-----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, Q1VwSoUHx3esO+YOidy/5KmtQTgBrEF12U12stWxj4CQaIQHDJHhkX2A1Dwqa0F4 WvNRv+3ulvcnfpOqFJOQ9Q== 0000914760-03-000093.txt : 20030515 0000914760-03-000093.hdr.sgml : 20030515 20030515163025 ACCESSION NUMBER: 0000914760-03-000093 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030515 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: 03705148 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: AMERIHOST PROPERTIES INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: AMERICA POP INC DATE OF NAME CHANGE: 19871111 10-Q 1 a32381_q103.txt MARCH 31, 2003 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended MARCH 31, 2003 ---------------------- 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 ----- ----- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No x ----- ----- As of May 15, 2003, 5,019,588 shares of the Registrant's Common Stock were outstanding. ================================================================================ ARLINGTON HOSPITALITY, INC. FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 2003 INDEX PART I: Financial Information Page ----------------------------- ---- Item 1 - Financial Statements Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002 4 Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002 6 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002 7 Notes to Consolidated Financial Statements 9 Item 2 - Management's Discussion and Analysis of Financial Condition 16 and Results of Operations Item 3 - Quantitative and Qualitative Disclosures About Market Risk 26 Item 4 - Controls and Procedures 26 PART II: Other Information -------------------------- Item 6 - Exhibits and Reports on Form 8-K 27 Signatures 27 Page 2 Part I: Financial Information Item 1: Financial Statements Page 3 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ==================================================================================================================
March 31, December 31, 2003 2002 --------------- -------------- ASSETS (UNAUDITED) Current assets: Cash and cash equivalents $ 4,345,504 $ 3,969,515 Accounts receivable, less allowance of $150,000 at March 31, 2003 and December 31, 2002 (including approximately $650,000 and $166,000 from related parties) 2,387,653 2,064,463 Notes receivable, current portion 100,000 100,000 Prepaid expenses and other current assets 959,606 975,432 Refundable income taxes 2,179,948 1,574,776 Costs and estimated earnings in excess of billings on uncompleted contracts 767,629 1,479,101 --------------- -------------- Total current assets 10,740,340 10,163,287 --------------- -------------- Investments in and advances to unconsolidated hotel joint ventures 4,292,450 4,291,504 --------------- -------------- Property and equipment: Land 12,901,351 13,418,378 Buildings 77,874,935 76,849,071 Furniture, fixtures and equipment 26,715,199 26,553,701 Construction in progress 2,067,692 6,447,039 Leasehold improvements 2,760,906 2,760,906 --------------- -------------- 122,320,083 126,029,095 Less accumulated depreciation and amortization 27,361,713 26,417,755 --------------- -------------- 94,958,370 99,611,340 --------------- -------------- Notes receivable, less current portion 927,708 782,083 Deferred income taxes 2,428,000 2,427,000 --------------- -------------- Other assets, net of accumulated amortization of approximately $1,334,000 and $1,259,000 2,484,400 2,658,500 5,840,108 5,867,583 --------------- -------------- $ 115,831,268 $ 119,933,714 =============== ============== (continued) Page 4 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS ================================================================================================================== March 31, December 31, 2003 2002 --------------- -------------- LIABILITIES AND SHAREHOLDERS' EQUITY (UNAUDITED) Current liabilities: Accounts payable $ 2,928,478 $ 3,965,028 Bank line-of-credit 5,980,000 6,384,287 Accrued payroll and related expenses 871,916 827,353 Accrued real estate and other taxes 2,192,603 1,969,297 Other accrued expenses and current liabilities 1,651,431 1,974,350 Current portion of long-term debt 5,243,995 4,038,301 --------------- -------------- Total current liabilities 18,868,423 19,158,616 --------------- -------------- Long-term debt, net of current portion 69,352,642 72,203,688 --------------- -------------- Deferred income 11,302,028 10,867,418 --------------- -------------- Commitments and contingencies Minority interests 294,313 333,888 --------------- -------------- 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 5,019,588 shares at March 31, 2003, and 4,962,817 shares at December 31, 2002 25,098 24,814 Additional paid-in capital 13,310,559 13,184,564 Retained earnings 3,115,080 4,597,601 --------------- -------------- 16,450,737 17,806,979 Less: Stock subscriptions receivable (436,875) (436,875) --------------- -------------- 16,013,862 17,370,104 --------------- -------------- $ 115,831,268 $ 119,933,714 =============== ============== See notes to consolidated financial statements.
Page 5 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED) ==================================================================================================================
2003 2002 --------------- -------------- Revenue: Hotel operations: AmeriHost Inn hotels $ 8,332,009 $ 9,159,927 Other hotels 1,890,968 2,256,553 Development and construction 1,479,978 1,803,750 Hotel sales and commissions 6,443,290 3,359,867 Management services 111,154 233,937 Employee leasing 517,407 852,361 Incentive and royalty sharing 205,655 109,564 Office building rental 177,228 161,670 --------------- -------------- 19,157,689 17,937,629 --------------- -------------- Operating costs and expenses: Hotel operations: AmeriHost Inn hotels 7,359,119 7,285,328 Other hotels 2,372,159 2,889,300 Development and construction 1,604,727 1,997,567 Hotel sales and commissions 5,240,817 2,030,948 Management services 88,633 154,530 Employee leasing 506,122 820,637 Office building rental 1,552 16,823 --------------- -------------- 17,173,129 15,195,133 --------------- -------------- 1,984,560 2,742,496 Depreciation and amortization 1,352,623 1,323,689 Leasehold rents - hotels 1,334,977 1,481,812 Corporate general and administrative 455,331 387,159 Impairment provision 100,000 - --------------- -------------- Operating loss (1,258,371) (450,164) Other income (expense): Interest expense (1,294,969) (1,423,674) Interest income 119,959 123,830 Other income (expense) (2,270) 60,010 Equity in net income and (losses) from unconsolidated joint ventures (74,446) 86,968 Gain on sale of assets - 327,076 --------------- -------------- Loss before minority interests and income taxes (2,510,097) (1,275,954) Minority interests in operations of consolidated subsidiaries and partnerships 39,576 13,203 --------------- -------------- Loss before income tax (2,470,521) (1,262,751) Income tax benefit 988,000 505,000 --------------- -------------- Net loss $ (1,482,521) $ (757,751) =============== ============== Net loss per share: Basic $ (0.30) $ (0.15) =============== ============== Diluted $ (0.30) $ (0.15) =============== ============== See notes to consolidated financial statements.
Page 6 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED) ===================================================================================================================
2003 2002 --------------- -------------- Cash flows from operating activities: Cash received from customers $ 20,313,497 $ 18,672,124 Cash paid to suppliers and employees (15,093,781) (14,801,544) Interest received 106,502 225,545 Interest paid (1,300,742) (1,446,687) Income taxes received (paid) 381,828 (118,999) --------------- -------------- Net cash provided by operating activities 4,407,304 2,530,439 --------------- -------------- Cash flows from investing activities: Distributions, and collections on advances, from unconsolidated joint ventures 285,980 165,228 Purchase of property and equipment (1,796,169) (2,370,365) Purchase of investments in, and advances to, unconsolidated joint ventures (325,740) (979,212) (Issuance) collections on notes receivable (145,625) 6,721 Proceeds from sale of assets - (6,700) --------------- -------------- Net cash used in investing activities (1,981,554) (3,184,328) --------------- -------------- Cash flows from financing activities: Proceeds from issuance of long-term debt 3,070,961 1,741,110 Principal payments on long-term debt (4,716,314) (2,365,158) Net (repayment) borrowings on the line of credit (404,287) (337,415) Distributions to minority interest - (112,819) Repurchase of common stock (121) - --------------- -------------- Net cash used in financing activities (2,049,761) (1,074,282) --------------- -------------- Net increase (decrease) in cash 375,989 (1,728,171) Cash and cash equivalents, beginning of period 3,969,515 4,748,156 --------------- -------------- Cash and cash equivalents, end of period $ 4,345,504 $ 3,019,985 =============== ============== (continued) Page 7 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, (UNAUDITED) ================================================================================================================== 2003 2002 --------------- -------------- Reconciliation of net loss to net cash provided by operating activities: Net loss $ (1,482,521) $ (757,752) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 1,352,623 1,323,689 Equity in net (income) loss and interest income from unconsolidated joint ventures and amortization of deferred income 33,524 (86,968) Minority interests in net income of consolidated subsidiaries and partnerships (39,576) (13,203) Amortization of deferred gain (314,167) (254,390) Deferred income taxes (1,000) 198,000 Issuance of common stock and options 126,400 Gain on sale of fixed assets - (327,076) Proceeds from sale of hotels 6,443,290 2,915,630 Income from sale of hotels (1,202,473) (884,682) Provision for impairment 100,000 - Changes in assets and liabilities, net of effects of acquisition: (Increase) decrease in accounts receivable (309,733) 224,460 Decrease in prepaid expenses and other current assets 2,369 550,868 Increase in refundable income taxes (605,172) (821,999) Decrease (increase) in costs and estimated earnings in excess of billings 711,472 (253,317) (Increase) decrease in other assets (70,201) 58,056 (Decrease) increase in accounts payable (1,036,550) 199,237 (Decrease) increase in accrued payroll and other accrued expenses and current liabilities (49,277) 239,743 Decrease in accrued interest (5,773) (23,013) Increase in deferred income 754,069 243,156 --------------- -------------- Net cash provided by operating activities $ 4,407,304 $ 2,530,439 =============== ============== See notes to consolidated financial statements.
Page 8 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2003 ================================================================================ 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 March 31, 2003 and December 31, 2002, and the results of its operations and cash flows for the three months ended March 31, 2003 and 2002. The results of operations for the three months ended March 31, 2003, 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 2002 Annual Report on Form 10-K. Certain reclassifications have been made to the 2002 financial statements in order to conform with the 2003 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: ----------------------------- The Company's critical accounting policies are described in its 2002 Form 10-K. 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 for common stock equivalents. Diluted EPS gives effect to all dilutive common stock equivalents outstanding for the period. The Company excluded the dilutive effect of stock options for both periods presented below, and excluded the impact of convertible partnership interests for the three month period ending March 31, 2003 since they had an anti-dilutive effect on the EPS computations. The calculations of basic and diluted earnings (loss) per share are as follows: Three Months Ended March 31, --------------------------------------- 2003 2002 ----------------- ---------------- Net loss $ (1,482,521) $ (757,752) Impact of convertible partnership interests - (27,023) ----------------- ---------------- $ (1,482,521) $ (784,775) ================= ================ Weighted average common shares outstanding 5,005,395 4,958,081 Dilutive effect of convertible partnership interests - 168,100 ----------------- ---------------- Dilutive common shares outstanding 5,005,395 5,126,181 ================= ================ Net loss per share - Basic $ (0.30) $ (0.15) ================= ================ Net loss per share - Diluted $ (0.30) $ (0.15) ================= ================
Page 9 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2003 ================================================================================ 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. The income tax benefit for the three months ended March 31, 2003 and 2002, 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 March 31, 2003, including 22 hotels leased from a REIT (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. The two leases, other than the REIT leases, each provide for an option to purchase the hotel. The purchase prices are based upon a fixed amount approximating the fair value at the lease commencement, subject to increases in the CPI index. The purchase option price for one of these hotels was $4,000,000 and $3,030,000 for the other hotel, or an aggregate of $7,030,000 as of March 31, 2003. One of these leases with the purchase option price of $3,030,000 expires August 31, 2003, and the Company does not intend to exercise its purchase option. 7. LIMITED PARTNERSHIP GUARANTEED DISTRIBUTIONS: --------------------------------------------- The Company is the general partner in one partnership where the Company has guaranteed minimum annual distributions to the limited partners, including a Director of the Company, in the amount of 10% of their original capital contributions. On September 18, 2000, in connection with the approval of all joint venture partners regarding the sale of the AmeriHost Inn brand and franchising rights, the Company finalized the terms of an agreement to issue 125,000 new stock options to the partners, including this same Director, in three existing joint ventures, canceling 60,000 existing stock options held by these partners, and to purchase their remaining ownership interests in these three joint ventures at specified prices. One of these acquisitions was completed in 2001, and one was completed during the second quarter of 2002 using approximately $800,000. The final acquisition for approximately $830,000 is scheduled to be completed before August 31, 2003. Page 10 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2003 ================================================================================ 8. INVESTMENTS: ------------ The Company, through wholly-owned subsidiaries, is a general partner or managing member in 15 joint ventures as of March 31, 2003. As such, the Company's subsidiaries are secondarily liable for the obligations and liabilities of these joint ventures. As of March 31, 2003, these joint ventures had $25.7 million outstanding under mortgage loan agreements. Approximately $4.3 million of this amount has been included in the Company's consolidated financial statements as of March 31, 2003, since it is from joint ventures in which the Company has a majority or controlling ownership interest, leaving approximately $21.4 million in off-balance sheet mortgage debt with unconsolidated joint ventures. If the Company subsequently obtains a majority or controlling ownership interest in a joint venture, the joint venture's debt will be included in the Company's consolidated financial statements. Of this $21.4 million of financing, the Company also has provided approximately $11.7 million in guarantees to the lenders. Other partners have also guaranteed portions of these financings. One unconsolidated joint venture mortgage loan in the amount of approximately $1.7 million at March 31, 2003, which is one of the loans guaranteed by the Company, matures in 2003. The Company expects the joint venture to sell this hotel, extend the loan, or refinance the loan prior to its maturity. The remaining joint venture mortgage loans mature after 2004. 9. SALE/LEASEBACK OF HOTELS: ------------------------- In 1998 and 1999, the Company completed the sale of 30 AmeriHost Inn hotels to a Real Estate Investment Trust ("REIT") for $73 million. Upon the sales to the REIT, the Company entered into agreements to lease back the hotels for an initial term of ten years, with two five year renewal options. The lease payments are fixed at 10% of the sale price for the first three years. Thereafter, the lease payments are subject to a CPI increase with a 2% annual maximum. The Company has deferred the gain on the sale of these hotels pursuant to sale/leaseback accounting. The deferred gain is being recognized on a straight-line basis over the remaining term of the lease, as extended, as a reduction of leasehold rent expense. As of March 31, 2003, the aggregate remaining unamortized deferred gain was approximately $7.2 million. 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 eight hotels are not sold to an unrelated third party or to the Company by the dates specified. As of March 31, 2003, the first two scheduled rent increases were not effective due to the sale of hotels by the REIT, however the Company is obligated to either facilitate the sale to a third party, or purchase from the REIT, one hotel prior to June 5, 2003, or the third 0.25% rent increase becomes effective. The Company intends to purchase this hotel using cash of approximately $556,000 and mortgage financing already committed by the REIT of approximately $1.7 million. However, the Company is currently negotiating an extension of this purchase obligation. There can be no assurance that such an extension will be obtained. The REIT sold one of its hotels to an unrelated third party during the three months ended March 31, 2002. Consequently, the Company terminated the lease with the REIT for this hotel and recognized a commission from the sale of this hotel, which is classified as hotel sales and commissions in the accompanying consolidated financial statements. The unamortized deferred gain related to the initial sale of this hotel was recognized upon termination of the respective lease. Page 11 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2003 ================================================================================ 10. BUSINESS SEGMENTS: ------------------ The Company's business is primarily involved in seven segments: (1) hotel operations, consisting of the operations of all hotels in which the Company has a 100% or controlling ownership or leasehold interest, (2) hotel development, consisting of development, construction and renovation of hotels for unconsolidated joint ventures and unrelated third parties, (3) hotel sales and commissions, resulting from the sale of AmeriHost Inn hotels, (4) hotel management, consisting of hotel management activities, (5) employee leasing, consisting of the leasing of employees to various hotels, (6) incentive and royalty sharing fees due from the owner of the AmeriHost Inn brand, and (7) office building rental activities. Results of operations of the Company's business segments are reported in the consolidated statements of operations. The following represents revenues, operating costs and expenses, operating income, identifiable assets, capital expenditures and depreciation and amortization for each business segment, as of and for the three months ended March 31, 2003 and 2002, which is the information utilized by the Company's decision makers in managing the business: Revenues 2003 2002 -------- ------------ ------------- Hotel operations $ 10,222,977 $ 11,416,480 Hotel development and construction 1,479,978 1,803,750 Hotel sales and commissions 6,443,290 3,359,867 Hotel management 111,154 233,937 Employee leasing 517,407 852,361 Incentive and royalty sharing 205,655 109,564 Office building rental 177,228 161,670 ------------ ------------- $ 19,157,689 $ 17,937,629 Operating costs and expenses ---------------------------- Hotel operations $ 9,731,277 $ 10,174,628 Hotel development and construction 1,604,727 1,997,567 Hotel sales and commissions 5,240,817 2,030,948 Hotel management 88,633 154,530 Employee leasing 506,122 820,637 Office building rental 1,552 16,823 ------------ ------------- $ 17,173,128 $ 15,195,133 Operating income (loss) ----------------------- Hotel operations $ (2,207,989) $ (1,491,030) Hotel development and construction (125,864) (195,465) Hotel sales and commissions 1,202,473 1,328,919 Hotel management 10,795 65,897 Employee leasing 10,716 31,109 Incentive and royalty sharing 205,655 109,564 Office building rental 135,120 108,281 Corporate (489,277) (407,440) ------------ ------------- $ (1,258,371) $ (450,165) ============ ============= Page 12 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2003 ================================================================================ 10. BUSINESS SEGMENTS (CONTINUED): ------------------------------ Identifiable assets 2003 2002 ------------------- ------------ ------------- Hotel operations $100,950,155 $ 95,797,932 Hotel development and construction 2,140,883 1,875,134 Hotel sales and commissions - - Hotel management 645,956 188,047 Employee leasing 515,243 92,953 Office building rental 6,461,708 6,644,703 Corporate 5,117,323 8,491,317 ------------ ------------- $115,831,268 $ 113,090,086 ============ ============= Capital expenditures -------------------- Hotel operations $ 1,772,762 $ 2,146,155 Hotel development and construction 15,218 - Hotel sales and commissions - - Hotel management 6,658 3,308 Employee leasing - - Office building rental 799 220,902 Corporate 732 - ------------ ------------- $ 1,796,169 $ 2,370,365 ============ ============= Depreciation/Amortization ------------------------- Hotel operations $ 1,264,712 $ 1,251,070 Hotel development and construction 1,114 1,648 Hotel sales and commissions - - Hotel management 11,727 13,510 Employee leasing 569 614 Office building rental 40,556 36,566 Corporate 33,945 20,281 ------------ ------------- $ 1,352,623 $ 1,323,689 ============ =============
