisees, except for those operated by the Company. During the first nine months of 2002, the Company provided cash from operations of $9.2 million, compared to $14.0 million the first nine months of 2001, or a decrease in cash provided by operations of approximately $4.8 million. The decrease in cash flow from operations during the first nine months of 2002, when compared to 2001, can be attributed primarily to the decrease in sale of hotel activity, partially offset by the increase in hotel development activity for a third party and minority-owned entities and the increase in operating income from operating its portfolio of 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. Currently, the Board of Directors has authorized the Company to buy back, at any time and without notice, up to 1,000,000 shares of it own common stock under certain conditions. Pursuant to an amendment to the master lease agreement with a 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 on all of the REIT hotels shall be increased by 0.25% each time. The Company cannot close on the sale of its third and fourth choice until the first and second REIT choices have been sold (or purchased by the Company), respectively. During 2001, the Company facilitated the sale of two hotels by the REIT (the Company's first and second choices), and purchased one hotel from the REIT (the REIT's first choice). During 2002, 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, and facilitated the sale of one hotel by 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 prices. 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. During the first nine months of 2002, the Company used $15.3 million in investing activities compared to using $14.9 million during the first nine months of 2001. During the first nine months of 2002, the Company bought out the partners' interests in one joint venture for $796,786, used $14.1 million to purchase property and equipment for Consolidated AmeriHost Inn hotels, and used $464,124 for investments in and advances to affiliates, net of distributions and collections on advances from affiliates. During the first nine months of 2001, the Company bought out the partners' interests in one joint venture for $795,384, used $12.9 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 $3.8 million during the first nine months of 2002 compared to $4.1 million during the first nine months of 2001. In 2002, the primary factors were $9.7 million in proceeds from the mortgage financing of Consolidated hotels, offset by net repayments of $812,415 on the Company's operating line-of-credit, and principal repayments of $4.9 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 $8.4 million in proceeds from the mortgage financing of Consolidated hotels, net proceeds of $3.4 million on the Company's operating line-of-credit, offset by principal repayments of $7.7 million on the mortgage financing of Consolidated hotels, including the repayments of mortgages in connection with the sale of hotels. Approximately $7.6 million is classified as current portion of long-term debt, including three 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 is currently under contract to sell a hotel with one of these mortgages with an outstanding balance of $2.7 million as of September 30, 2002. The remaining two mortgages bear interest at the fixed rates of 8.23% and 7.25% per annum. The Company expects to refinance these mortgages at similar interest rates. 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 September 30, 2002, these joint ventures had $33.6 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 September 30, 2002 since it is from joint ventures in which the Company has a majority or controlling ownership interest, leaving approximately $26.1 million in off balance sheet mortgage debt with unconsolidated joint ventures. Of this amount, the Company has also provided approximately $16.7 million in guarantees to the lenders. Other partners have also guaranteed portions of this amount. One unconsolidated joint venture sold its hotel subsequent to September 30, 2002. Upon the sale, this joint venture repaid its mortgage loan in the amount of $1.6 million at September 30, 2002. One unconsolidated joint venture mortgage loan in the amount of $1.8 million at September 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 $6.6 million at September 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 September 30, 2002. At September 30, 2002, the Company had $6.0 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 in compliance with these covenants as of September 30, 2002. The Company is evaluating financing options that would replace all or part of this line-of-credit with financing of longer duration that would better match the Company's business plan of developing, building and selling AmeriHost Inn hotels. As a result, the Company has begun discussions with its current operating line-of-credit lender regarding an extension of the maturity of this facility, while pursuing longer term financing options with this lender and others. However, there can be no assurance that the Company will obtain an extension of the current line-of-credit or an alternative credit facility of longer duration under terms and conditions that the Company deems satisfactory. In that event, the Company believes that cash flow from operations and proceeds from the sale of hotels will be sufficient to make all necessary payments on its maturing debt. 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. In June 2002, the financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred rather than when a company commits to such an activity and also establishes fair value as the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company has not yet fully assessed the impact of SFAS 146 on the consolidated financial statements, but does not anticipate it to be material. 