11. BANK LINE OF CREDIT: -------------------- The Company had $5,980,000 and $6,384,287 outstanding on its bank operating line-of-credit at March 31, 2003 and December 31, 2002, respectively. The operating line-of-credit is collateralized by substantially all the assets of the Company, subject to first mortgages from other lenders on hotel assets, 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), with a minimum rate of 5.5% per annum (effective rate as of March 31, 2003), and was scheduled to mature April 30, 2003. Prior to maturity, the Company renewed the line-of-credit agreement until April 30, 2004. The renewed line-of-credit facility provides for a maximum amount available of $6.5 million with interest payable monthly at the rate of prime plus 2.5% per annum (with a floor of 6.75%). The maximum commitment under the line-of-credit will be reduced to $6.0 million on September 29, 2003, and to $5.5 million on February 27, 2004. The Company will also be required to maintain certain financial covenants, including minimum net income, minimum tangible net worth, a maximum leverage ratio and a minimum debt service coverage ratio. Page 13 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2003 ================================================================================ 12. LONG-TERM DEBT: --------------- Approximately $5.2 million is classified as current portion of long-term debt, including two mortgages in the amount of approximately $2.8 million 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 negotiating to sell one of these hotels with an outstanding mortgage balance of $1.1 million as of March 31, 2003. The remaining mortgage bears interest at the floating rate of prime minus 0.25% per annum. If necessary, the Company believes it can refinance this mortgage at a similar interest rate. The Company has secured a $20 million construction line of credit facility, which provides for both construction financing as well as long-term mortgage financing. The Company utilizes this facility primarily for the construction of wholly-owned AmeriHost Inn properties, as approved by the lender on a project-by-project basis. As of March 31, 2003, approximately $9.1 million has been utilized for four hotel projects, which is, or will be, converted to long-term financing. The Company has until May 31, 2003, to utilize this facility for new construction projects and is currently negotiating the renewal of this facility. Any new hotel projects with the financing committed under this facility prior to its expiration will automatically convert to the long-term financing when construction is completed. 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 March 31, 2003. 13. SUPPLEMENTAL CASH FLOW DATA: ---------------------------- The following represents the supplemental schedule of noncash investing and financing activities for the years ended March 31: 2003 2002 ----------- ----------- Notes received in connection with the sale of hotels $ 150,000 $ - ----------- ----------- Interest paid, net of interest capitalized $ 1,300,742 $ 1,446,687 ----------- ----------- 14. SALE OF HOTELS: --------------- The Company sold two wholly owned AmeriHost Inn hotels during the three months ended March 31, 2003. Net cash proceeds from the sale of these hotels was approximately $6.4 million, which has been included in hotel sales and commission revenue in the accompanying consolidated financial statements. The net book value of these hotels at the time of their sales was approximately $5.2 million, resulting in operating income from the sale of these hotels of approximately $1.2 million. In addition, approximately $4.1 in mortgage debt was paid off with proceeds from the sale of these hotels. In addition, a joint venture in which the Company has a minority ownership interest sold its hotel asset during the first quarter of 2003. The Company accounts for this joint venture by the equity method and has included its share of the gain from this sale in equity in net income and (losses) of unconsolidated joint ventures in the accompanying consolidated financial statements. Page 14 ARLINGTON HOSPITALITY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) FOR THE THREE MONTHS ENDED MARCH 31, 2003 ================================================================================ 14. SALE OF HOTELS (CONTINUED): --------------------------- Consistent with the 8-K filing dated March 18, 2003, the Company is exploring a strategy of selling its non-AmeriHost Inn brand hotels along with 25-35 AmeriHost Inn hotels. The Company has selected a national hotel broker and is negotiating a written agreement for the broker to represent the Company in the implementation of this strategy. Management has begun to perform extensive financial and market analysis with the assistance of the national broker, and, in certain cases, an outside consultant to identify the AmeriHost Inn hotels to be marketed for sale. In addition, in determining which hotels are to be marketed for sale, management will be evaluating the impact on the Company's cash flow, operations and financial position post sale, including any impact under Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The results of this hotel analysis and of an evaluation of the long-term effect on the Company may have a significant affect on the quantity and timing of the hotels to be sold. If implemented, the Company expects this strategy will reduce debt and generate cash to pursue development and other strategic objectives as well as increase the economic benefits of the Company's transaction with Cendant. However, there can be no assurances that any sales will be consummated or, if consummated, when and on what terms. The Company expects to determine the feasibility and means to best implement its strategy and identify which hotels to initially market for sale in the next sixty days. 15. INCENTIVE AND ROYALTY FEES: --------------------------- The franchisor of the AmeriHost Inn brand, a Cendant Corporation related company ("Cendant"), has agreed to pay the Company a development incentive fee every time the Company sells one of its existing AmeriHost Inn hotels to a buyer who executes an AmeriHost Inn franchise agreement with Cendant. In addition, this fee also will be paid to the Company for new hotels that the Company develops which are then sold to a buyer who executes a franchise agreement with Cendant. This fee applies to the first 370 hotels sold by the Company during the 15-year term of the agreement. To date, the Company has collected the fee on 19 hotels. Since the potential for reimbursement exists, from future fees earned, in the event the buyer defaults on the franchise agreement, within the first 76 months, these fees are deferred when received, in accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements." The deferred fees are amortized as incentive and royalty sharing segment revenue in the accompanying consolidated financial statements on a straight-line basis over the 76-month period, as the contingencies on the revenues are removed. Page 15 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. As of March 31, 2003, the Company had 61 AmeriHost Inn hotels open, of which 52 were wholly-owned or leased, one was majority-owned, and eight were minority-owned. During the past 12 months, the Company built and opened three AmeriHost Inn hotels in which the Company has an ownership interest and completed construction of one AmeriHost Inn hotel which was built for an unaffiliated third party. As of March 31, 2003, one wholly-owned AmeriHost Inn hotel and one hotel in which the Company has a non-controlling minority ownership interest were under construction. Same room revenues for all AmeriHost Inn hotels owned and operated by the Company, including unconsolidated minority-owned hotels, decreased approximately 1.4% during the first quarter of 2003, compared to the first quarter of 2002, attributable to a 0.4% decrease in occupancy and by a decrease of $0.56 in average daily rate. These results relate to the 60 AmeriHost Inn hotels that have been operating for at least 13 full months during the three months ended March 31, 2003. The table below sets forth information regarding the Company's hotels at March 31, 2003. Open Under Hotels Construction Total --------------- ---------------- --------------- Hotels Rooms Hotels Rooms Hotels Rooms ------ ----- ------ ----- ------ ----- Consolidated (1): AmeriHost Inn hotels 53 3,398 1 84 54 3,482 Other brands 8 1,045 - - 8 1,045 ------ ----- ------ ----- ------ ----- 61 4,443 1 84 62 4,527 ------ ----- ------ ----- ------ ----- Unconsolidated: AmeriHost Inn hotels 8 538 1 96 9 634 Other brands 2 228 - - 2 228 ------ ----- ------ ----- ------ ----- 10 766 1 96 11 862 ------ ----- ------ ----- ------ ----- Totals: AmeriHost Inn hotels 61 3,936 2 180 63 4,116 Other brands 10 1,273 - - 10 1,273 ------ ----- ------ ----- ------ ----- 71 5,209 2 180 73 5,389 ====== ===== ====== ===== ====== ===== (1) Consolidated hotels are those in which the Company has a 100% or controlling ownership interest or a leasehold interest.
Revenues from hotel operations consist of the revenues from all consolidated hotels. Consolidated hotels are those hotels in which the Company has a 100% or controlling ownership or leasehold interest, and are consolidated in the Company's financial statements. Unconsolidated hotels are those hotels in which the Company has a minority or non-controlling ownership or leasehold interest, and are accounted for by the equity method. Non-core hotels are those hotels operated as independent of a franchise affiliation (one hotel as of March 31, 2003), or under a national franchise affiliation other than the AmeriHost Inn brand, such as Days Inn, Ramada Inn, and Howard Johnson Express (nine hotels as of March 31, 2003). Development and construction revenues consist of fees for new construction and renovation activities performed by the Company for unconsolidated 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 receives revenue from management and employee leasing services provided to unconsolidated hotels and unrelated third parties. Incentive and royalty sharing fees consist of the amortization of one-time development incentive fees received upon the sale of an AmeriHost Inn hotel to a third party who enters into an AmeriHost Inn franchise agreement, and the Company's portion of the franchise royalty fees paid by all AmeriHost Inn hotels to Cendant Corporation ("Cendant"), the franchisor and owner of the AmeriHost Inn brand. Finally, the Company also owns the office building in which its headquarters is located, and receives revenues as landlord from the third-party tenants in the building. Page 16 Total revenues increased 6.8% to $19.2 million during the first quarter of 2003, from $17.9 million during the first quarter of 2002, due primarily to the increase from hotel sales and commissions, offset by the decrease in hotel operations, hotel development, hotel management and employee leasing. Revenues from consolidated AmeriHost Inn hotels decreased 9.0% to $8.3 million during the first quarter of 2003, from revenues of $9.2 million during the first quarter of 2002, due primarily to the sale of seven consolidated AmeriHost Inn hotels to franchisees during the past 15 months. As of March 31, 2003, there were 53 consolidated AmeriHost Inn hotels versus 55 consolidated AmeriHost Inn hotels at March 31, 2002. Revenues from the development segment decreased to $1.5 million during the first quarter of 2003, from $1.8 million during the first quarter of 2002, due to the decrease in hotel development activity for unconsolidated minority owned entities and third parties. Revenues from hotel sales and commissions increased 91.8% to $6.4 million during the first quarter of 2003, from $3.4 million during the first quarter of 2002, as a result of the sale of two wholly-owned AmeriHost Inn hotels during the first three months of 2003, versus the sale of one wholly-owned AmeriHost Inn hotel during the first three months of 2002. The Company also received a commission from the sale of one leased hotel during the first quarter of 2002. Revenues from hotel management and employee leasing segments decreased by 42.1% in total during the first quarter of 2003, due primarily to the sale or termination of hotels under management contracts. Revenues from consolidated non-AmeriHost Inn hotels decreased 16.2% during the first quarter of 2003, compared to the first quarter of 2002, as a result primarily of the 1.6% decrease in same room revenue and the elimination of food and beverage operations at two hotels. The Company recorded a net loss of ($1.5) million during the first quarter of 2003, or ($0.30) per diluted share, compared to a net loss of ($757,751) or ($0.15) per diluted share during the first quarter of 2002. On September 30, 2000, the Company sold the AmeriHost Inn brands and franchising rights to Cendant. 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 hotels in the franchise system (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. The Company received $698,000 in development incentive fees during the first quarter of 2003 which were deferred and are being amortized over a 76-month period. Revenues from development incentive and royalty sharing fees, including the amortization of deferred development incentive fees, increased 87.7% to approximately $206,000 during the first quarter of 2003 compared to $110,000 during the first quarter of 2002. Excluding hotels under construction, the Company had an ownership interest in 71 hotels at March 31, 2003, versus 76 hotels at March 31, 2002. Total consolidated hotels decreased to 61 hotels at March 31, 2003, versus 63 hotels at March 31, 2002. The increased ownership from the development of AmeriHost Inn hotels for the Company's own account and for joint ventures in which the Company has a non-controlling minority ownership interest, and the acquisition of a non-controlling ownership in a non-core hotel, was more than offset by the sale of AmeriHost Inn hotels to Cendant franchisees and the sale of one non-AmeriHost Inn hotel. OPERATING RISKS The Company's revenues and investments are nearly all in a single industry, the lodging industry. As a result, the Company's operations and results have been, and will be, adversely affected by one or more of the risks inherent in the lodging industry. These risks, include, but are not limited to: competition and seasonality (as described under "Seasonality" below); cyclical overbuilding; the results and operations of franchisors utilized by the Company's hotels, primarily Cendant; changing levels of demand for hotel rooms and related services, as currently evidenced since the downturn in economic conditions and the September 11, 2001 terrorist attacks; unexpected or ongoing increases in hotel expenses, such as insurance, energy and the costs of wages and benefits; demographic and other market changes which impact customer preferences; changes in governmental regulations that impact the hotel's cost of doing business; the inability to fully reduce hotel expenditures to cover hotel revenue shortfalls; the recurring and extraordinary costs of necessary renovations and refurbishment of hotels; and the impact of geopolitical events. If the present economic and lodging industry slowdown or concerns over geopolitical events worsens significantly, or continues for a protracted period of time, declines in the occupancy levels or average daily rates of the Company's hotels could have a material adverse effect on the Company's operating results. Page 17 CRITICAL ACCOUNTING POLICIES The Company's critical accounting policies are described in its 2002 Form 10-K. RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2002 Revenues increased 6.8% to $19.2 million during the three months ended March 31, 2003, from $17.9 million during the three months ended March 31, 2002. An increase in the revenues from the sale of consolidated AmeriHost Inn hotels was partially offset by a decrease in revenues from hotel operations, hotel development, hotel management, and employee leasing activities. Hotel operations revenue decreased 10.5% to $10.2 million during the three months ended March 31, 2003, from $11.4 million during the three months ended March 31, 2002. Revenues from consolidated AmeriHost Inn hotels decreased 9.0% to $8.3 million during the three months ended March 31, 2003, from $9.2 million during the three months ended March 31, 2002. These decreases were attributable primarily to the sale of five consolidated AmeriHost Inn hotels to franchisees during the twelve months ended March 31, 2003, partially offset by the opening of two newly constructed AmeriHost Inn hotels, and the acquisition of one AmeriHost Inn hotel from an existing joint venture during this same period. Same room revenues for the consolidated AmeriHost Inn hotels decreased 2.1%. Revenue from consolidated other brand hotels decreased 16.2% during the three-month period, due primarily to the 1.6% decrease in same room revenue and the elimination of food and beverage operations at two hotels. The hotel operations segment included the operations of 61 consolidated hotels (including 53 AmeriHost Inn hotels) comprising 4,443 rooms at March 31, 2003, compared to 63 consolidated hotels (including 55 AmeriHost Inn hotels) comprising 4,595 rooms at March 31, 2002. The Company typically builds new hotels in growing markets where it anticipates a certain level of additional hotel development. 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. The Company believes that as the number of AmeriHost Inn hotels increases, the greater the benefits will be at all locations from marketplace recognition and repeat business. As the revenue from AmeriHost Inn hotels not operated by the Company increases, the Company's royalty sharing stream from Cendant is also enhanced. The Company does not anticipate a significant improvement in the operations of several of its non-core hotels, and intends to sell these assets when the terms are considered appropriate. See "Liquidity and Capital Resources" below regarding the Company's evaluation of a strategic plan to sell hotel assets. Hotel development revenue decreased to $1.5 million during the three months ended March 31, 2003, from $1.8 million during the three months ended March 31, 2002. Hotel development revenues are directly related to the number of hotels being developed and constructed for minority-owned entities or unrelated third parties. The Company was constructing one hotel for a minority-owned entity during the first quarter of 2003, compared to one hotel for a minority-owned entity and another hotel for a third party during the three months ended March 31, 2002. However, the Company had several additional projects in various stages of pre-construction development during both three-month periods. The Company recorded $6.4 million in hotel sales and commission revenue in connection with the sale of AmeriHost Inn hotels during the first quarter of 2003, compared to $3.4 million during the first quarter of 2002. The Company closed on the sale of two wholly-owned AmeriHost Inn hotels during the first quarter of 2003, compared to the sale of one wholly-owned AmeriHost Inn hotel and the sale of one leased AmeriHost Inn hotel by the REIT during the first quarter 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 decreased 52.5% to $111,154 during the three months ended March 31, 2003, from $233,937 during the three months ended March 31, 2002. The number of hotels managed for third parties and minority-owned entities decreased from 13 hotels, representing 963 rooms, at March 31, 2002, to seven hotels, representing 554 rooms, at March 31, 2003. The decrease included the elimination of management fees from a minority-owned hotel upon its acquisition and consolidation during the second quarter of 2002, and the sale of three unconsolidated joint ventures during the twelve months ended March 31, 2003. Page 18 Employee leasing revenue decreased 39.3% to $517,407 during the three months ended March 31, 2003, from $852,361 during the three months ended March 31, 2002, due primarily to the reduction in hotels managed for minority-owned entities and unrelated third parties as described above. Development incentive and royalty sharing revenue increased to approximately $206,000 during the three months ended March 31, 2003, compared to approximately $110,000 during the three months ended March 31, 2002, as a result of the Company's sale of additional AmeriHost Inn hotels and the increase in the number of non-Company owned AmeriHost Inn hotels franchised with Cendant. The Company received $698,000 during the three months ended March 31, 2003, and $237,000 during the three months ended March 31, 2002, in development incentive fees from the sale of AmeriHost Inn hotels, with approximately $141,000 and $77,000 recognized during the three months ended March 31, 2003 and 2002, respectively, from the amortization of this deferred income. In addition, the Company recorded approximately $65,000 and $33,000 in royalty sharing fees during the three months ended March 31, 2003 and 2002, respectively. Office building rental and other revenue, consisting primarily of leasing activities from the Company's office building in 2003 and 2002, increased to approximately $177,000 during the three months ended March 31, 2003, from approximately $162,000 during the three months ended March 31, 2002. On October 1, 2001, the Company purchased the office building in which its headquarters is located. The 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 increased 13.0% to $17.2 million during the three months ended March 31, 2003, from $15.2 million during the three months ended March 31, 2002, or 89.6% and 84.7% of total revenues during the three months ended March 31, 2003 and 2002, respectively. Operating costs and expenses in the hotel operations segment decreased 4.4% to $9.7 million from $10.2 million during the three months ended March 31, 2003 and 2002, respectively. A decrease in operating costs associated with the fewer number of AmeriHost Inn hotels included in this segment (53 hotels at March 31, 2003 versus 55 hotels at March 31, 2002), was partially offset by increases in operating costs. Total hotel operating costs and expenses as a percentage of segment revenue increased to 95.2% during the three months ended March 31, 2003, from 89.1% during the three months ended March 31, 2002. Operating costs and expenses as a percentage of revenues from the consolidated AmeriHost Inn hotels increased to 88.3% during the three months ended March 31, 2003, from 79.5% during the three months ended March 31, 2002. Operating costs and expenses as a percentage of revenues from the other consolidated hotels decreased to 125.4% during the three months ended March 31, 2003, from 128.0% during the three months ended March 31, 2002. The increases in cost as a percentage of revenue were due primarily to significant increases in several hotel operating costs including energy and insurance. Operating costs and expenses for the hotel development segment decreased 19.7% to $1.6 million during the three months ended March 31, 2003 from $2.0 million during the three months ended March 31, 2002, consistent with the decrease in hotel development revenues for the three months ended March 31, 2003. Operating costs and expenses in the hotel development segment as a percentage of segment revenue decreased during the three months ended March 31, 2003, due to the decrease in hotel construction activity and the preconstruction development activity from one hotel project during the first quarter of 2003. Hotel management segment operating costs and expenses decreased 42.6% to $88,633 during the three months ended March 31, 2003, from $154,530 during the three months ended March 31, 2002. This decrease was due to the decrease in the number of hotels managed for unconsolidated minority-owned hotels and unaffiliated third parties. Employee leasing operating costs and expenses decreased 38.3% to $506,122 during the three months ended March 31, 2003, from $820,637 during the three months ended March 31, 2002, which is consistent with the 39.3% decrease in segment revenue for the three months ended March 31, 2003. Office building rental and other operating costs and expenses consisted primarily of expenses related to the management of the Company's office building in 2003 and 2002. Certain of the office building costs have been allocated to the Company's other operating segments. Office building rental and other operating expenses were $1,552 during the three months ended March 31, 2003, and $16,823 during the three months ended March 31, 2002. Page 19 On October 1, 2001, the Company purchased the office building in which its headquarters is located and assumed the landlord duties for the other tenants. Depreciation and amortization expense increased 2.2% to $1.4 million during the three months ended March 31, 2003, from $ 1.3 million during the three months ended March 31, 2002. The increase attributable to the acquisition of the office building, the opening of newly constructed hotels, and the acquisition or consolidation of existing hotels was partially offset by the sale of hotels during the last twelve months. Leasehold rents - hotels decreased 9.9% to approximately $1.3 million during the three months ended March 31, 2003, from $1.5 million during the three months ended March 31, 2002. This decrease was due primarily to the sale of one leased AmeriHost Inn hotel during the first three months of 2002, and the exercise of lease purchase options on two hotels during 2002. Corporate general and administrative expense increased 17.6% to $455,331 during the three months ended March 31, 2003, from $387,159 during the three months ended March 31, 2002, which can be attributed primarily to an increase in professional fees. The Company had an operating loss of ($1.3) million during the three months ended March 31, 2003, compared to an operating loss of ($450,165) during the three months ended March 31, 2002. The following discussion of operating income (loss) by segment is exclusive of any corporate general and administrative expense. Operating loss from consolidated AmeriHost Inn hotels increased to ($1.2) million during the three months ended March 31, 2003, from ($581,129) during the three months ended March 31, 2002. This increase in operating loss was due to the decrease in revenues and higher operating costs and expenses during the first quarter of 2003 compared to the first quarter of 2002 and impairment provisions of $100,000 during the first quarter of 2003. Operating loss from the hotel development segment decreased to ($125,864) during the three months ended March 31, 2003, from an operating loss of ($195,465) during the three months ended March 31, 2002. The decrease in hotel development operating loss was due to the increase in pre-construction hotels development fees from hotels developed and constructed for unconsolidated minority-owned entities during the first quarter of 2003. Operating income from hotel sales and commissions remained relatively flat at approximately $1.2 million during the first quarter of 2003 and $1.3 million during the first quarter of 2002. The differences in sale prices and net book values of the two AmeriHost Inn hotels during the first quarter of 2003, were comparable to the one wholly-owned AmeriHost Inn hotel sold during the first quarter of 2002, and the commission earned from the sale of a leased hotel. The hotel management segment operating income decreased $55,102 to $10,795 during the three months ended March 31, 2003, from $65,897 during the three months ended March 31, 2002. This decrease was due primarily to the reduction of hotels managed for unconsolidated minority owned entities. Employee leasing operating income decreased to $10,716 during the three months ended March 31, 2003, from $31,109 during the three months ended March 31, 2002, due to the reduction in employee leasing revenues. Operating income from incentive and royalty sharing increased to $205,655 during the first quarter of 2003, from $109,564 during the first quarter of 2002, attributable to the sale of additional AmeriHost Inn hotels and the increase in the number of AmeriHost Inn hotels which pay royalty fees to Cendant. Office building rental operating income increased to $135,120 during the three months ended March 31, 2003, from $108,281 during the three months ended March 31, 2003, and was attributable primarily to additional tenants and operational efficiencies. Interest expense decreased slightly to approximately $1.3 million during the three months ended March 31, 2003, from $1.4 million during the three months ended March 31, 2002. The decrease attributable to sale of AmeriHost Inn hotels, whereby the Company does not incur any interest expense on sold hotels after the sale dates, and the decrease from lower interest on floating rate debt, was offset by the mortgage financing of newly constructed or acquired consolidated hotels. The Company capitalizes interest expense incurred during the pre-opening construction period of a consolidated hotel project, as part of the total development cost. The amount capitalized includes both interest charges from a direct construction loan, and interest computed on the Company's equity investment. The Company's share of equity in income (loss) of affiliates was ($74,446) during the three months ended March 31, 2003, compared to $86,968 during the three months ended March 31, 2002. The fluctuation in equity of affiliates during the three months ended March 31, 2003, compared to the three months ended March 31, 2002, was primarily due to the recognition of the Company's increased share of net operating losses from certain joint ventures during Page 20 the 2003 period in excess of the Company's stated ownership percentage versus its share recognized in these joint ventures in the 2002 period. Distributions from affiliates were $4,739 during the three months ended March 31, 2003, compared to $6,085 during the three months ended March 31, 2002. The Company recorded gains from the sale of assets of $327,076 during the three months ended March 31, 2002, which was comprised primarily of the unamortized deferred gain remaining from the original sale of the hotel to the REIT, which was recognized upon the consummation of the sale of this hotel by the REIT to an unrelated third party and the simultaneous termination of the Company's leases with the REIT. The Company expects to continue recognizing the unamortized deferred gain from the future sale of REIT owned hotels. The Company recorded income tax benefit of $988,000 during the first quarter of 2003, compared to $505,000 during the first quarter of 2002, which are directly related to the pre-tax losses incurred during the first quarters of 2003 and 2002, respectively. The Company reported a net loss of ($1.5) million during the first quarter of 2003, compared to a net loss of ($757,751) during the first quarter of 2002, primarily due to the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES The Company has seven main sources of cash from operating activities: (i) revenues from hotel operations; (ii) fees from development, construction and renovation projects, (iii) revenues from the sale of hotel assets; (iv) fees from management contracts, (v) fees from employee leasing services, (vi) hotel development incentive fees and royalty sharing pursuant to the Cendant transaction, and (vii) rental income from the ownership of an office building. Approximately 10% of the Company's hotel operations revenues is not received at checkout and is generated through other businesses and contracts (such as direct billings to local companies using the hotel and third party hotel room brokers), which is usually paid within 30 to 45 days from billing. Fees from development, construction and renovation projects are typically received within 15 to 45 days from billing. Due to the procedures in place for processing its construction draws, the Company typically does not pay its contractors until the Company receives its draw from the equity or lending source. The Company 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. Management fee revenues typically are received by the Company within five working days of 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 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. Office space rents are typically received monthly in advance, around the first of each month. During the first three months of 2003, the Company received cash from operations of $4.4 million, compared to cash received from operations of $2.5 million during the first three months of 2002, or an increase in cash provided by operations of $1.9 million. The increase in cash flow from operations during the first three months of 2003, when compared to 2002, can be primarily attributed to the sale of two wholly-owned hotels in 2003, versus the sale of one wholly-owned hotel and one leased hotel in 2002, and the increase in hotel development for a minority-owned hotel during 2003. 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. The Board of Directors has authorized the Company to buy back, at any time and without notice, up to 1,000,000 shares of its own common stock under certain conditions. Under this authorization, to date the Company has repurchased 26,240 shares. 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 Page 21 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 at predetermined prices. 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, using approximately $680,000 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 of the REIT's third choice by June 5, 2003. The Company believes a sale of this hotel is not likely in the near future, and thus it intends to purchase this hotel by this date using cash of approximately $556,000 and mortgage financing already committed by an affiliate of the REIT of approximately $1.7 million. The Company is currently negotiating an extension of this purchase commitment. There can be no assurance that such an extension will be obtained. On September 18, 2000, in connection with the approval of all joint venture partners regarding the sale of the AmeriHost Inn brand and franchising rights to Cendant, the Company finalized the terms of an agreement to issue 125,000 new stock options to the partners in three existing joint ventures, canceling 60,000 existing stock options held by these partners, and to purchase their remaining ownership interests in these three joint ventures at specified prices. One of the partners in these three joint ventures is a director of the Company. One of these acquisitions was completed in 2001, and one was completed during the second quarter of 2002 using approximately $797,000. The final acquisition for approximately $830,000 is scheduled to be completed before August 31, 2003. During the first three months of 2003, the Company used $2.0 million in investing activities compared to using $3.2 million during the first three months of 2002. During the first three months of 2003, the Company used $1.8 million to purchase property and equipment for consolidated AmeriHost Inn hotels and used $39,761 for investments in and advances to affiliates, net of distributions and collections on advances from affiliates. During the first three months of 2002, the Company used $2.4 million to purchase property and equipment for consolidated AmeriHost Inn hotels and used $813,984 for investments in and advances to affiliates, net of distributions and collections on advances from affiliates. Cash used in financing activities was $2.0 million during the first three months of 2003, compared to cash used in financing activities of $1.1 million during the first three months of 2002. In 2003, the contributing factors were principal repayments of $4.7 million, including the repayment of mortgages in connection with the sale of a hotel, offset by $3.1 million in proceeds from the mortgage financing of consolidated hotels and $404,287 in net repayments on the line of credit. In 2002, the primary factors were principal repayments of $2.4 million, including the repayment of mortgages in connection with the sale of hotels, offset by $1.7 million in proceeds from the mortgage financing of consolidated hotels and $337,415 in net repayments on the line of credit. The Company has secured a $20 million construction line of credit facility, which provides for both construction financing as well as long-term mortgage financing. The Company utilizes this facility primarily for the construction of wholly-owned AmeriHost Inn properties, as approved by the lender on a project-by-project basis. As of March 31, 2003, approximately $9.1 million has been utilized for four hotel projects, which is, or will be, converted to long-term financing. The Company has until May 31, 2003, to utilize this facility for new projects and is currently negotiating the renewal this facility. Any new hotel projects with financing committed under this facility prior to its expiration will automatically convert to the long-term financing when construction is completed. The Company, through wholly-owned subsidiaries, is a general partner or managing member in 15 joint ventures as of March 31, 2003. As such, the Company is secondarily liable for the obligations and liabilities of these joint ventures. As of March 31, 2003, these joint ventures had $25.7 million outstanding under mortgage loan agreements. Approximately $4.3 million of this amount has been included in the Company's consolidated financial statements as of March 31, 2003, since it is from joint ventures in which the Company has a majority or controlling ownership interest, leaving approximately $21.4 million in off-balance sheet mortgage debt with unconsolidated joint ventures. If the Company subsequently obtains a majority or controlling ownership interest in a joint venture, Page 22 the joint venture's debt will be included in the Company's consolidated financial statements. Of this $21.4 million of financing, the Company also has provided approximately $11.7 million in guarantees to the lenders. Other partners have also guaranteed portions of the financings. One unconsolidated joint venture mortgage loan in the amount of approximately $1.7 million at March 31, 2003, which is one of the loans guaranteed by the Company, matures in 2003. The Company expects the joint venture may sell this hotel, extend the loan, or refinance the loan 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 advances bear interest at rates ranging from prime to 10% per annum and are due upon demand. The advances were $2.8 million at March 31, 2003, 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 March 31, 2003. At March 31, 2003, the Company had $6.0 million outstanding under its operating line-of-credit, which matured April 30, 2003. Prior to its maturity, the Company renewed the line-of-credit with the lender through April 30, 2004. The renewed line-of-credit is collateralized by substantially all the assets of the Company, subject to first mortgages from other lenders on hotel assets, and has a maximum available of $6.5 million, reducing to $6.0 million on September 29, 2003, and to $5.5 million on February 27, 2004. The renewed line-of-credit provides for interest at the rate of prime, plus 2.5%, with a floor of 6.75%. The credit line also provides for the maintenance of certain financial covenants, including minimum tangible net worth, a maximum leverage ratio, a minimum debt service coverage ratio, and a minimum net income covenant for 2003. The Company intends to pursue longer term financing options with other lenders that would better match the Company's business plan of developing, building and selling AmeriHost Inn hotels. However, there can be no assurance that the Company will obtain an alternative credit facility of longer duration under terms and conditions that the Company deems satisfactory. Consistent with the 8-K filing dated March 18, 2003, the Company is exploring a strategy of selling its non-AmeriHost Inn brand hotels along with 25-35 AmeriHost Inn hotels over the next two years. The Company has selected a national hotel broker and is negotiating a written agreement for the broker to represent the Company in the implementation of this strategy. Management has begun to perform extensive financial and market analysis with the assistance of the national broker, and, in certain cases, an outside consultant to identify the AmeriHost Inn hotels to be marketed for sale. In addition, in determining which hotels are to be marketed for sale, management will be evaluating the impact on the Company's cash flow, operations and financial position post sale, including any impact under Statement of Financial Accounting Standard No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The results of this hotel analysis and of an evaluation of the long-term effect on the Company may have a significant affect on the quantity and timing of the hotels to be sold. If implemented, the Company expects this strategy will reduce debt and generate cash to pursue development and other strategic objectives as well as increase the economic benefits of the Company's transaction with Cendant. However, there can be no assurances that any sales will be consummated or, if consummated, when and on what terms. The Company expects to determine the feasibility and means to best implement its strategy and identify which hotels to initially market for sale in the next sixty days. Page 23 The following table summarizes the contractual obligations of the Company, including off-balance sheet mortgage loan guarantees provided for certain joint ventures: Payments due by period ---------------------- Less than 1 - 3 3 - 5 More than Total 1 year years years 5 years ------------- ------------- ------------- ------------- ------------- Long-term debt - consolidated $ 74,596,637 $ 5,243,995 $ 12,975,226 $ 16,655,962 $ 39,721,454 Long-term debt - unconsolidated joint ventures 21,402,596 2,508,582 2,496,301 2,148,847 14,248,866 Line of credit 5,980,000 5,980,000 - - - Operating leases - consolidated 66,610,363 5,935,592 11,938,435 12,394,517 36,341,819 Operating leases - unconsolidated - - - - - Purchase obligations: Joint venture buyout 829,800 829,800 - - - Lease buyout 2,225,000 2,225,000 - - - Construction contracts 2,172,921 2,172,921 - - - Other long-term liabilities - - - - - ------------- ------------- ------------- ------------- ------------- Total $ 173,817,317 $ 24,895,890 $ 27,409,962 $ 31,199,326 $ 90,312,139 ============= ============= ============= ============= =============
The Company expects cash from operations, including proceeds from the sale of hotels, to be sufficient to pay all operating and interest expenses in 2003, as well as commitments to purchase hotel assets; provided that current financing facilities remain in place. FINANCING RISKS The availability of financing on reasonable terms is critical to the ability of the Company to develop hotels, maintain its operations and sell hotels. The Company's results and prospects may be materially affected by the availability and conditions of development and mortgage financing and lines-of-credit for the Company and for potential purchasers and franchisees of the Company's hotels. The requirements of lenders may be influenced by economic and geopolitical conditions, as well as the Company's business. Changes in the availability or terms of financing could have a material adverse effect on the company. SEASONALITY AND OTHER RISKS 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 primarily midwest 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. Quarterly earnings also may be adversely affected by events beyond the Company's control, such as extreme weather conditions, economic factors, securities and geopolitical concerns and other general factors affecting travel. In addition, hotel construction is seasonal, depending upon the geographic location of the construction projects. Construction activity in the Midwest may be slower in the first and fourth calendar quarters due to weather conditions. Also, since the Company's management fees are based upon a percentage of the hotel's total gross revenues, the Company is further susceptible to seasonal variations. 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. 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 Page 24 differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital to finance the Company's business plan on terms satisfactory to the Company; competitive factors, such as the introduction of new hotels or renovation of existing hotels in the same markets; changes in travel patterns which could affect demand for the Company's hotels; changes in development and operating costs, including labor, construction, land, equipment, and capital costs; general business and economic conditions; and other risk factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. Page 25 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 March 31, 2003. As the table incorporates only those exposures that existed as of March 31, 2003, 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 $ 5,980,000 5.5% Mortgage debt - fixed rate $ 27,066,206 7.45% Mortgage debt - variable rate $ 47,530,431 5.94%