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, including the Company's ability to refinance existing debt when due; 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. The Company's severance agreement with its President/Chief Executive Officer is scheduled to be effective upon the simultaneous closings of the sale of two hotels to affiliates of the President/Chief Executive Officer; should such closings not occur by February 15, 2003, the agreements shall be void. The closing of the Agreements is contingent upon procurement of appraisals demonstrating sale of the hotels at a price not less than appraised value, closing of financing commitments (subject to normal and customary contingencies) and procurement of a release of the Company from its guaranty of the land lease underlying one of the hotels. There can be no assurances that such contingencies can be met or that other events may impede the successful closing of the contemplated transactions. 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 September 30, 2002. The carrying amounts reflected approximate the estimated fair values. As the table incorporates only those exposures that existed as of September 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 $ 5,981,287 5.50% Mortgage debt - fixed rate $ 46,036,288 7.51% Mortgage debt - variable rate $ 32,433,118 6.19% ITEM 4. CONTROLS AND PROCEDURES ----------------------- The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days of the filing date of this report, that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. PART II: OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS: ----------------------------------------------------- The annual shareholders' meeting was held on August 15, 2002. One matter was voted with the following results: Matter 1: Election of Directors
Director For Authority Withheld Abstain/Non-Votes --------------------- ---------------- ---------------------- -------------------- Michael P. Holtz 4,021,832 4,449 794 Russell J. Cerqua 4,022,607 3,674 794 Salomon J. Dayan 4,022,207 4,190 678 Thomas J. Romano 4,008,136 18,261 678 Gerald T. LaFlamme 4,007,911 18,486 678 Kenneth M. Fell 3,338,219 3,283 130 Steven J. Belmonte 3,329,469 12,033 130 Reno J. Bernardo 682,663 2,471 664 Jon K. Haahr 668,417 16,833 548
In accordance with the bylaws of the Company, the election of Directors requires the affirmative vote of a plurality of voting power represented at the annual shareholder meeting. Since the shareholders were voting on a seven member Board of Directors, the seven members were elected as follows: Messrs. Holtz, Cerqua, Dayan, Romano, LaFlamme, Fell, and Belmonte. On August 15, 2002, after the annual shareholder meeting, Mr. Cerqua resigned from the Board of Directors, and Mr. Holtz submitted his resignation as a Director and President/CEO with a six-month notice, agreeing to serve through the transitional period as a replacement was found. In addition, on September 9, 2002, Mr. Andrew E. Shapiro was appointed to the Board of Directors. The Board has appointed Kenneth Fell as "Lead Director" and effective upon Mr. Holtz's resignation from the Board of Directors, Mr. Fell would serve as Chairman of the Board of Directors. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Reports on Form 8-K: The Company filed a report on Form 8-K on August 15, 2002. This filing included the script from management's presentation on the Company as presented immediately after the Company's annual shareholder meeting. The Company filed a report on Form 8-K on November 8, 2002. This filing included a press release regarding the settlement arrangement with the outgoing President/Chief Executive Officer and the sale of two of its AmeriHost Inn hotels to the President/CEO. This filing also includes the Settlement Agreements between the Company and the President/CEO. (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 revised on October 22, 2002 10.7 Form of Indemnification Agreement executed by independent directors 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: November 14, 2002 By: /s/ James B. Dale ---------------------------- James B. Dale Chief Financial Officer CERTIFICATIONS I, Michael P. Holtz, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Arlington Hospitality, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ Michael P. Holtz ---------------------------- Michael P. Holtz Chief Executive Officer I, James B. Dale, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Arlington Hospitality, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 /s/ James B. Dale ------------------------ James B. Dale Chief Financial Officer EX-3.2 3 a32381_x32.txt BY-LAWS OF ARLINGTON HOSPITALITY, INC. EXHIBIT 3.2 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. Section 4.5. [ADOPTED 10/22/2002] The Board of Directors may appoint a Director to serve as Chairman of the Board. The Chairman of the Board shall not be an officer of the Corporation, unless specifically designated as an officer by the Board of Directors. The Chairman of the Board shall, if present, 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. The Chairman of the Board shall have such other powers, authority and duties as may be determined by the Board of Directors. The Chairman of the Board shall be elected by, and may be removed at any time (with or without cause) by, the affirmative vote of a majority of the Board of Directors. 