ITEM 4. CONTROLS AND PROCEDURES - ------ Our chief executive officer and our chief financial officer have concluded, based on their evaluation within 90 days before the filing date of this quarterly report, that the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c)) 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 our internal controls or in other factors that could significantly affect our disclosure controls and procedures subsequent to the date of the previously mentioned evaluation. Page 26 PART II: Other Information Item 6. Exhibits and Reports on Form 8-K: - ------ (a) The following exhibits are included in this Report on Form 10-Q filed May 15, 2003: Exhibit No. Description ----------- ----------- 10.14 Amended and Restated Loan and Security Agreement with LaSalle Bank, NA 99.1 Certification of CEO and CFO (b) Reports on Form 8-K. The following reports on Form 8-K were filed during this period covered by this report: Date filed Description ---------- ----------- March 18, 2003 Presentation given at the Roth Capital Partners Growth Stock Conference SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ARLINGTON HOSPITALITY, INC. By: /s/ Jerry H. Herman ----------------------------- Jerry H. Herman Chief Executive Officer By: /s/ James B. Dale ----------------------------- James B. Dale Chief Financial Officer Chief Accounting Officer Date: May 15, 2003 Page 27 CERTIFICATIONS -------------- I, Jerry H. Herman, 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: May 15, 2003 /s/ Jerry H, Herman ------------------------ Jerry H. Herman Chief Executive Officer Page 28 CERTIFICATIONS -------------- 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: May 15, 2003 /s/ James B. Dale --------------------------- James B. Dale Chief Financial Officer Chief Accounting Officer Page 29 EX-10.14 3 a32381_xq103.txt AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT --------------------------- This AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT dated as of the 30th day of April, 2003 (the "Agreement"), is executed by and between ARLINGTON HOSPITALITY, INC., a Delaware corporation (the "Borrower"), whose address is 2355 S. Arlington Heights Road, Arlington Heights, Illinois 60005, and LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"), whose address is 135 South La Salle Street, Chicago, Illinois 60603. RECITALS -------- WHEREAS, Bank and Borrower are parties to that certain Loan and Security Agreement dated as of February 1, 2002 (the "Original Agreement"), which Original Agreement was amended by that certain First Amendment to Loan and Security Agreement dated as of August 9, 2002 (the "First Amendment") and by that certain Second Amendment to Loan and Security Agreement dated as of December 10, 2002 (the "Second Amendment") (the Original Agreement, as amended by the First Amendment and the Second Amendment, referred to herein as the "Loan Agreement"); WHEREAS, Borrower and Bank do desire to further amend and restate the Loan Agreement for the purposes of extending the maturity of the Revolving Loan and modifying certain other provisions of the Loan Agreement; and WHEREAS, Borrower has requested that Bank waive Borrower's non-compliance with certain covenant requirements more specifically described below; and WHEREAS, Bank is agreeable to such waiver, subject to adoption of the amendments to the Loan Agreement and other terms and conditions set forth herein. NOW, THEREFORE, in consideration of the renewal by the Bank of the line of credit and the mutual covenants and promises contained in this Agreement, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Borrower and Bank agree as follows: 1. DEFINITIONS. ------------ 1.1 Defined Terms. For the purposes of this Agreement, the following capitalized words and phrases shall have the meanings set forth below. "Bankruptcy Code" shall mean the United States Bankruptcy Code, as now existing or hereafter amended. "Business Day" shall mean any day other than a Saturday, Sunday or a legal holiday on which banks are authorized or required to be closed for the conduct of commercial banking business in Chicago, Illinois. "Capital Expenditures" shall mean expenditures (including Capital Lease obligations which should be capitalized under GAAP) for the acquisition of fixed assets which are required to be capitalized under GAAP. "Capital Lease" shall mean, as to any Person, a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by such Person as lessee that is, or should be, in accordance with Financial Accounting Standards Board Statement No. 13, as amended from time to time, or, if such Statement is not then in effect, such statement of GAAP as may be applicable, recorded as a "capital lease" on the balance sheet of the Borrower prepared in accordance with GAAP. "Cendant" shall mean Cendant Finance Holding Corporation, a Delaware corporation. "Cendant Agreement" shall mean that certain Royalty Sharing Agreement dated as of September 30, 2000 among Borrower, Cendant and AmeriHost Franchise Systems, Inc. ("Franchisor"). "Closing Date" shall mean April 30, 2003 or such later date which Borrower and the Bank shall agree. "Collateral" shall have the meaning set forth in Section 6. 1. "Contingent Liability" and "Contingent Liabilities" shall mean, respectively, each obligation and liability of the Borrower or any of its Subsidiaries and all such obligations and liabilities of the Borrower or any of its Subsidiaries incurred pursuant to any agreement, undertaking or arrangement by which the Borrower or any of its Subsidiaries: (a) guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, dividend, obligation or other liability of any other Person in any manner (other than by endorsement of instruments in the course of collection), including without limitation, any indebtedness, dividend or other obligation which may be issued or incurred at some future time; (b) guarantees the payment of dividends or other distributions upon the shares or ownership interest of any other Person; (c) undertakes or agrees (whether contingently or otherwise): (i) to purchase, repurchase, or otherwise acquire any indebtedness, obligation or liability of any other Person or any or any property or assets constituting security therefor, (ii) to advance or provide funds for the payment or discharge of any indebtedness, obligation or liability of any other Person (whether in the form of loans, advances, stock purchases, capital contributions or otherwise), or to maintain solvency, assets, level of income, working capital or other financial condition of any other Person, or (iii) to make payment to any other Person other than for value received; (d) agrees to lease property or to purchase securities, property or services from such other Person with the purpose or intent of assuring the owner of such indebtedness or obligation of the ability of such other Person to make payment of the indebtedness or obligation; (e) to induce the issuance of, or in connection with the issuance of, any letter of credit for the benefit of such other Person; or (f) undertakes or agrees otherwise to assure a creditor against loss. The amount of any Contingent Liability shall (subject to any limitation set forth herein) be deemed to be the outstanding principal amount (or maximum 2 permitted principal amount, if larger) of the indebtedness, obligation or other liability guaranteed or supported thereby. "Debt Service Charges" shall mean, for any period, the sum of: (a) all interest, charges and related expenses payable with respect to that fiscal period to a lender in connection with borrowed money or the deferred purchase price of assets that are treated as interest in accordance with GAAP, plus (b) the aggregate amount of principal payable on Indebtedness with respect to that fiscal period, plus (c) the portion of rent payable with respect to that fiscal period under Capital Leases that should be treated as interest in accordance with GAAP, plus (d) all charges paid or payable (without duplication) during that period with respect to any Interest Rate Agreements. "Default Rate" shall mean a per annum rate of interest equal to the Prime Rate plus five percent (5%) per annum. "Depreciation" shall mean the total amounts added to depreciation, amortization, obsolescence, valuation and other proper reserves, as reflected on the consolidated financial statement of Borrower and its Subsidiaries and determined in accordance with GAAP. "EBITDA" shall mean, for any period, the sum of the following: (a) Net Income (excluding extraordinary and unusual items and income or loss attributable to equity in any affiliated corporation or Subsidiary but including net deferred incentive fees due from Cendant pursuant to the Cendant Agreement) for such period, plus (b) Interest Charges, plus (c) income taxes payable or accrued, plus (d) Depreciation for such period, plus (e) all other non-cash charges, minus (f) that portion of net income arising out of the sale of assets outside of the ordinary course of business (to the extent not previously excluded under clause (a) of this definition), in each case to the extent included in determining Net Income for such period. "Employee Plan" includes any pension, stock bonus, employee stock ownership plan, retirement, disability, medical, dental or other health plan, life insurance or other death benefit plan, profit sharing, deferred compensation, stock option, bonus or other incentive plan, vacation benefit plan, severance plan or other employee benefit plan or arrangement, including, without limitation, those pension, profit-sharing and retirement plans of the Borrower and/or any of its Subsidiaries described from time to time in the financial statements of the Borrower and any pension plan, welfare plan, defined benefit pension plans (as defined in ERISA) or any multi-employer plan, maintained or administered by the Borrower and/or any of its Subsidiaries or to which the Borrower is a party or may have any liability or by which the Borrower and/or any of its Subsidiaries is bound. "Environmental Laws" shall mean all federal, state, district, local and foreign laws, rules, regulations, ordinances, and consent decrees relating to health, safety, hazardous substances. pollution and environmental matters, as now or at any time hereafter in effect, applicable to the business or facilities owned or operated by the Borrower or any of its subsidiaries, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes in the environment (including, without limitation, ambient air, surface water, land surface or subsurface strata) or 3 otherwise relating to the generation, manufacture, processing, distribution, use, treatment. storage, disposal, transport or handling of Hazardous Materials. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Event of Default" shall mean any of the events or conditions set forth in Section 11 hereof. "GAAP" shall mean generally accepted accounting principles, using the accrual basis of accounting and consistently applied with prior periods, provided, however, that GAAP with respect to any interim financial statements or reports shall be deemed subject to fiscal yearend adjustments and footnotes made in accordance with GAAP. "Hazardous Materials" shall mean any hazardous, toxic or dangerous substance, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials or wastes that are or become regulated under any Environmental Law (including without limitation, any that are or become classified as hazardous or toxic under any Environmental Law). "Indebtedness" shall mean at any time (a) all Liabilities of the Borrower or any of its Subsidiaries, (b) all Capital Lease obligations of the Borrower or any of its Subsidiaries, (c) all other debt, secured or unsecured, created, issued, incurred or assumed by the Borrower or any of its Subsidiaries for money borrowed or for the deferred purchase price of any fixed or capital asset, (d) indebtedness secured by any Lien existing on property owned by the Borrower or any of its Subsidiaries whether or not the Indebtedness secured thereby has been assumed, and (e) all Contingent Liabilities of the Borrower or any of its Subsidiaries whether or not reflected on its balance sheet. "Indemnified Party" and "Indemnified Parties" shall mean, respectively, each of the Bank and any parent corporations, affiliated corporations or subsidiaries of the Bank, and each of their respective officers, directors, employees, attorneys and agents, and all of such parties and entities. "Letter of Credit" and "Letters of Credit" shall mean, respectively, a letter of credit and all such letters of credit issued by the Bank, in its sole discretion, upon the execution and delivery by the Borrower and the acceptance by the Bank of a Master Letter of Credit Agreement and an application for Letter of Credit, as set forth in SECTION 2.5 of this Agreement. "Letter of Credit Obligations" shall mean, at any time, an amount equal to the aggregate of the original face amounts of all Letters of Credit minus the sum of (i) the amount of any reductions in the original face amount of any Letter of Credit which did not result from a draw thereunder, (ii) the amount of any payments made by the Bank with respect to any draws made under a Letter of Credit for which the Borrower has reimbursed the Bank, (iii) the 4 amount of any payments made by the Bank with respect to any draws made under a Letter of Credit which have been converted to a Revolving Loan as set forth in SECTION 2.5, and (iv) the portion of any issued but expired Letter of Credit which has not been drawn by the beneficiary thereunder. For purposes of determining the outstanding Letter of Credit Obligations at any time, the Bank's acceptance of a draft drawn on the Bank pursuant to a Letter of Credit shall constitute a draw on the applicable Letter of Credit at the time of such acceptance. "Liabilities" shall mean at all times all liabilities of the Borrower or any of its Subsidiaries that would be shown as such on a consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with GAAP. "Lien" shall mean any mortgage, pledge, hypothecation, judgment lien or similar legal process. title retention lien, or other lien or security interest, including, without limitation, the interest of a vendor under any conditional sale or other title retention agreement and the interest of a lessor under a lease of any interest in any kind of property or asset, whether real, personal or mixed, or tangible or intangible, by such Person as lessee that is, or should be, a Capital Lease on the consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with GAAP. "Loans" shall mean, collectively, all Revolving Loans made by the Bank to the Borrower and all Letter of Credit Obligations under and pursuant to this Agreement. "Loan Documents" shall mean the agreements and documents delivered to the Bank as set forth in Sections 3.1 and 3.2. "Loan-to-Value Ratio" shall mean (i) in respect of any individual Mortgaged Premises, the ratio of (a) Indebtedness of the Borrower or any Subsidiary secured by Lien on such Mortgaged Premises to (b) the value of the Mortgaged Premises disclosed by the appraisal of such Mortgaged Premises most recently accepted by the Bank, and (ii) in respect of all of the Mortgaged Premises and Other Property of the Borrower and all Wholly-Owned Subsidiaries, the ratio of (a) the aggregate consolidated Indebtedness of the Borrower and all Wholly-Owned Subsidiaries secured by a Lien on any Mortgaged Premises or Other Property to (b) the aggregate value of the Mortgaged Premises and Other Property as determined by the Bank, in its sole discretion. "Maturity Date" shall be April 30, 2004, unless extended by the Bank pursuant to any modification, extension or renewal note executed by the Borrower and accepted by the Bank in its sole and absolute discretion in substitution for the Substitute Revolving Note. "Maximum Letter of Credit Obligation" shall mean the Revolving Loan Commitment less the aggregate amount of all Revolving Loans outstanding at any time. "Mortgage" shall mean those second or junior mortgages or deeds of trust made by Borrower or any of its Subsidiaries in favor of the Bank. "Mortgaged Premises" shall mean the real estate and improvements described in Exhibit B attached hereto and the leasehold interests and improvements owned by the Ohio Partnership. 5 "Net Income" shall mean, with respect to any period, the amount shown opposite the caption "Net Income" or a similar caption on the consolidated financial statements of the Borrower, and its Subsidiaries prepared in accordance with GAAP. "Note" shall mean the Amended and Restated Revolving Note referred to in Section 4.1. "Obligation" shall mean the Loans, as evidenced by the Note, all interest accrued thereon, any fees due the Bank hereunder, any expenses incurred by the Bank hereunder and any and all other liabilities and obligations of the Borrower (and of any partnership in which the Borrower is or may be a partner) to the Bank, howsoever created, arising or evidenced, and howsoever owned, held or acquired, whether now or hereafter existing, whether now due or to become due, direct or indirect, absolute or contingent, and whether several, joint or joint and several, including, but not limited to, any Interest Rate Agreements. "Obligor" shall mean the Borrower, any Subsidiary which makes a Mortgage in favor of the Bank, any guarantor, accommodation endorser, third party pledgor, or any other party liable with respect to the Obligations. "Ohio Partnership" shall mean Athens Motel Associates Limited Partnership II, an Ohio limited partnership. "Other Properties" shall mean any and all real property heretofore presently or hereafter, owned by Borrower or any Subsidiary, excluding the Mortgaged Premises, and any interest of any kind in improvements thereon. "Person" shall mean any individual, partnership, limited liability company, corporation, trust, joint venture, joint stock company, association, unincorporated organization, government or agency or political subdivision thereof, or other entity. "Prime Rate" shall mean the floating per annum rate of interest which at any time, and from time to time, shall be most recently announced by the Bank as its Prime Rate, which is not intended to be the Bank's lowest or most favorable rate of interest at any one time. The effective date of any change in the Prime Rate shall for purposes hereof be the date the Prime Rate is changed by the Bank. The Bank shall not be obligated to give notice of any change in the Prime Rate. "Regulatory Change" shall mean the introduction of, or any change in any applicable law, treaty, rule, regulation or guideline or in the interpretation or administration thereof by any governmental authority or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or its lending office. "Revolving Interest Rate" shall mean the Prime Rate plus two and 50/100ths percent 2.5% per annum; provided, however, that the Revolving Interest Rate shall never be less than six and 75/100ths percent (6.75%) per annum. 6 "Revolving Loan" and "Revolving Loans" shall mean, respectively, each direct advance and the aggregate of all such direct advances, from time to time made by the Bank to the Borrower under and pursuant to this Agreement, as set forth in SECTION 2.1 of this Agreement. "Revolving Loan Availability" shall mean at any time, the Revolving Loan Commitment less the Letter of Credit Obligations. "Revolving Loan Commitment" shall mean (a) Six Million Five Hundred Thousand and 00/100 Dollars ($6,500,000.00) until September 29, 2003, (b) Six Million and 00/100 Dollars ($6,000.000.00) from September 30, 2003 to February 27, 2004 and (c) Five Million Five Hundred Thousand and 00/100 Dollars ($5,500,000.00) from and after February 28, 2004; in each case, as may be further reduced by (i) an amount equal to the net proceeds to Borrower or any Subsidiary from the sale of any Mortgaged Premises, after payment of the Senior Mortgage Indebtedness thereon and costs of sale of such Mortgaged Premises (except to the extent the Bank, in its sole discretion, agrees to accept a Mortgage on a Substitute Mortgaged Premises in lieu of a further reduction of its commitment hereunder) or (ii) such other reserves as the Bank determines in its sole discretion. "Revolving Note" shall have the meanings set forth in Section 4.1 hereof. "Senior Mortgage Indebtedness" shall mean the Indebtedness of Borrower or any Subsidiary existing on the date hereof which is disclosed on the financial statements referred to in Section 7 and secured by one of the Senior Mortgages. "Senior Mortgages" shall mean those (i) first priority mortgages on the Mortgaged Premises listed on Exhibit B attached hereto or (ii) any other Indebtedness of Borrower or any Subsidiary existing on the date hereof which is disclosed on the financial statements referred to in Section 7 and secured by a Lien on any Other Property. "Subordinated Debt" shall mean that portion of the Liabilities of the Borrower or any Subsidiary which is subordinated to the Obligations in a manner satisfactory to the Bank, including, but not limited to, right and time of payment of principal and interest. "Substitute Mortgaged Premises" shall mean such real estate and/or improvements, if any, and Mortgage in favor of the Bank thereon, as may be accepted by the Bank, in its sole discretion, in lieu of a further reduction of the Revolving Loan Commitment. "Subsidiary" and "Subsidiaries" shall mean, respectively, each and all such corporations, partnerships, limited partnerships, limited liability companies, limited liability partnerships or other entities of which or in which the Borrower owns directly or indirectly fifty percent (50.00%) or more of (i) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such entity if a corporation, (ii) the management authority and capital interest or profits interest of such entity, if a partnership, limited partnership, limited liability company, limited liability partnership, joint venture or similar entity, or (iii) the beneficial interest of such entity, if a trust, association or other unincorporated organization. 7 "Tangible Assets" shall mean the total of all assets appearing on a consolidated balance sheet of the Borrower and its Subsidiaries prepared in accordance with GAAP (with Inventory being valued at the lower of cost or market), after deducting all proper reserves (including reserves for Depreciation, obsolescence and amortization) less the sum of (i) goodwill, patents, trademarks, prepaid expenses, deposits held as security deposits on lease contracts, franchise fees and other similar assets, deferred charges and other personal property which is classified as intangible property in accordance with GAAP, and (ii) any amounts due from shareholders, affiliates, officers or employees of the Borrower or any Subsidiary. "Tangible Net Worth" shall mean at any time the total of Tangible Assets less Liabilities plus Subordinated Debt. "Total Liabilities to Worth Ratio" shall mean a ratio of (a) consolidated Liabilities minus deferred income to (b) consolidated Tangible Net Worth plus the sum of (i) deferred taxes, (ii) deferred income, including deferred loan costs and deferred lease costs, and (iii) deposits held as security deposits on lease contracts, franchise fees and other similar assets, in each case of Borrower and its Subsidiaries. "UCC" shall mean the Uniform Commercial Code in effect in Illinois from time to time. "Wholly-Owned Subsidiary" shall mean any Subsidiary of which or in which the Borrower owns directly or indirectly 100% of (i) the combined voting power of all classes of stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such Person, if it is a corporation, (ii) the capital interest or profits interest of such Persons, if it is a partnership, joint venture or similar entity, or (iii) the beneficial interest of such Persons, if it is a trust, association or other unincorporated organization. 1.2 Accounting Terms. Any accounting terms used in this Agreement which are not specifically defined herein shall have the meanings customarily given them in accordance with GAAP. Calculations and determinations of financial and accounting terms used and not otherwise specifically defined hereunder and the preparation of financial statements to be furnished to the Bank pursuant hereto shall be made and prepared, both as to classification of items and as to amount, in accordance with GAAP as used in the preparation of the financial statements of the Borrower on the date of this Agreement. If any changes in accounting principles or practices from those used in the preparation of the financial statements are hereafter occasioned by the promulgation of rules, regulations, pronouncements and opinions by or required by the Financial Accounting Standards Board or the American Institute of Certified Public Accountants (or any successor thereto or agencies with similar functions), which results in a material change in the method of accounting in the financial statements required to be furnished to the Bank hereunder or in the calculation of financial covenants, standards or terms contained in this Agreement, the parties hereto agree to enter into good faith negotiations to amend such provisions so as equitably to reflect such changes to the end that the criteria for evaluating the financial condition and performance of the Borrower will be the same after such changes as they were before such changes; and if the parties fail to agree on the amendment of such provisions, the Borrower will furnish financial statements in accordance with such changes but shall provide calculations for all financial covenants, perform all financial covenants and otherwise observe 8 all financial standards and terms in accordance with applicable accounting principles and practices in effect immediately prior to such changes. Calculations with respect to financial covenants required to be stated in accordance with applicable accounting principles and practices in effect immediately prior to such changes shall be reviewed and certified by the Borrower's accountants. 1.3 Other Terms Defined in UCC. All other capitalized words and phrases used herein and not otherwise specifically defined shall have the respective meanings assigned to such terms in the UCC, as amended from time to time, to the extent the same are used or defined therein. 1.4 Other Definitional Provisions; Construction. Whenever the context so requires, the neuter gender includes the masculine and feminine, the single number includes the plural, and vice versa, and in particular the word "Borrower" shall be so construed. The words "hereof', "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and references to Article, Section, Subsection, Annex, Schedule, Exhibit and like references are references to this Agreement unless otherwise specified. An Event of Default shall "continue" or be "continuing" until such Event of Default has been waived in accordance with SECTION 13.3 hereof. References in this Agreement to any party shall include such party's successors and permitted assigns. References to any "Section" shall be a reference to such Section of this Agreement unless otherwise stated. To the extent any of the provisions of the other Loan Documents are inconsistent with the terms of this Loan Agreement, the provisions of this Loan Agreement shall govern. 2. COMMITMENT OF THE BANK. ---------------------- 2.1 Revolving Loans. (a) Revolving Loan Commitment. Subject to the terms and conditions of this Agreement and the other Loan Documents, and in reliance upon the representations and warranties of the Borrower set forth herein and in the other Loan Documents, the Bank agrees to make such Revolving Loans at such times as the Borrower may from time to time request until, but not including, the Maturity Date, and in such amounts as the Borrower may from time to time request, provided, however, that the aggregate principal balance of all Revolving Loans outstanding at any time shall not exceed the Revolving Loan Availability. Borrower acknowledges that the amount of the Revolving Loan Commitment was determined by the Bank based on the Bank's analysis of the value of the Collateral as of Closing, including the aggregate net equity in respect of the Mortgaged Premises which, due to the nature of such Collateral, may be difficult to establish or highly variable. Accordingly, notwithstanding any other term or provision hereof to the contrary, Bank has the right from time to time to periodically determine and redetermine the value of the Collateral, to establish (based on advance 9 percentages and eligibility criteria established by the Bank and communicated to Borrower from time to time) borrowing base formulas in respect of Accounts and Equipment (as defined in the UCC) and to establish reserves, to require borrowing base certificates and to require such other actions on the part of Borrower as Bank in its discretion may deem necessary or appropriate. Revolving Loans made by the Bank may be repaid and, subject to the terms and conditions hereof, borrowed again up to, but not including the Maturity Date unless the Revolving Loans are otherwise terminated or extended as provided in this Agreement. The Revolving Loans shall be used by the Borrower for the purpose of supporting the working capital and letter of credit needs of the Borrower. (b) Revolving Loan Interest and Payments. Except as otherwise provided in this SECTION 2.1(B), the principal amount of the Revolving Loans outstanding from time to time shall bear interest at the Revolving Interest Rate. Accrued and unpaid interest on the unpaid principal balance of all Revolving Loans outstanding from time to time, shall be due and payable monthly, in arrears, commencing on May 1, 2003 and continuing on the first day of each calendar month thereafter, and on the Maturity Date. Any amount of principal or interest on the Revolving Loans which is not paid when due, whether at stated maturity, by acceleration or otherwise, shall bear interest payable on demand at the Default Rate. (c) Revolving Loan Principal Repayments. (i) Mandatory Principal Prepayments. All Revolving Loans hereunder shall be repaid by the Borrower on the Maturity Date, unless payable sooner pursuant to the provisions of this Agreement. In the event the aggregate outstanding principal balance of all Revolving Loans and Letter of Credit Obligations hereunder exceed the Revolving Loan Availability, the Borrower shall, without notice or demand of any kind, immediately make such repayments of the Revolving Loans or take such other actions as shall be necessary to eliminate such excess. In the event the Borrower or any Wholly-Owned Subsidiary shall sell, transfer or otherwise dispose of any of the Mortgaged Premises, the Bank may, in its sole discretion, require that Borrower make a mandatory repayment of the Revolving Loans in an amount equal to the proceeds of the sale of such Mortgaged Premises, after payment of the Senior Mortgage Indebtedness thereon and costs of sale of the Mortgaged Premises. (ii) Optional Prepayments. The Borrower may from time to time prepay the Revolving Loans, in whole or in part, without any prepayment penalty whatsoever, subject to the following conditions: (i) each partial prepayment shall be in an amount equal to $10,000.00 or a higher integral multiple of $5,000; and (ii) any prepayment of 10 the entire principal balance of the Loans shall include accrued interest on such Loans to the date of such prepayment and payment in full of all other Obligations (including payment in full of the fees described in Section 3.6 below) due and payable under this Agreement. 2.2 [INTENTIONALLY OMITTED] 2.3 [INTENTIONALLY OMITTED] 2.4 Interest and Fee Computation; Collection of Funds. Except as otherwise set forth herein, all interest and fees shall be calculated on the basis of a year consisting of 360 days and shall be paid for the actual number of days elapsed. Principal payments submitted in funds not immediately available shall continue to bear interest until collected. If any payment to be made by the Borrower hereunder or under the Note shall become due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day and such extension of time shall be included in computing any interest in respect of such payment. 2.5 Letters of Credit. Subject to the terms and conditions of this Agreement and the Master Letter of Credit Agreement dated as of February 1, 2002 between Bank and Borrower ("the Master Letter of Credit Agreement") and, upon the execution and delivery by the Borrower, and the acceptance by the Bank, in its sole and absolute discretion, of an application for letter of credit, the Bank agrees to issue for the account of the Borrower out of the Revolving Loan Availability, such Letters of Credit in the standard form of the Bank and otherwise inform and substance acceptable to the Bank from time to time during the term of this Agreement, provided that the Letter of Credit Obligations may not at any time exceed the Maximum Letter of Credit Obligation and provided, further, that no Letter of Credit shall have an expiration date later than twenty five (25) days prior to the Maturity Date. The amount of any payments made by the Bank with respect to draws made by a beneficiary under a Letter of Credit for which the Borrower has failed to reimburse the Bank upon the earlier of (i) the Bank's demand for repayment, or (ii) five (5) days from the date of such payment to such beneficiary by the Bank, shall be deemed to have been converted to a Revolving Loan as of the date such payment was made by the Bank to such beneficiary. Upon the occurrence of an Event of a Default and at the option of the Bank, all Letter of Credit Obligations shall be converted to Prime Loans, all without demand, presentment, protest or notice of any kind, all of which are hereby waived by the Borrower. 3. CONDITIONS OF BORROWING. ----------------------- Notwithstanding any other provision of this Agreement, the Bank shall not be required to disburse or make all or any portion of the Loans if any of the following conditions shall have occurred. 3.1 Closing Documents. The Borrower shall have failed to execute and deliver to the Bank any of the following Loan Documents at or prior to the Closing Date, all of which must be satisfactory to the Bank and the Bank's counsel in form, substance and execution: (a) Loan Agreement. This Agreement duly executed by the Borrower. 11 (b) Revolving Note. An Amended and Restated Revolving Note duly executed by the Borrower in the form attached hereto as Exhibit "A". (c) Constitutive Documents. Certified copies of Borrower's and each Obligor's articles of incorporation and by-laws, or a certificate of Borrower's and each Obligor's Secretary, confirming that there have been no changes or describing any changes to the articles of organization and by-laws of Borrower or such Obligor since February 1, 2002; (d) Resolutions. Certified resolutions of the board of directors and/or shareholders of the Borrower and each Obligor authorizing the execution, delivery and performance of this Agreement and/or the Loan Documents to which each is a party. (e) Borrower's Attorney's Opinion. An opinion of counsel to the Borrower and each Obligor in form and substance acceptable to the Bank. (f) Amendments to Mortgages. Amendments to the Mortgages to and for the benefit of the Bank on each of the Mortgaged Premises, executed by Borrower or the Subsidiary of Borrower which is the record fee owner of such Mortgaged Premises, in form and substance acceptable to the Bank, conforming each such Mortgage to the terms of this Agreement. (g) Appraisals. If requested by Bank, updated appraisals on any one or more of the Mortgaged Premises prepared by an appraiser acceptable to Bank. (h) Updates to Title Insurance Commitments. Updates to title insurance commitments issued by First American Title Company or other title insurance company acceptable to Bank (collectively, the "Title Insurance Company"), indicating that no judgments, tax or other liens (other than the Liens permitted under Section 8.2 and Liens in favor of the Bank) are of record or on file encumbering any portion of such Mortgaged Premises and that no foreclosure or other adverse proceedings have been commenced in respect of any such Mortgaged Premises. (i) Consent. Consent satisfactory to the Bank from the mortgagee having a Senior Mortgage on the Mortgaged Premises located in Niles, Illinois, consenting to the second mortgage on such Mortgaged Premises in favor of the Bank, in form and substance acceptable to the Bank. (j) UCC Searches. Uniform Commercial Code searches, confirming the Bank's first priority security interests in the Collateral and indicating that no judgments, tax or other liens (other than the Liens permitted under Section 8.2 and Liens in favor of the Bank) are of record or on file encumbering any portion of the Collateral. (k) Insurance. Insurance policies (or binders acceptable to the Bank) with premiums prepaid in companies, forms, amounts and coverage satisfactory to the Bank, identifying the Bank as lender's loss payee or mortgagee's loss payee and as an additional insured and containing waiver of subrogation and mortgage clauses in favor of the Bank. Without limiting the generality of the foregoing, such policies shall include all insurance required to be carried by the Borrower under the Mortgages. The Borrower will also provide casualty insurance against loss and damage by all risks of physical loss or 12 damage, including fire, windstorm, flood, earthquake and other risks covered by the so-called extended coverage endorsement in amounts not less than the full insurable replacement value of all improvements, fixtures and equipment from time to time on the land and bearing a replacement cost agreed amount endorsement. (l) Additional Documents. Such other certificates, financial statements, schedules, resolutions, opinions of counsel, notes and other documents which are provided for hereunder or which the Bank may require, including, but not limited to, evidence acceptable to the Bank that there are no defaults, or events which would be defaults upon the passage of time or the giving of notice, under the Cendant Agreement. 3.2 Event of Default. Any Event of Default, or any event which, with notice or lapse of time or both would constitute an Event of Default, shall have occurred and be continuing. 3.3 Adverse Changes. A material adverse change in the financial condition or affairs of the Borrower, as determined in the Bank's sole and complete discretion, shall have occurred. 3.4 Litigation. Any litigation or governmental proceeding shall have been instituted against the Borrower or any of its officers or shareholders which in the discretion of the Bank, reasonably exercised, materially adversely affects the financial condition or continued operation of the Borrower. 3.5 Representations and Warranties. Any representation or warranty of the Borrower contained herein or in any Loan Document shall be untrue or incorrect in any material way as of the date of any Loan as though made on such date, except to the extent such representation or warranty expressly relates to an earlier date. 3.6 Fees. The Borrower shall have failed to pay to the Bank a renewal fee in the amount of One Hundred Thirty Thousand and 00/100 Dollars ($130,000.00), payable as follows: (a) $30,000 upon execution of this Agreement, (b) $50,000 on August 1, 2003, and (c) $50,000 on December 1, 2003. Bank acknowledges receipt of a waiver fee in the amount of Twenty Thousand Dollars ($20,000) in respect of the waivers described in Section 13.19 below. 4. NOTES EVIDENCING LOANS. ---------------------- 4.1 Revolving Note. The Revolving Loans and the Letter of Credit Obligations shall be evidenced by a single Amended and Restated Revolving Note (together with any and all renewal, extension, modification or replacement notes executed by the Borrower and delivered to the Bank and given in substitution therefor, the "Revolving Note") in the form of Exhibit "A" attached hereto, duly executed by the Borrower and payable to the order of the Bank. At the time of the initial disbursement of a Revolving Loan and at each time an additional Revolving Loan shall be requested hereunder or a repayment made in whole or in part thereon, an appropriate notation thereof shall be made on the books and records of the Bank. All amounts recorded shall be, absent demonstrable error, conclusive and binding evidence of (i) the principal amount of the Revolving Loans advanced hereunder and the amount of all Letter of Credit Obligations, (ii) any unpaid interest owing on the Revolving Loans, and (iii) all amounts repaid on the Revolving Loans or the Letter of Credit Obligations. The failure to record any such amount or any error in recording such amounts shall not, 13 however, limit or otherwise affect the obligations of the Borrower under the Revolving Note to repay the principal amount of the Revolving Loans, together with all interest accruing thereon. 5. MANNER OF BORROWING. ------------------- Each Loan shall be made available to the Borrower upon its request, from any Person whose authority to so act has not been revoked by the Borrower in writing previously received by the Bank. A request for a Loan must be received by no later than 11:00 a.m. Chicago, Illinois time, on the day it is to be funded. The proceeds of each Loan shall be made available at the office of the Bank by credit to the account of the Borrower or by other means requested by the Borrower and acceptable to the Bank. Each Letter of Credit shall be issued by the Bank pursuant to the Master Letter of Credit Agreement, and the execution and delivery by the Borrower and the acceptance by the Bank, in its sole discretion, of the Bank's standard application for Letter of Credit and the payment by the Borrower of the Bank's fees charged in connection therewith. In addition to all other applicable fees, charges and/or interest payable by the Borrower pursuant to the Master Letter of Credit Agreement or otherwise payable in accordance with the Bank's standard letter of credit fee schedule, all standby Letters of Credit issued under and pursuant to this Agreement shall bear an annual fee equal to one and one-quarter percent (1.25%) of the face amount of such standby Letter of Credit, payable by the Borrower on or before the issuance of such Letter of Credit by the Bank and annually thereafter on the same date unless and until (i) such Letter of Credit has expired or has been returned to the Bank, or (ii) the Bank has paid the beneficiary thereunder the full face amount of such Letter of Credit. All Letters of Credit other than standby Letters of Credit shall bear such fees, costs and interest as charged by the Bank and shall contain such other terms as set forth in the Master Letter of Credit Agreement and the Bank's standard letter of credit fee schedule. The Bank is authorized to rely on any written, verbal, electronic, telephonic or telecopy loan requests which the Bank believes in its good faith judgment to emanate from a properly authorized representative of the Borrower, whether or not that is in fact the case. The Borrower does hereby irrevocably confirm, ratify and approve all such advances by the Bank and does hereby indemnify the Bank against losses and expenses (including court costs, attorneys' and paralegals' fees) and shall hold the Bank harmless with respect thereto. 6. SECURITY FOR THE OBLIGATIONS. ---------------------------- 6.1 Security for Obligations. As security for the payment of the Obligations, the Borrower does hereby pledge, assign, transfer and deliver to the Bank and does hereby grant to the Bank a continuing and unconditional security interest in and to any and all property of the Borrower, of any kind or description, tangible or intangible, whether now existing or hereafter arising or acquired, including, but not limited to, the following (all of which property, along with the products and proceeds therefrom, and the additional collateral referred to in Section 6.2 below, are individually and collectively referred to as the "Collateral"): 14 (a) all property of, or for the account of, the Borrower now or hereafter coming into the possession, control or custody of, or in transit to, the Bank or any agent or bailee for the Bank or any parent, affiliate or subsidiary of the Bank or any participant with the Bank in the Loans (whether for safekeeping, deposit, collection, custody, pledge, transmission or otherwise), including all earnings, dividends, interest, or other rights in connection therewith and the products and proceeds therefrom, including the proceeds of insurance thereon; and (b) the additional property of the Borrower, whether now existing or hereafter arising or acquired, and wherever now or hereafter located, together with all additions and accessions thereto, substitutions for, and replacements, products and proceeds therefrom, and all of the Borrower's books and records and recorded data relating thereto (regardless of the medium of recording or storage), together with all of the Borrower's right, title and interest in and to all computer software required to utilize, create, maintain and process any such records or data on electronic media, identified and set forth as follows: (i) All Accounts and all Goods whose sale, lease or other disposition by the Borrower has given rise to Accounts and have been returned to, or repossessed or stopped in transit by, the Borrower, or rejected or refused by an Account Debtor; (ii) All Inventory, including, without limitation, raw materials, work-in-process and finished goods; (iii) All Goods (other than Inventory), including, without limitation, embedded software, Equipment, vehicles, furniture and Fixtures; (iv) All Software and computer programs; (v) All Securities, Investment Property, Financial Assets and Deposit Accounts; (vi) All Chattel Paper, Electronic Chattel Paper, Instruments, Documents, Letter of Credit Rights, all proceeds of letters of credit, Health care insurance Receivables, Supporting Obligations, notes secured by real estate, Commercial Tort Claims and General Intangibles, including Payment Intangibles; and (vii) All insurance policies and proceeds insuring the foregoing property or any part thereof, including unearned premiums. 6.2 Additional Collateral. In addition, the Obligations are also secured by the Mortgages, a Collateral Assignment, Security Agreement and Pledge Agreement made by Arlington Inns of Ohio, Inc. and API/Athens, OH , Inc. dated 15 as of February 1, 2002 pledging certain partnership interests in the Ohio Partnership and a Collateral Assignment and Security Agreement dated as of February 1, 2002 collaterally assigning to Bank Borrower's rights under the Cendant Agreement. 6.3 [INTENTIONALLY OMITTED] ----------------------- 6.4 Possession and Transfer of Collateral. Until an Event of Default has occurred hereunder, the Borrower shall be entitled to possession or use of the Collateral. The cancellation or surrender of the Revolving Note, upon payment or otherwise, shall not affect the right of the Bank to retain the Collateral for any other of the Obligations. The Borrower shall not sell, assign (by operation of law or otherwise), license, lease or otherwise dispose of, or grant any option with respect to any of the Collateral, except that (a) the Borrower may sell Inventory in the ordinary course of business and (b) Borrower or any Subsidiary may sell one or more hotel properties in accordance with the provisions of Section 6.11 hereof. 6.5 Financing Statements. The Borrower shall, at the Bank's request, at any time and from time to time, execute and deliver to the Bank such financing statements, amendments and other documents and do such acts as the Bank deems necessary in order to establish and maintain valid, attached and perfected first security interests in the Collateral in favor of the Bank, free and clear of all Liens and claims and rights of third parties whatsoever (except as otherwise specifically set forth in Section 8 hereof). The Borrower hereby irrevocably authorizes the Bank at any time, and from time to time, to file in any jurisdiction any initial financing statements and amendments thereto that (a) indicate the Collateral (i) as all assets of the Borrower or words of similar effect, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed, or (ii) as being of an equal or lesser scope or within greater detail, and (b) contain any other information required by Section 5 of Article 9 of the Uniform Commercial Code of the jurisdiction wherein such financing statement or amendment is filed regarding the sufficiency or filing office acceptance of any financing statement or amendment, including (i) whether the Borrower is an organization, the type of organization and any organization identification number issued to the Borrower, and (ii) in the case of a financing statement filed as a fixture filing or indicating Collateral as as-extracted collateral or timber to be cut, a sufficient description of real property to which the Collateral relates. The Borrower agrees to furnish any such information to the Bank promptly upon request. The Borrower further ratifies and affirms its authorization for any financing statements and/or amendments thereto, executed and filed by the Bank in any jurisdiction prior to the date of this Agreement. 