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. [ADOPTED 10/22/2002] The officers of the corporation shall be chosen by the Board of Directors. The Board of Directors may appoint a president, one or more executive vice-presidents, one or more vice-presidents, a secretary and a treasurer. Any number of offices may be held by the same person, unless the Certificate of Incorporation or these By-Laws otherwise provide. Section 2. [ADOPTED 10/22/2002] [Reserved] Section 3. [ADOPTED 10/22/2002] 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. [ADOPTED 10/22/2002] The salaries of all officers of the corporation shall be fixed by the Board of Directors or a Committee of the Board of Directors or their designee. Section 5. [ADOPTED 10/22/2002] 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. Section 6. [ADOPTED 10/22/2002] [Reserved] Section 7. [ADOPTED 10/22/2002] The President. Unless the Board of Directors determines otherwise, the President shall report to the Board of Directors and shall be the chief executive officer of the corporation and on a day to day basis shall, subject to the direction of the Board of Directors, 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. The President shall also assume an active role in planning and policy making for the corporation and such other duties as the Board of Directors may assign to him from time to time. The President 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 responsible for ensuring that all orders and resolutions of the Board of Directors are carried out and shall make such reports on the affairs of the Company as the Board of Directors may from time to time require. 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] EX-10.7 4 a32381_x107.txt FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.7 ARLINGTON HOSPITALITY INC. INDEPENDENT DIRECTOR INDEMNIFICATION AGREEMENT This Indemnification Agreement ("Agreement") is made as of this _____ day of ____________, 2002, by and between Arlington Hospitality, Inc., a Delaware corporation (the "Company"), and ______________________ ("Indemnitee"). WHEREAS, the Company and Indemnitee recognize the significant cost of directors' liability insurance and the general reductions in the coverage of such insurance; WHEREAS, the Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting independent directors to expensive litigation risks at the same time as the coverage of liability insurance has been severely limited; and WHEREAS, the Company desires to attract and retain the services of highly qualified individuals, such as Indemnitee, to serve as independent directors of the Company and to indemnify its independent directors so as to provide them with the maximum protection permitted by law. NOW, THEREFORE, in consideration for Indemnitee's services as a director of the Company, the Company and Indemnitee hereby agree as follows: Indemnification. Third Party Proceedings. The Company shall indemnify Indemnitee if Indemnitee is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or any alternative dispute resolution mechanism, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Company) by reason of the fact that Indemnitee is or was a director of the Company, or any subsidiary of the Company, or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) actually and reasonably incurred by Indemnitee in connection with such action, suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, and, with respect to any criminal action or proceeding, had reasonable cause to believe that Indemnitee's conduct was unlawful. Proceedings By or in the Right of the Company. The Company shall indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Company or any subsidiary of the Company to procure a judgment in its favor by reason of the fact that Indemnitee is or was a director of the Company, or any subsidiary of the Company, or by reason of the fact that Indemnitee is or was serving at the request of the Company as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees) and, to the fullest extent permitted by law, amounts paid in settlement actually and reasonably incurred by Indemnitee in connection with the defense or settlement of such action or suit if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Company, except that no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged to be liable to the Company unless and only to the extent that the Court of Chancery of the State of Delaware or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery of the State of Delaware or such other court shall deem proper. Notwithstanding the foregoing, Indemnitee shall not be entitled to to be indemnified pursuant to this Section 1(b) for amounts paid in settlement in connection with any threatened, pending or completed action or suit which was approved or authorized by the Board of Directors of the Company. Mandatory Payment of Expenses. To the extent that Indemnitee has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Subsections (a) and (b) of this Section 1, or in defense of any claim, issue or matter therein, Indemnitee shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by Indemnitee in connection therewith. Agreement to Serve. In consideration of the protection afforded by this Agreement, Indemnitee agrees to serve at least for the 90 days after the effective date of this Agreement as a director and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. Following the applicable period set forth above, Indemnitee agrees to continue to serve in such capacity at the will of the Company so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the Bylaws of the Company or any subsidiary of the Company or until such time as he tenders his resignation in writing. Expenses; Indemnification Procedure. Advancement of Expenses. The Company shall advance all expenses incurred by Indemnitee in connection with the investigation, defense, settlement or appeal of any civil or criminal action, suit or proceeding referenced in Section 1(a) or (b) hereof (but not amounts actually paid in settlement of any such action, suit or proceeding). Indemnitee hereby undertakes to repay such amounts advanced only if, and to the extent that, it shall ultimately be determined that Indemnitee is not entitled to be indemnified by the Company as authorized hereby. The advances to be made hereunder shall be paid by the Company to Indemnitee within thirty (30) days following delivery of a written request therefor by Indemnitee to the Company (accompanied by reasonably detailed supporting documentation of the amount sought). Notice/Cooperation by Indemnitee. Indemnitee shall, as a condition precedent to his right to be indemnified under this Agreement, give the Company notice in writing as soon as practicable of any claim made against Indemnitee for which indemnification