6.6 Additional Collateral. The Borrower shall deliver to the Bank immediately upon its demand, following the occurrence of an Event of Default, such other collateral as the Bank may from time to time request, should the value of the Collateral, in the Bank's sole and absolute discretion, decline, deteriorate, depreciate or become impaired, and does hereby grant to the Bank a continuing security interest in such other collateral, which, when pledged, assigned and transferred to the Bank shall be and become part of the Collateral. The Bank's security interests in each of the foregoing Collateral shall be valid, complete and perfected whether or not covered by a specific assignment. 6.7 Preservation of the Collateral. The Bank may, but is not required to, take such action from time to time as the Bank deems appropriate to maintain or protect the Collateral. The Bank shall have exercised reasonable care in the 16 custody and preservation of the Collateral if it takes such action as the Borrower shall reasonably request in writing; provided, however, that such request shall not be inconsistent with the Bank's status as a secured party, and the failure of the Bank to comply with any such request shall not be deemed a failure to exercise reasonable care. In addition, any failure of the Bank to preserve or protect any rights with respect to the Collateral against prior or third parties, or to do any act with respect to preservation of the Collateral, not so requested by the Borrower, shall not be deemed a failure to exercise reasonable care in the custody or preservation of the Collateral. The Borrower shall have the sole responsibility for taking such action as may be necessary, from time to time, to preserve all rights of the Borrower and the Bank in the Collateral against prior or third parties. Without limiting the generality of the foregoing, where Collateral consists in whole or in part of securities, the Borrower represents to, and covenants with, the Bank that the Borrower has made arrangements for keeping informed of changes or potential changes affecting the securities (including, but not limited to, rights to convert or subscribe, payment of dividends, reorganization or other exchanges, tender offers and voting rights), and the Borrower agrees that the Bank shall have no responsibility or liability for informing the Borrower of any such or other changes or potential changes or for taking any action or omitting to take any action with respect thereto. 6.8 Other Actions as to any and all Collateral. The Borrower further agrees to take any other action reasonably requested by the Bank to insure the attachment, perfection and first priority of, and the ability of the Bank to enforce, the Bank's security interest in any and all of the Collateral including, without limitation, (a) executing, delivering and, where appropriate, filing financing statements and amendments relating thereto under the Uniform Commercial Code, to the extent, if any, that the Borrower's signature thereon is required therefor, (b) causing the Bank's name to be noted as secured party on any certificate of title for a titled good if such notation is a condition to attachment, perfection or priority of, or ability of the bank to enforce, the Bank's security interest in such Collateral, (c) complying with any provision of any statute, regulation or treaty of the United States as to any Collateral if compliance with such provision is a condition to attachment, perfection or priority of, or ability of the Bank to enforce, the Bank's security interest in such Collateral, (d) obtaining governmental and other third party consents and approvals, including without limitation any consent of any licensor, lessor or other Person obligated on Collateral, (e) obtaining waivers from mortgagees and landlords in form and substance satisfactory to the Bank, and (f) taking all actions required by the UCC in effect from time to time or by other law, as applicable in any relevant UCC jurisdiction, or by other law as applicable in any foreign jurisdiction. 6.9 Collateral in the Possession of a Warehouseman or Bailee. If any of the Collateral at any time is in the possession of a warehouseman or bailee, the Borrower shall promptly notify the Bank thereof, and if requested by the Bank, shall promptly obtain an acknowledgement from the warehouseman or bailee, in form and substance satisfactory to the Bank, that the warehouseman or bailee holds such Collateral for the benefit of the Bank and shall act upon the instructions of the Bank, without the further consent of the Borrower. 6.10 Partial Release of Mortgaged Premises. Upon the written request of the Borrower at any time and from time to time, Borrower or any Subsidiary may sell one or more Mortgaged Premises and the Bank shall execute and deliver to Borrower a release of the Mortgage on any of the Mortgaged Premises so long as no Event of Default shall have occurred and be continuing; provided, however, 17 that the Bank may, in its sole discretion, require that the proceeds of the sale of such Mortgaged Premises, after repayment of the Senior Mortgage Indebtedness and costs of sale, be applied to repayment of the Revolving Loans. 6.11 Sale of Hotel Properties. Without limiting the provisions of Section 6.10 above, and so long as no Event of Default shall have occurred and be continuing or, after giving effect to the proposed sale, would occur, with the giving of notice or lapse of time or both, Borrower or any Subsidiary may sell one or more hotel properties in the ordinary course of business subject to satisfaction of the following conditions: (a) Borrower shall give the Bank no less than thirty (30) days' prior written notice of each such sale; (b) Each notice of proposed sale of a hotel property shall include (i) the location and a description of the property being sold, (ii) the sales price for the property in question, and (iii) the identity of the buyer; and (c) Upon the written request of the Bank, Borrower shall provide such additional information concerning the transaction as the Bank may thereafter request. 7. REPRESENTATIONS AND WARRANTIES. ------------------------------ To induce the Bank to make the Revolving Loans, the Borrower makes the following representations and warranties to the Bank, each of which shall be true and correct as of the date of the execution and delivery of this Agreement, and which shall survive the execution and delivery of this Agreement: 7.1 Borrower Organization and Name. The Borrower and each Subsidiary is a corporation duly organized, existing and in good standing under the laws of its state of incorporation, with full and adequate corporate power to carry on and conduct its business as presently conducted. The Borrower and each Subsidiary is duly licensed or qualified in all foreign jurisdictions wherein the nature of its activities require such qualification or licensing. The exact legal name of the Borrower is as set forth in the first paragraph of this Agreement, and the Borrower currently does not conduct, nor has it during the last five (5) years conducted, business under any other name or trade name, except for the names "AmeriHost Properties, Inc.," "AmeriHost Inn," "AmeriHost Inn and Suites," "AmeriHost Hotel" and "AmeriHost Suites." The Borrower's state issued organizational identification number is 204441. 7.2 Authorization; Validity. The Borrower and each Subsidiary which is a party to any of the Loan Documents has full right, power and authority to enter into this Agreement and/or each Loan Document to which it is a party, to make the borrowings and execute and deliver the Loan Documents as provided herein and to perform all of its duties and obligations under this Agreement and each Loan Document to which it is a party. The execution and delivery of this Agreement and/or the Loan Documents will not, nor will the observance or performance of any of the matters and things herein or therein set forth, violate or contravene any provision of law or of the articles of incorporation or bylaws of the Borrower or any Subsidiary which is a party to any Loan 18 Document. All necessary and appropriate corporate action has been taken on the part of the Borrower and each Subsidiary which is a party to any Loan Document to authorize the execution and delivery of this Agreement and/or the Loan Documents to which it is a party. This Agreement and the Loan Documents to which it is a party are valid and binding agreements and contracts of the Borrower and each Subsidiary which is a party to any Loan Document in accordance with their respective terms. 7.3 Compliance With Laws. To the best knowledge of Borrower, the nature and transaction of the business and operations of Borrower and each Subsidiary and the use of their respective properties and assets, including, but not limited to, the Collateral or any real estate owned or occupied by any of them, do not and during the term of the Loans shall not, violate or conflict with any applicable law, statute, ordinance, rule, regulation or order of any kind or nature, including, without limitation, the provisions of the Fair Labor Standards Act or any zoning, land use, building, noise abatement, occupational health and safety or other laws, any building permit or any condition, grant, easement, covenant, condition or restriction, whether recorded or not. 7.4 Environmental Laws and Hazardous Substances. The Borrower represents, warrants and agrees with the Bank that (i) to the best knowledge of Borrower, neither the Borrower nor any Subsidiary has generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off any of the premises of the Borrower (whether or not owned by it) or Subsidiary in any manner which at any time violates any Environmental Law or any license, permit, certificate, approval or similar authorization thereunder, (ii) to the best knowledge of Borrower, the operations of the Borrower and each Subsidiary comply in all material respects with all Environmental Laws and all licenses, permits certificates, approvals and similar authorizations thereunder, (iii) to the best knowledge of Borrowers, there has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any governmental authority or any other Person, nor is any pending or, to the best of the Borrower's knowledge, threatened, and the Borrower shall immediately notify the Bank upon becoming aware of any such investigation, proceeding, complaint, order, directive, claim, citation or notice, and shall take prompt and appropriate actions to respond thereto, with respect to any non-compliance with, or violation of, the requirements of any Environmental Law by the Borrower or any Subsidiary or the release, spill or discharge, threatened or actual, of any Hazardous Material or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Material or any other environmental, health or safety matter, which affects the Borrower or its business, operations or assets or any properties at which the Borrower or any Subsidiary has transported, stored or disposed of any Hazardous Materials, (iv) to the best knowledge of Borrower, neither the Borrower nor any Subsidiary has any material liability, contingent or otherwise, in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Material; and (v) without limiting the generality of the foregoing, the Borrower shall, following determination by the Bank that there is non-compliance, or any condition which requires any action by or on behalf of the Borrower or any Subsidiary in order to avoid any non-compliance, with any Environmental Law, at the Borrower's sole expense, cause an independent environmental engineer acceptable to the Bank to conduct such tests of the relevant site as are appropriate, and prepare and 19 deliver a report setting forth the result of such tests, a proposed plan for remediation and an estimate of the costs thereof. 7.5 Absence of Breach. The execution, delivery and performance of this Agreement, the Loan Documents and any other documents or instruments to be executed and delivered by the Borrower or any Subsidiary in connection with the Loans shall not: (i) violate any provisions of law or any applicable regulation, order, writ, injunction or decree of any court or governmental authority, or (ii) conflict with, be inconsistent with, or result in any breach or default of any of the terms, covenants, conditions, or provisions of any indenture, mortgage, deed of trust, instrument, document, agreement or contract of any kind to which the Borrower or any Subsidiary is a party or by which the Borrower or any Subsidiary or any of their respective property or assets may be bound. 7.6 Collateral Representations. The Borrower or, in the case of the Mortgaged Premises, a Subsidiary, is the sole owner of the Collateral, free from any Lien of any kind, other than the Lien of the Bank and the Liens permitted by Section 8.2 of this Agreement. 7.7 Financial Statements. All financial statements submitted to the Bank have been prepared in accordance with GAAP on a basis, except as otherwise noted therein, consistent with the previous fiscal year and truly and accurately reflect the consolidated financial condition of the Borrower and its Subsidiaries and the consolidated results of the operations for the Borrower and its Subsidiaries as of such date and for the periods indicated. Since the date of the most recent financial statement submitted by the Borrower to the Bank, there has been no material adverse change in the financial condition or in the consolidated assets or liabilities of the Borrower and its Subsidiaries, or any changes except those occurring in the ordinary course of business. 7.8 Litigation and Taxes. There is no litigation, demand, charge, claim, petition or governmental investigation or proceeding pending, or to the best knowledge of the Borrower, threatened, against the Borrower and/or any Subsidiary, which, if adversely determined, would result in any material adverse change in the financial condition or properties, business or operations of the Borrower or Subsidiary. The Borrower and each Subsidiary have duly filed all applicable income or other tax returns and to the best knowledge of Borrower, have paid all income or other taxes when due. There is no controversy or objection pending, or to the best knowledge of the Borrower, threatened in respect of any tax returns of the Borrower or any Subsidiary, except for extensions of time and pending audits being conducted by certain state revenue departments in the ordinary course of business, none of which is (are) expected to result in any material liability, either singly or in the aggregate. 7.9 Event of Default. No Event of Default has occurred and is continuing, and no event has occurred and is continuing which, with the lapse of time, the giving of notice, or both, would constitute such an Event of Default under this Agreement or any of the Loan Documents and neither the Borrower nor any Subsidiary is in default (without regard to grace or cure periods) under any contract or agreement to which it is a party. 7.10 ERISA Obligations. All Employee Plans of the Borrower and its Subsidiaries meet the minimum funding standards of Section 302 of ERISA where applicable and each such Employee Plan that is intended to be qualified within 20 the meaning of Section 401 of the Internal Revenue Code of 1986 is qualified. No withdrawal liability has been incurred under any such Employee Plans and no "Reportable Event" or "Prohibited Transaction" (as such terms are defined in ERISA), has occurred with respect to any such Employee Plans, unless approved by the appropriate governmental agencies. The Borrower and each Subsidiary have promptly paid and discharged all obligations and liabilities arising under the Employee Retirement Income Security Act of 1974 ("ERISA") of a character which if unpaid or unperformed might result in the imposition of a Lien against any of its properties or assets. 7.11 Adverse Circumstances. To the best knowledge of Borrower, no condition, circumstance, event, agreement, document, instrument, restriction, litigation or proceeding (or threatened litigation or proceeding or basis therefor) exists which (a) could adversely affect the validity or priority of the Liens granted to the Bank under the Loan Documents, (b) could materially adversely affect the ability of the Borrower to perform its obligations under the Loan Documents, (c) would constitute a default under any of the Loan Documents, or (d) would constitute such a default with the giving of notice or lapse of time or both. 7.12 Lending Relationship. The Borrower acknowledges and agrees that the relationship hereby created with the Bank is and has been conducted on an open and arm's length basis in which no fiduciary relationship exists and that the Borrower has not relied and is not relying on any such fiduciary relationship in executing this Agreement and in consummating the Loans. The Bank represents that it will receive the Note payable to its order as evidence of a bank loan. 7.13 Business Loan. The Loans, including interest rate, fees and charges as contemplated hereby, (i) are business loans within the purview of 815 ILCS 205/4(l)(c), as amended from time to time, (ii) are an exempted transaction under the Truth In Lending Act, 12 v.S.C. 1601 et seq., as amended from time to time, and (iii) do not, and when disbursed shall not, violate the provisions of the Illinois usury laws, any consumer credit laws or the usury laws of any state which may have jurisdiction over this transaction, the Borrower or any property securing the Loans. 7.14 Compliance with Regulation U. No portion of the proceeds of the Loans shall be used by the Borrower, or any affiliates of the Borrower, either directly or indirectly, for the purpose of purchasing or carrying any margin stock, within the meaning of Regulation U as adopted by the Board of Governors of the Federal Reserve System. 7.15 Governmental Regulation. The Borrower and its Subsidiaries are not, or after giving effect to any loan, will not be, subject to regulation under the Public Utility Holding Company Act of 1935, the Federal Power Act or the Investment Company Act of 1940 or to any federal or state statute or regulation limiting its ability to incur indebtedness for borrowed money. 7.16 Bank Accounts. All Deposit accounts and other bank accounts of the Borrower (but not the Subsidiaries) are maintained by Borrower at the Bank. 21 7.17 Place of Business. The principal place of business of the Borrower is 2355 S. Arlington Heights Road, Arlington Heights, Illinois 60005 and the Borrower shall promptly notify the Bank of any change in such location. The Borrower will not remove or permit the Collateral to be removed from such location without the prior written consent of the Bank, except for Inventory sold in the usual and ordinary course of the Borrower's business. 7.18 Complete Information. This Agreement and all financial statements, schedules, certificates, confirmations, agreements, contracts, and other materials submitted to the Bank in connection with or in furtherance of this Agreement by or on behalf of the Borrower fully and fairly state the matters with which they purport to deal, and neither misstate any material fact nor, separately or in the aggregate, fail to state any material fact necessary to make the statements made not misleading. 8. NEGATIVE COVENANTS. ------------------ 8.1 Indebtedness. The Borrower shall not, and shall cause each of its Subsidiaries to not, either directly or indirectly, create, assume, incur or have outstanding any Indebtedness (including purchase money indebtedness), or become liable, whether as endorser, guarantor, surety or otherwise, for any debt or obligation of any other Person, except: (a) the Obligations; (b) endorsement for collection or deposit of any commercial paper secured in the ordinary course of business; (c) obligations of the Borrower or any of its Subsidiaries for taxes, assessments, municipal or other governmental charges; (d) obligations of the Borrower or any of its Subsidiaries for accounts payable, other than for money borrowed, incurred in the ordinary course of business; and (e) obligations, including the Senior Mortgage Indebtedness, existing on the date hereof which are disclosed on the financial statements referred to in Section 7; (f) obligations in respect of Indebtedness issued to refinance the Senior Mortgage Indebtedness (the "Senior Refinancing Indebtedness"); provided, however, that the issuance of such Senior Refinancing Indebtedness shall not cause or result in a violation of any covenant set forth in Section 10; (g) obligations in respect of Indebtedness secured by a Lien on any Other Property developed by Borrower or any Subsidiary (i) after the sales by Borrower or its Subsidiary of the Kenton, Ohio and Fontana, California hotel properties (or the sale of other hotel properties generating substantially equivalent net proceeds of sale, after repayment of Senior 22 Mortgage Indebtedness thereon and costs of sale of such properties) or (ii) in connection with a joint venture project in which Borrower and/or any Subsidiary own less than fifty percent (50%) of the equity interests and Borrower is the project developer; provided that the issuance of such Indebtedness shall not cause or result in a violation of any covenant set forth in Section 10; (h) obligations arising under Capital Leases for property acquired (or deemed to be acquired) by the Borrower or any of its Subsidiaries or claims arising from the use or loss of, or damage to, such property; and (i) Indebtedness for Capital Expenditures (exclusive of Indebtedness as incurred by a Lien on any Other Property permitted under Section 8.1(g) above) incurred after the date of this Agreement not to exceed One Million and 00/100 Dollars ($1,000,000.00) in the aggregate in any one calendar year. 8.2 Encumbrances. The Borrower shall not, and shall cause each of its Subsidiaries to not, either directly or indirectly, create, assume, incur or suffer or permit to exist any Lien or charge of any kind or character upon any asset of the Borrower or any Subsidiary, whether owned at the date hereof or hereafter acquired except: (a) Liens for taxes, assessments or other governmental charges not yet due or which are being contested in good faith by appropriate proceedings in such a manner as not to make the property forfeitable; (b) Liens or charges incidental to the conduct of its business or the ownership of its property and assets which were not incurred in connection with the borrowing of money or the obtaining of an advance or credit, and which do not in the aggregate materially detract from the value of its property or assets or materially impair the use thereof in the operation of its business; (c) Liens arising out of judgments or awards against the Borrower with respect to which it shall concurrently therewith be prosecuting a timely appeal or proceeding for review and with respect to which it shall have secured a stay of execution pending such appeal or proceedings for review; (d) pledges or deposits to secure obligations under worker's compensation laws or similar legislation; (e) good faith deposits in connection with lending contracts or leases to which the Borrower is a party; (f) deposits to secure public or statutory obligations of the Borrower; 23 (g) Liens, including the Senior Mortgages, existing on the date hereof and disclosed on the financial statements referred to in Section 7; (h) Liens securing obligations permitted under Section 8.1(f), Section 8.1(g) and/or Section 8.1(h); and (i) Liens granted to the Bank. Without limiting the generality of the foregoing, Borrower shall not, and shall cause each Subsidiary not to, mortgage or otherwise encumber Borrower's or such Subsidiary's fee or leasehold interest in any Mortgaged Premises or Other Property, except as expressly permitted pursuant to (g) or (h) above or as consented to by the Bank in writing. 