will or could be sought under this Agreement. Notice to the Company shall be directed to the President of the Company at the address shown on the signature page of this Agreement (or such other address as the Company shall designate in writing to Indemnitee). Notice shall be deemed received three business days after the date postmarked if sent by domestic certified or registered mail, properly addressed, five business days if sent by airmail to a country outside of North America; otherwise notice shall be deemed received when such notice shall actually be received by the Company. In addition, Indemnitee shall give the Company such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. Procedure. Any indemnification and advances provided for in Section 1 and this Section 3 shall be made no later than thirty (30) days after receipt of the written request of Indemnitee. If a claim under this Agreement, under any statute, or under any provision of the Company's Certificate of Incorporation or Bylaws providing for indemnification, is not paid in full by the Company within thirty (30) days after a written request for payment thereof has first been received by the Company, Indemnitee may, but need not, at any time thereafter bring an action against the Company to recover the unpaid amount of the claim and, subject to Section 13 of this Agreement, Indemnitee shall also be entitled to be paid for the expenses (including attorneys' fees) of bringing such action. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in connection with any action, suit or proceeding in advance of its final disposition) that Indemnitee has not met the standards of conduct which make it permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed. However, Indemnitee shall be entitled to receive interim payments of expenses pursuant to Subsection 3(a) unless and until such defense has been finally adjudicated by court order or judgment and up to one appeal of any such order or judgment if such appeal is timely filed and pursued by Indemnitee. If such appeal is not timely filed and pursued by Indemnitee, or if any such appeal is dismissed or denied, then the Company shall not be required to provide interim payments of expenses pursuant to Subsection 3(a). It is the parties' intention that if the Company contests Indemnitee's right to indemnification, the question of Indemnitee's right to indemnification shall be for the court to decide, and neither the failure of the Company (including its Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) to have made a determination that indemnification of Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct required by applicable law, nor an actual determination by the Company (including it Board of Directors, any committee or subgroup of the Board of Directors, independent legal counsel, or its stockholders) that Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has or has not met the applicable standard of conduct. Notice to Insurers. If, at the time of the receipt of a notice of a claim pursuant to Section 3(b) hereof, the Company has director liability insurance in effect, the Company shall give prompt notice of the commencement of such proceeding to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take commercially reasonable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such proceeding in accordance with the terms of such policies. Selection of Counsel. In the event the Company shall be obligated under Section 3(a) hereof to pay the expenses of any proceeding against Indemnitee, the Company, if appropriate, shall be entitled to assume the defense of such proceeding, with counsel approved by Indemnitee, upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same proceeding, provided that (i) Indemnitee shall have the right to employ his counsel in any such proceeding at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not, in fact, have employed counsel to assume the defense of such proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Company. Additional Indemnification Rights; Nonexclusivity. Scope. Notwithstanding any other provision of this Agreement, the Company hereby agrees to indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by the other provisions of this Agreement, the Company's Certificate of Incorporation, the Company's Bylaws or by statute. In the event of any change, after the date of this Agreement, in any applicable law, statute, or rule which expands the right of a Delaware corporation to indemnify a member of its board of directors, such changes shall be, ipso facto, within the purview of Indemnitee's rights and Company's obligations, under this Agreement. In the event of any change in any applicable law, statute or rule which narrows the right of a Delaware corporation to indemnify a member of its board of directors, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement shall have no effect on this Agreement or the parties' rights and obligations hereunder. Nonexclusivity. The indemnification provided by this Agreement shall not be deemed exclusive of any rights to which Indemnitee may be entitled under the Company's Certificate of Incorporation, its Bylaws, any agreement, any vote of stockholders or disinterested Directors, the General Corporation Law of the State of Delaware, or otherwise, both as to action in Indemnitee's official capacity and as to action in another capacity while holding such office. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though he may have ceased to serve in such capacity at the time of any action, suit or other covered proceeding. Partial Indemnification. If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of the expenses, judgments, fines or penalties actually or reasonably incurred by him in the investigation, defense, appeal or settlement of any civil or criminal action, suit or proceeding, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such expenses, judgments, fines or penalties to which Indemnitee is entitled. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors under this Agreement or otherwise. Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Company's right under public policy to indemnify Indemnitee. Director Liability Insurance. The Company shall, from time to time, make the good faith determination whether or not it is practicable for the Company to obtain and maintain a policy or policies of insurance with reputable insurance companies providing the directors of the Company with coverage for losses from wrongful acts, or to ensure the Company's performance of its indemnification obligations under this Agreement. Among other considerations, the Company will weigh the costs of obtaining such insurance coverage against the protection afforded by such coverage. In all policies of director liability insurance, Indemnitee shall be named as an insured in such a manner as to provide Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Company's directors. Notwithstanding the foregoing, the Company shall have no obligation to obtain or maintain such insurance if the Company determines in good faith that such insurance is not reasonably available, if the premium costs for such insurance are disproportionate to the amount of coverage provided, if the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, if Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Company, or if the Board of Directors in good faith determines that maintaining such insurance is not in the best interest of the Company's stockholders. Severability. Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Company's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 8. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Company shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement: Claims Initiated by Indemnitee. To indemnify or advance expenses to Indemnitee with respect to proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the Delaware General Corporation Law, but such indemnification or advancement of expenses may be provided by the Company in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or Lack of Good Faith. To indemnify Indemnitee for any expenses incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or Insured Claims. To indemnify Indemnitee for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to or on behalf of Indemnitee by an insurance carrier under a policy of directors' liability insurance maintained by the Company. Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute. Construction of Certain Phrases. For purposes of this Agreement, references to the "Company" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, so that if Indemnitee is or was a director of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued. For purposes of this Agreement, references to "other enterprises" shall include employee benefit plans; references to "fines" shall include any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Company" shall include any service as a director of the Company which imposes duties on, or involves services by, such director with respect to an employee benefit plan, its participants, or beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Company" as referred to in this Agreement. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. Successors and Assigns. This Agreement shall be binding upon the Company and its successors and assigns, and shall inure to the benefit of Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns. Attorneys' Fees. In the event that any action is instituted by Indemnitee under this Agreement to enforce or interpret any of the terms hereof, Indemnitee shall be entitled to be paid all court costs and expenses, including reasonable attorneys' fees, incurred by Indemnitee with respect to such action, unless as a part of such action, the court of competent jurisdiction determines that each of the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous. In the event of an action instituted by or in the name of the Company under this Agreement or to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all court costs and expenses, including attorneys' fees, incurred by Indemnitee in defense of such action (including with respect to Indemnitee's counterclaims and cross-claims made in such action), unless as a part of such action the court determines that each of Indemnitee's material defenses to such action were made in bad faith or were frivolous. Notice. All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee, on the date of such receipt, or (ii) if mailed by domestic certified or registered mail with postage prepaid, on the third business day after the date postmarked. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this Agreement and agree that any action instituted under this Agreement shall be brought only in the state courts of the State of Delaware. Choice of Law. This Agreement shall be governed by and its provisions construed in accordance with the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within Delaware without regard to the conflict of law principles thereof. Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal representatives after the expiration of three years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such two-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern. Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights. Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by both the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. Arlington Hospitality Inc. --------------------------------- Signature of Authorized Signatory --------------------------------- Print Name and Title Address: ------------------------- AGREED TO AND ACCEPTED: INDEMNITEE: - -------------------------------------- Signature - -------------------------------------- Address: ------------------------------ ------------------------------ ------------------------------ EX-99.1 5 a32381_x991.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 September 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 November 14, 2002 -----END PRIVACY-ENHANCED MESSAGE-----