8.3 Investments. The Borrower shall not, and shall cause each Subsidiary to not, either directly or indirectly, make or have outstanding any new investments (whether through purchase of stocks, obligations or otherwise) in, or loans or advances to, any other Person, or acquire all or any substantial part of the assets, business, stock or other evidence of beneficial ownership of any other Person except: (a) investments in direct obligations of the United States; (b) investments in certificates of deposit issued by the Bank or any bank with assets greater than One Hundred Million Dollars ($100,000,000.00); or (c) investments in Prime Commercial Paper (for purposes hereof, Prime Commercial Paper shall mean short-term unsecured promissory notes sold by large corporations and rated A-I/P-1 by Standard & Poor's Ratings Group, a division of McGraw Hill, Inc., and Moody's Investment Service, Inc.); or (d) deposits held by the Bank or by any affiliate of ABN AMRO Incorporated. Without limiting the generality of the foregoing, except in connection with a joint venture project in which Borrower and/or any Subsidiary owns less than fifty percent (50%) of the equity interests and Borrower is the developer, Borrower shall not, and shall cause each Subsidiary not to invest in or commence development of any new hotel property(ies) until the sale by Borrower and/or a Subsidiary of the Kenton, Ohio and Fontana, California hotel properties (or the sale of other hotel properties generating substantially equivalent net proceeds of sale, after repayment of Senior Mortgage Indebtedness thereon and costs of sale of such properties). 8.4 Transfer; Merger. The Borrower shall not, and shall cause each Subsidiary to not, either directly or indirectly, merge, consolidate, sell, transfer, license, lease, encumber or otherwise dispose of all or any part of its property or business or all or any substantial part of its assets, or sell or discount (with or without recourse) any of its Promissory Notes, Chattel Paper, Payment Intangibles or Accounts, except that Borrower or any Subsidiary may sell one or more hotel properties in accordance with the provisions of Sections 6.10 and 6.11. 24 8.5 Distributions. Except for purchases of Borrower's stock in an amount not to exceed One Million Dollars ($1,000,000.00) in any fiscal year of Borrower, none of which, individually or in the aggregate would cause or result in the occurrence of an Event of Default, the Borrower shall not, either directly or indirectly, purchase or redeem any shares of its stock or, except with the prior written consent of the Bank, declare or pay any dividends, whether in cash or otherwise, or set aside any funds for any such purpose or make any distribution to its shareholders. 8.6 Use of Proceeds. Neither the Borrower nor any of its Subsidiaries or affiliates shall use any portion of the proceeds of the Loans, either directly or indirectly, for the purpose of purchasing any securities underwritten by ABN AMRO Incorporated, an affiliate of the Bank. 8.7 Bank Accounts. The Borrower shall not, and shall cause each Subsidiary to not, establish any new Deposit accounts or other bank accounts, other than local bank accounts maintained by the Subsidiaries or bank accounts established at or with the Bank without the prior written consent of the Bank. 8.8 Change of Legal Status. Neither the Borrower nor any Subsidiary which is a party to any of the Loan Documents shall change its name, its organizational identification number, if it has one, its type of organization, its jurisdiction of organization or other legal structure without the prior written consent of the Bank. 9. AFFIRMATIVE COVENANTS. --------------------- 9.1 Compliance with Bank Regulatory Requirements. Upon demand by the Bank, the Borrower shall reimburse the Bank for the Bank's additional costs and/or reductions in the amount of principal or interest received or receivable by the Bank if at any time after the date of this Agreement any law, treaty or regulation or any change in any law, treaty or regulation or the interpretation thereof by any governmental authority charged with the administration thereof or any central bank or other fiscal, monetary or other authority having jurisdiction over the Bank or the Loans, whether or not having the force of law, shall impose, modify or deem applicable any reserve (except reserve requirements taken into account in calculating the Revolving Interest Rate) and/or special deposit requirement against or in respect of assets held by or deposits in or for the account of the Loans by the Bank or impose on the Bank any other condition with respect to this Agreement or the Loans, the result of which is to either increase the cost to the Bank of making or maintaining the Loans or to reduce the amount of principal or interest received or receivable by the Bank with respect to such Loans. Said additional costs and/or reductions will be those which directly result from the imposition of such requirement or condition on the making or maintaining of such Loans. All Loans shall be deemed to be match funded for the purposes of the Bank's determination in the previous sentence. Notwithstanding the foregoing, the Borrower shall not be required to pay any such additional costs which could be avoided by the Bank with the exercise of reasonable conduct and diligence. 9.2 Corporate Existence. The Borrower shall, and shall cause each Subsidiary to, at all times preserve and maintain its corporate existence, rights, franchises and privileges, and shall at all times continue as a going concern in the business which the Borrower or such Subsidiary is presently conducting. If the Borrower does not have a state issued identification number 25 and later obtains one, the Borrower shall promptly notify the Bank of such organizational identification number. 9.3 Maintain Property. The Borrower shall, and shall cause each Subsidiary to, at all times maintain, preserve and keep its plant, properties and Equipment, including, but not limited to, any Collateral, in good repair, working order and condition, and shall from time to time make all needful and proper repairs, renewals, replacements, and additions thereto so that at all times the efficiency thereof shall be fully preserved and maintained. The Borrower shall, and shall cause each Subsidiary to, permit the Bank to examine and inspect such plant, properties and Equipment, including, but not limited to, any Collateral, at all reasonable times. 9.4 Maintain Insurance. The Borrower shall, and shall cause each Subsidiary to, at all times insure and keep insured in insurance companies acceptable to the Bank, all insurable property owned by it which is of a character usually insured by companies similarly situated and operating like properties, against loss or damage from fire and such other hazards or risks as are customarily insured against by companies similarly situated and operating like properties; and shall similarly insure employers', public and professional liability risks. Prior to the date of the funding of the Note the Borrower shall deliver to the Bank a certificate setting forth in summary form the nature and extent of the insurance maintained by the Borrower and its Subsidiaries pursuant to this SECTION 9. All such policies of insurance must be satisfactory to the Bank in relation to the amount and term of the Obligations and type and value of the Collateral and assets of the Borrower and each Subsidiary, shall identify the Bank as lender's loss payee or mortgagee and as an additional insured. In the event the Borrower either fails to provide the Bank with evidence of the insurance coverage required by this Section or at any time hereafter shall fail to obtain or maintain any of the policies of insurance required above, or to pay any premium in whole or in part relating thereto, then the Bank, without waiving or releasing any obligation or default by the Borrower hereunder, may at any time (but shall be under no obligation to so act), obtain and maintain such policies of insurance and pay such premium and take any other action with respect thereto, which the Bank deems advisable. This insurance coverage (i) may, but need not, protect the Borrower's and each Subsidiary's interest in the such property, including, but not limited to the Collateral, and (ii) may not pay any claim made by, or against, the Borrower or any Subsidiary in connection with such property, including, but not limited to the Collateral. The Borrower may later cancel any such insurance purchased by the Bank, but only after providing the Bank with evidence that the Borrower has obtained the insurance coverage required by this Section. The costs of such insurance obtained by the Bank, through and including the effective date such insurance coverage is canceled or expires, shall be payable on demand by the Borrower to the Bank, together with interest at the Default Rate on such amounts until repaid and any other charges by the Bank in connection with the placement of such insurance. The costs of such insurance, which may be greater than the cost of insurance which the Borrower may be able to obtain on its own, together with interest thereon at the Default Rate and any other charges by the Bank in connection with the placement of such insurance may be added to the total Obligations due and owing. 9.5 Tax Liabilities. The Borrower shall, and shall cause each Subsidiary to, at all times pay and discharge all property and other taxes, assessments and governmental charges upon, and all claims (including claims for labor, materials and supplies) against the Borrower and each Subsidiary or any of its properties, Equipment or Inventory, before the same shall become 26 delinquent and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings and are insured against or bonded over to the satisfaction of the Bank. 9.6 ERISA Liabilities; Employee Plans. The Borrower shall, and shall cause each Subsidiary to, (i) keep in full force and effect any and all Employee Plans which are presently in existence or may, from time to time, come into existence under ERISA, and not withdraw from any such Employee Plans, unless such withdrawal can be effected or such Employee Plans can be terminated without liability to the Borrower or any Subsidiary; (ii) make contributions to all of such Employee Plans in a timely manner and in a sufficient amount to comply with the standards of ERISA; including the minimum funding standards of ERISA; (iii) comply with all material requirements of ERISA which relate to such Employee Plans; (iv) notify the Bank immediately upon receipt by the Borrower or any Subsidiary of any notice concerning the imposition of any withdrawal liability or of the institution of any proceeding or other action which may result in the termination of any such Employee Plans or the appointment of a trustee to administer such Employee Plans; (v) promptly advise the Bank of the occurrence of any "Reportable Event" or "Prohibited Transaction" (as such terms are defined in ERISA), with respect to any such Employee Plans; and (vi) amend any Employee Plan that is intended to be qualified within the meaning of Section 401 of the Internal Revenue Code of 1986 to the extent necessary to keep the Employee Plan qualified, and to cause the Employee Plan to be administered and operated in a manner that does not cause the Employee Plan to lose its qualified status. 9.7 Financial Statements. The Borrower shall, and shall cause each Subsidiary to, at all times maintain a standard and modern system of accounting, on the accrual basis of accounting and in all respects in accordance with GAAP, and shall furnish to the Bank or its authorized representatives such information regarding the business affairs, operations and financial condition of the Borrower and its Subsidiaries, including, but not limited to: (a) as soon as available, and in any event, within ninety (90) days after the close of each of its fiscal years, a copy of the annual audited consolidated financial statements of the Borrower and its Subsidiaries, including balance sheet, statement of income and retained earnings, statement of cash flows for the fiscal year then ended and such other information (including nonfinancial information) as the Bank may request, in reasonable detail, prepared and certified by an independent certified public accountant acceptable to the Bank, containing an unqualified opinion; and (b) as soon as available, and in any event, within forty five (45) days following the end of each fiscal quarter, a copy of the consolidated financial statements of the Borrower and its Subsidiaries regarding such fiscal quarter, including balance sheet, statement of income and retained earnings, statement of cash flows for the fiscal quarter then ended and such other information (including nonfinancial information) 27 as the Bank may request, in reasonable detail, prepared and certified as accurate by the Borrower. No change with respect to such accounting principles shall be made by the Borrower without giving prior notification to the Bank. The Borrower represents and warrants to the Bank that the financial statements delivered to the Bank at or prior to the execution and delivery of this Agreement and to be delivered at all times thereafter accurately reflect and will accurately reflect the consolidated financial condition of the Borrower and its Subsidiaries. The Bank shall have the right at all times during business hours to inspect the books and records of the Borrower and make extracts therefrom. The Borrower agrees to advise the Bank immediately of any adverse change in the financial condition, the operations or any other status of the Borrower. 9.8 Supplemental Financial Statements. The Borrower shall immediately upon receipt thereof, provide to the Bank copies of interim and supplemental reports if any, submitted to the Borrower by independent accountants in connection with any interim audit or review of the books of the Borrower or any Subsidiary. 9.9 Covenant Compliance Report. The Borrower shall, within thirty (30) days after the end of each fiscal quarter, deliver to the Bank (a) a computation in such detail as the Bank shall specify, showing compliance by the Borrower with the covenants set forth in SECTION 10, and (b) a certificate that neither the Borrower nor any Subsidiary is in default under the terms of or has otherwise breached the terms of any of the Senior Mortgages or received any notice(s) with respect to a default or breach of any of the foregoing, in each case certified as accurate by the Borrower. 9.10 Field Audits. The Borrower shall allow the Bank, at the Borrower's sole expense, to conduct an annual field examination of the Accounts of the Borrower and its Subsidiaries, the results of which must be satisfactory to the Bank in the Bank's sole and absolute discretion. 9.11 Other Reports. The Borrower shall, within such period of time as the Bank may specify deliver to the Bank such other schedules and reports as the Bank may require. 9.12 Collateral Records. Borrower shall keep full and accurate books and records relating to the Collateral and shall mark such books and records to indicate the Bank's Lien in the Collateral. 9.13 Notice of Proceedings. The Borrower shall, immediately after knowledge thereof shall have come to the attention of any officer of the Borrower, give written notice to the Bank of all threatened or pending actions, suits, and proceedings before any court or governmental department, commission, board or other administrative agency which may have a material effect on the business, property or operations of the Borrower or any Subsidiary. 9.14 Notice of Default. The Borrower shall, immediately after the commencement thereof, give notice to the Bank in writing of the occurrence of an Event of Default or of any event which, with the lapse of time, the giving of notice or both, would constitute an Event of Default hereunder. 28 9.15 Banking Relationship. The Borrower covenants and agrees, at all times during the term of this Agreement, to utilize the Bank as its primary bank of account and depository for all financial services, including all receipts, disbursements, cash management and related service, of Borrower and its Subsidiaries. 10. FINANCIAL COVENANTS. ------------------- 10.1 Tangible Net Worth. As of the end of each of its fiscal quarters, the Borrower and its Subsidiaries shall maintain consolidated Tangible Net Worth in an amount not less than Nine Million Five Hundred Thousand and 00/100 Dollars ($9,500,000.00). 10.2 Total Liabilities to Worth. As of the end of each of its fiscal quarters, the Borrower and its Subsidiaries shall maintain a Total Liabilities to Worth Ratio of not greater than the following: Fiscal Quarter Ended Total Liabilities to Worth -------------------- -------------------------- March 31, 2003 3.75 to 1.0 June 30, 2003 3.75 to 1.0 September 30, 2003 3.75 to 1.0 December 31, 2003 3.50 to 1.0 March 31, 2004 3.50 to 1.0 10.3 Debt Service Coverage Ratio. As of the end of each of its fiscal quarters, the Borrower and its Subsidiaries shall maintain a ratio of (a) consolidated EBITDA to (b) consolidated Debt Service Charges of not less than 1.20 to 1.0, measured on a trailing twelve (12) month basis for the twelve (12) fiscal month period immediately preceding the end of such fiscal quarter. 10.4 Aggregate Loan-to-Value Ratio. The Bank may from time to time order reappraisals on any of the Mortgaged Premises and/or appraisals, in form and substance acceptable to the Bank, on any one or more of the Other Properties. At all times, the Borrower and its Subsidiaries shall maintain an aggregate Loan-to-Value Ratio for the Mortgaged Properties, as determined by the Bank, not exceeding sixty-five percent (65%). 10.5 Aggregate Revenue Per Room. As of the end of each month, aggregate gross room receipts for all hotel properties owned solely by any Wholly Owned Subsidiary shall not have declined as of two consecutive months' end by more than five percent (5%) from the aggregate gross room receipts attributable to the same hotel rooms as of the end of the two (2) immediately preceding fiscal months' end. 29 10.6 Annual Net Income. Borrower's Net Income for the fiscal year ending December 31, 2003 shall be no less than Two Hundred and 00/100 Thousand Dollars ($200,000.00). 11. EVENTS OF DEFAULT. ----------------- The Borrower, without notice or demand of any kind, shall be in default under this Agreement upon the occurrence of any of the following events (each an "Event of Default"). 11.1 Nonpayment of Obligations. Any amount due and owing on the Note or any of the Obligations, whether by its terms or as otherwise provided herein, is not paid within ten (10) days after notice from the Bank that such amount was not paid when due. 11.2 Misrepresentation. Any oral or written warranty, representation, certificate or statement in this Agreement, the Loan Documents or any other agreement with the Bank shall be false when made or at any time. 11.3 Nonperformance. Any failure to perform or default in the performance of any covenant, condition or agreement contained in this Agreement and, if capable of being cured, such failure to perform or default in performance continues for a period of thirty (30) days after the Borrower receives notice or knowledge from any source of such failure to perform or default in performance. 11.4 Default under Loan Documents. A default by Borrower or any Obligor under any of the other Loan Documents, which continues beyond any applicable grace or cure period, all of which covenants, conditions and agreements contained therein are hereby incorporated in this Agreement by express reference, shall be and constitute an Event of Default under this Agreement and any other of the Obligations. 11.5 Default under Other Agreements. Any default in the payment of principal, interest or any other sum for any other obligation beyond any period of grace provided with respect thereto or in the performance of any other term, condition or covenant contained in any agreement (including, but not limited to any capital or operating lease or any agreement in connection with the deferred purchase price of property) under which any such obligation is created, the effect of which default is to cause or permit the holder of such obligation (or the other party to such other agreement) to cause such obligation to become due prior to its stated maturity or terminate such other agreement. 11.6 Assignment for Creditors. Any Obligor makes an assignment for the benefit of creditors, fails to pay, or admits in writing its inability to pay its debts as they mature; or if a trustee of any substantial part of the assets of any Obligor is applied for or appointed, and in the case of such trustee being appointed in a proceeding brought against such Obligor, the Obligor, by any action or failure to act indicates its approval of, consent to, or acquiescence in such appointment and such appointment is not vacated, stayed on appeal or otherwise shall not have ceased to continue in effect within thirty (30) days after the date of such appointment. 11.7 Bankruptcy. Any proceeding involving any Obligor, is commenced by or against such Obligor under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law or statute of 30 the federal government or any state government, and in the case of any such proceeding being instituted against such Obligor, (i) such Obligor, by any action or failure to act indicates its approval of, consent to or acquiescence therein, or (ii) an order shall be entered approving the petition in such proceedings and such order is not vacated, stayed on appeal or otherwise shall not have ceased to continue in effect within thirty (30) days after the entry thereof. 11.8 Judgments. The entry of any judgment, decree, levy, attachment, garnishment or other process, or the filing of any Lien against any Obligor which is not fully covered by insurance, and such judgment or other process shall not have been, within thirty (30) days from the entry thereof, (i) bonded over to the satisfaction of the Bank and appealed, (ii) vacated, or (iii) discharged. 11.9 Change in Control. Subject to Section 6.11 hereof, any sale, conveyance, assignment or other transfer, directly or indirectly, of any ownership interest of the Borrower in any Subsidiary which owns any of the Mortgaged Premises. 11.10 Collateral Impairment. (a) The entry of any judgment, decree, levy, attachment, garnishment or other process, or the filing of any Lien against, any of the Collateral or any collateral under a separate security agreement securing any of the Obligations and such judgment or other process shall not have been, within thirty (30) days from the entry thereof, (i) bonded over to the satisfaction of the Bank and appealed, (ii) vacated, or (iii) discharged, or (b) the loss, theft, destruction, seizure or forfeiture, or the occurrence of any deterioration or impairment of any of the Collateral or any of the collateral under any security agreement securing any of the Obligations, or any decline or depreciation in the value or market price thereof (whether actual or reasonably anticipated), which causes the Collateral, in the sole opinion of the Bank acting in good faith, to become unsatisfactory as to value or character, or which causes the Bank to reasonably believe that it is insecure and that the likelihood for repayment of the Obligations is or will soon be impaired, time being of the essence, which loss, deterioration, decline, depreciation, or other source of insecurity or impairment continues for a period of thirty (30) days after the Borrower receives written notice from the Bank. The cause of such deterioration, impairment, decline or depreciation shall include, but is not limited to, the failure by the Borrower to do any act deemed necessary by the Bank to preserve and maintain the value and collectability of the Collateral. 12. REMEDIES. -------- Upon the occurrence of an Event of Default, the Bank shall have all rights, powers and remedies set forth in the Loan Documents, in any written agreement or instrument (other than this Agreement or the Loan Documents) relating to any of the Obligations or any security therefor, or as otherwise provided at law or in equity. Without limiting the generality of the foregoing, the Bank may, at its option upon the occurrence of an Event of Default, declare its commitments to the Borrower to be terminated and all Obligations to be immediately due and payable, provided, however, that upon the occurrence of an Event of Default under either Section 11.6, "Assignment for Creditors", or Section 11.7, "Bankruptcy", all commitments of the Bank to the Borrower shall immediately terminate and all Obligations shall be automatically due and payable, all without demand, notice or further action of any kind required on 31 the part of the Bank. The Borrower hereby waives any and all presentment, demand, notice of dishonor, protest, and all other notices and demands in connection with the enforcement of Bank's rights under the Loan Documents, and hereby consents to, and waives notice of release, with or without consideration, of any Collateral, notwithstanding anything contained herein or in the Loan Documents to the contrary. In addition to the foregoing: 12.1 Possession and Assembly of Collateral. The Bank may, without notice, demand or legal process of any kind, take possession of any or all of the Collateral (in addition to Collateral of which the Bank already has possession), wherever it may be found, and for that purpose may pursue the same wherever it may be found, and may enter into any of the Borrower's premises where any of the Collateral may be or is supposed to be, and search for, take possession of, remove, keep and store any of the Collateral until the same shall be sold or otherwise disposed of and the Bank shall have the right to store the same in any of the Borrower's premises without cost to the Bank. At the Bank's request, the Borrower will, at the Borrower's sole expense, assemble the Collateral and make it available to the Bank at a place or places to be designated by the Bank which is reasonably convenient to the Bank and the Borrower. 12.2 Sale of Collateral. The Bank may sell any or all of the Collateral at public or private sale, upon such terms and conditions as the Bank may deem proper, and the Bank may purchase any or all of the Collateral at any such sale. The Bank may apply the net proceeds, after deducting all costs, expenses, attorneys' and paralegals' fees incurred or paid at any time in the collection, protection and sale of the Collateral and the Obligations, to the payment of the Note and/or any of the other Obligations, returning the excess proceeds, if any, to the Borrower. The Borrower shall remain liable for any amount remaining unpaid after such application, with interest. Any notification of intended disposition of the Collateral required by law shall be conclusively deemed reasonably and properly given if given by the Bank at least five (5) calendar days before the date of such disposition. The Borrower hereby confirms, approves and ratifies all acts and deeds of the Bank relating to the foregoing, and each part thereof. 12.3 Standards for Exercising Remedies. To the extent that applicable law imposes duties on the Bank to exercise remedies in a commercially reasonable manner, the Borrower acknowledges and agrees that it is not commercially unreasonable for the Bank (a) to fail to incur expenses reasonably deemed significant by the Bank to prepare Collateral for disposition or otherwise to complete raw material or work-in-process into finished goods or other finished products for disposition. (b) to fail to obtain third party consents for access to Collateral to be disposed of, or to obtain or, if not required by other law, to fail to obtain governmental or third party consents for the collection or disposition of Collateral to be collected or disposed of, (c) to fail to exercise collection remedies against Account Debtors or other Persons obligated on Collateral or to remove liens or encumbrances on or any adverse claims against Collateral, (d) to exercise collection remedies against Account Debtors and other Persons obligated on Collateral directly or through the use of collection agencies and other collection specialists, (e) to advertise dispositions of Collateral through publications or media of general circulation, whether or not the Collateral is of a specialized nature, (f) to contact other Persons, whether or not in the same business as the Borrower, for expressions of interest in acquiring all or any portion of the Collateral, (g) to hire one or more professional auctioneers to assist in the disposition of Collateral, whether or not the collateral is of a specialized nature, (h) to dispose of Collateral by utilizing Internet sites that provide for the auction of assets of the types included in the Collateral or that have the reasonable capability of 32 doing so, or that match buyers and sellers of assets, (i) to dispose of assets in wholesale rather than retail markets, (j) to disclaim disposition warranties, including, without limitation, any warranties of title, (k) to purchase insurance or credit enhancements to insure the Bank against risks of loss, collection or disposition of Collateral or to provide to the Bank a guaranteed return from the collection or disposition of Collateral, or (1) to the extent deemed appropriate by the Bank, to obtain the services of other brokers, investment bankers, consultants and other professionals to assist the Bank in the collection or disposition of any of the Collateral. The Borrower acknowledges that the purpose of this Section is to provide non-exhaustive indications of what actions or omissions by the Bank would not be commercially unreasonable in the Bank's exercise of remedies against the Collateral and that other actions or omissions by the Bank shall not be deemed commercially unreasonable solely on account of not being indicated in this Section. Without limitation upon the foregoing, nothing contained in this Section shall be construed to grant any rights to the Borrower or to impose any duties on the Bank that would not have been granted or imposed by this Agreement or by applicable law in the absence of this Section. 12.4 UCC and Offset Rights. The Bank may exercise, from time to time, any and all rights and remedies available to it under the UCC or under any other applicable law in addition to, and not in lieu of, any rights and remedies expressly granted in this Agreement or in any other agreements between any Obligor and the Bank, and may, without demand or notice of any kind, appropriate and apply toward the payment of such of the Obligations, whether matured or unmatured, including costs of collection and attorneys' and paralegals' fees, and in such order of application as the Bank may, from time to time, elect, any indebtedness of the Bank to any Obligor, however created or arising, including, but not limited to, balances, credits, deposits, accounts or moneys of such Obligor in the possession, control or custody of, or in transit to the Bank. The Borrower, on behalf of itself and each Obligor, hereby waives the benefit of any law that would otherwise restrict or limit the Bank in the exercise of its right, which is hereby acknowledged, to appropriate at any time hereafter any such indebtedness owing from the Bank to any Obligor. 12.5 Additional Remedies. The Bank shall have the right and power to: (a) instruct the Borrower, at its own expense, to notify any parties obligated on any of the Collateral, including, but not limited to, any Account Debtors, to make payment directly to the Bank of any amounts due or to become due thereunder, or the Bank may directly notify such obligors of the security interest of the Bank, and/or of the assignment to the Bank of the Collateral and direct such obligors to make payment to the Bank of any amounts due or to become due with respect thereto, and thereafter, collect any such amounts due on the Collateral directly from such Persons obligated thereon; (b) enforce collection of any of the Collateral, including, but not limited to, any Accounts, by suit or otherwise, or make any compromise or settlement with respect to any of the Collateral, or surrender, release or exchange all or any part thereof, or compromise, extend 33 or renew for any period (whether or not longer than the original period) any indebtedness thereunder; (c) take possession or control of any proceeds and products of any of the Collateral, including the proceeds of insurance thereon; (d) extend, renew or modify for one or more periods (whether or not longer than the original period) the Note, any other of the Obligations, any obligation of any nature of any other obligor with respect to the Note or any of the Obligations; (e) grant releases, compromises or indulgences with respect to the Note, any of the Obligations, any extension or renewal of any of the Obligations, any security therefor, or to any other obligor with respect to the Note or any of the Obligations; (f) transfer the whole or any part of securities which may constitute Collateral into the name of the Bank or the Bank's nominee without disclosing, if the Bank so desires, that such securities so transferred are subject to the security interest of the Bank, and any corporation, association, or any of the managers or trustees of any trust issuing any of said securities, or any transfer agent, shall not be bound to inquire, in the event that the Bank or said nominee makes any further transfer of said securities, or any portion thereof, as to whether the Bank or such nominee has the right to make such further transfer, and shall not be liable for transferring the same; (g) vote the Collateral; (h) make an election with respect to the Collateral under Section 1111 of the Bankruptcy Code or take action under Section 364 or any other section of the Bankruptcy Code; provided, however, that any such action of the Bank as set forth herein shall not, in any manner whatsoever, impair or affect the liability of the Borrower hereunder, nor prejudice, waive, nor be construed to impair, affect, prejudice or waive the Bank's rights and remedies at law, in equity or by statute, nor release, discharge, nor be construed to release or discharge, the Borrower, any guarantor or other Person liable to the Bank for the Obligations; and (i) at any time, and from time to time, accept additions to, releases, reductions, exchanges or substitution of the Collateral, without in any way altering, impairing, diminishing or affecting the provisions of this Agreement, the Loan Documents, or any of the other Obligations, or the Bank's rights hereunder, under the Note or under any of the other Obligations. 34 The Borrower hereby ratifies and confirms whatever the Bank may do with respect to the Collateral and agrees that the Bank shall not be liable for any error of judgment or mistakes of fact or law with respect to actions taken in connection with the Collateral. 12.6 Attorney-in-Fact. The Borrower hereby irrevocably makes, constitutes and appoints the Bank (and any officer of the Bank or any Person designated by the Bank for that purpose) as the Borrower's true and lawful proxy and attorney-in-fact (and agent-in-fact) in the Borrower's name, place and stead, with full power of substitution, to (i) take such actions as are permitted in this Agreement, (ii) execute such financing statements and other documents and to do such other acts as the Bank may require to perfect and preserve the Bank's security interest in, and to enforce such interests in the Collateral, and (iii) carry out any remedy provided for in this Agreement, including, without limitation, endorsing the Borrower's name to checks, drafts, instruments and other items of payment, and proceeds of the Collateral, executing change of address forms with the postmaster of the United States Post Office serving the address of the Borrower, changing the address of the Borrower to that of the Bank, opening all envelopes addressed to the Borrower and applying any payments contained therein to the Obligations. The Borrower hereby acknowledges that the constitution and appointment of such proxy and attorney-in-fact are coupled with an interest and are irrevocable. The Borrower hereby ratifies and confirms all that said attorney-in-fact may do or cause to be done by virtue of any provision of this Agreement. 12.7 No Marshaling. The Bank shall not be required to marshal any present or future collateral security (including but not limited to this Agreement and the Collateral) for, or other assurances of payment of, the Obligations or any of them or to resort to such collateral security or other assurances of payment in any particular order. To the extent that it lawfully may, the Borrower hereby agrees that it will not invoke any law relating to the marshaling of collateral which might cause delay in or impede the enforcement of the Bank's rights under this Agreement or under any other instrument creating or evidencing any of the Obligations or under which any of the Obligations is outstanding or by which any of the Obligations is secured or payment thereof is otherwise assured, and, to the extent that it lawfully may, the Borrower hereby irrevocably waives the benefits of all such laws. 12.8 Application of Proceeds. The Bank will within three (3) business days after receipt of cash or solvent credits from collection of items of payment, proceeds of Collateral or any other source, apply the whole or any part thereof against the Obligations secured hereby. The Bank shall further have the exclusive right to determine how, when and what application of such payments and such credits shall be made on the Obligations, and such determination shall be conclusive upon the Borrower. Any proceeds of any disposition by the Bank of all or any part of the Collateral may be first applied by the Bank to the payment of expenses incurred by the Bank in connection with the Collateral, including attorneys' fees and legal expenses as provided for in SECTION 13 hereof. 12.9 No Waiver. No Event of Default shall be waived by the Bank except in writing. No failure or delay on the part of the Bank in exercising any right, power or remedy hereunder shall operate as a waiver of the exercise of the same or any other right at any other time; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy hereunder. There 35 shall be no obligation on the part of the Bank to exercise any remedy available to the Bank in any order. The remedies provided for herein are cumulative and not exclusive of any remedies provided at law or in equity. The Borrower agrees that in the event that the Borrower fails to perform, observe or discharge any of its Obligations or liabilities under this Agreement or any other agreements with the Bank, no remedy of law will provide adequate relief to the Bank, and further agrees that the Bank shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. 13. MISCELLANEOUS. ------------- 13.1 Obligations Absolute. None of the following shall affect the Obligations of the Borrower to the Bank under this Agreement or the Bank's rights with respect to the Collateral: (a) acceptance or retention by the Bank of other property or any interest in property as security for the Obligations; (b) release by the Bank of all or any part of the Collateral or of any party liable with respect to the Obligations; (c) release, extension, renewal, modification or substitution by the Bank of the Note, or any note evidencing any of the Obligations, or the compromise of the liability of the Obligations; or (d) failure of the Bank to resort to any other security or to pursue the Borrower or any other obligor liable for any of the Obligations before resorting to remedies against the Collateral. 13.2 Entire Agreement. This Agreement (i) is valid, binding and enforceable against the Borrower and the Bank in accordance with its provisions and no conditions exist as to its legal effectiveness; (ii) constitutes the entire agreement between the parties; and (iii) is the final expression of the intentions of the Borrower and the Bank. No promises, either expressed or implied, exist between the Borrower and the Bank, unless contained herein. This Agreement supersedes all negotiations, representations, warranties, commitments, offers, contracts (of any kind or nature, whether oral or written) prior to or contemporaneous with the execution hereof. 13.3 Amendments; Waivers. No amendment, modification, termination, discharge or waiver of any provision of this Agreement or of the Loan Documents, or consent to any departure by the Borrower therefrom, shall in any event be effective unless the same shall be in writing and signed by the Bank, and then such waiver or consent shall be effective only for the specific purpose for which given. 13.4 WAIVER OF DEFENSES. THE BORROWER, ON BEHALF OF ITSELF AND ANY GUARANTORS OF ANY OF THE OBLIGATIONS, WAIVES EVERY PRESENT AND FUTURE DEFENSE, CAUSE OF ACTION, COUNTERCLAIM OR SETOFF WHICH THE BORROWER MAY NOW HAVE OR HEREAFTER MAY HAVE TO ANY ACTION BY THE BANK IN ENFORCING THIS AGREEMENT. THE BORROWER WAIVES ANY IMPLIED COVENANT OF GOOD FAITH AND RATIFIES AND CONFIRMS WHATEVER THE BANK MAY DO PURSUANT TO THE TERMS OF THIS AGREEMENT. THIS PROVISION 36 IS A MATERIAL INDUCEMENT FOR THE BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER. 13.5 WAIVER OF JURY TRIAL. THE BANK AND THE BORROWER, AFTER CONSULTING OR HAVING HAD THE OPPORTUNITY TO CONSULT WITH COUNSEL, EACH KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE IRREVOCABLY, THE RIGHT TO TRIAL BY JURY WITH RESPECT TO ANY LEGAL PROCEEDING BASED HEREON, OR ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE NOTE OR ANY OF THE OTHER OBLIGATIONS, THE COLLATERAL, OR ANY OTHER AGREEMENT EXECUTED OR CONTEMPLATED TO BE EXECUTED IN CONJUNCTION WITH THIS AGREEMENT, OR ANY COURSE OF CONDUCT OR COURSE OF DEALING IN WHICH THE BANK AND THE BORROWER ARE ADVERSE PARTIES. THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE BANK GRANTING ANY FINANCIAL ACCOMMODATION TO THE BORROWER. 13.6 LITIGATION. TO INDUCE THE BANK TO MAKE THE LOANS, THE BORROWER IRREVOCABLY AGREES THAT ALL ACTIONS ARISING, DIRECTLY OR INDIRECTLY, AS A RESULT OR CONSEQUENCE OF THIS AGREEMENT, THE NOTE[S], ANY OTHER AGREEMENT WITH THE BANK OR THE COLLATERAL, SHALL BE INSTITUTED AND LITIGATED ONLY IN COURTS HAVING THEIR SITUS IN THE CITY OF CHICAGO, ILLINOIS. THE BORROWER HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION AND VENUE OF ANY STATE OR FEDERAL COURT HAVING ITS SITUS IN SAID CITY, AND WAIVES ANY OBJECTION BASED ON FORUM NON CONVENIENS. THE BORROWER HEREBY WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS AND CONSENTS THAT ALL SUCH SERVICE OF PROCESS MAY BE MADE BY CERTIFIED MAIL, RETURN RECEIPT REQUESTED, DIRECTED TO THE BORROWER AS SET FORTH HEREIN IN THE MANNER PROVIDED BY APPLICABLE STATUTE, LAW, RULE OF COURT OR OTHERWISE. 13.7 Assignability. The Bank may at any time assign the Bank's rights in this Agreement, the Note, the Obligations, or any part thereof and transfer the Bank's rights in any or all of the Collateral, and the Bank thereafter shall be relieved from all liability with respect to such Collateral. In addition, the Bank may at any time sell one or more participations in the Loans. The Borrower may not sell or assign this Agreement, or any other agreement with the Bank or any portion thereof, either voluntarily or by operation of law, without the prior written consent of the Bank. This Agreement shall be binding upon the Bank and the Borrower and their respective legal representatives and successors. All references herein to the Borrower shall be deemed to include any successors, whether immediate or remote. In the case of a joint venture or partnership, the term "Borrower" shall be deemed to include all joint venturers or partners thereof, who shall be jointly and severally liable hereunder. 13.8 Confidentiality. The Borrower and the Bank hereby agree and acknowledge that any and all information relating to the Borrower which is (i) furnished by the Borrower to the Bank (or to any affiliate of the Bank), and (ii) non-public, confidential or proprietary in nature, shall be kept confidential by the Bank or such affiliate in accordance with applicable law, provided, however, that such information and other credit information relating to the Borrower may be distributed by the Bank or such affiliate to the Bank's 37 or such affiliate's directors, officers. employees, attorneys, affiliates, auditors and regulators, and upon the order of a court or other governmental agency having jurisdiction over the Bank or such affiliate, to any other party. The Borrower and the Bank further agree that this provision shall survive the termination of this Agreement. 13.9 Binding Effect. This Agreement shall become effective upon execution by the Borrower and the Bank. If this Agreement is not dated or contains any blanks when executed by the Borrower, the Bank is hereby authorized, without notice to the Borrower, to date this Agreement as of the date when it was executed by the Borrower, and to complete any such blanks according to the terms upon which this Agreement is executed. 13.10 Governing Law. This Agreement, the Loan Documents and the Note shall be delivered and accepted in and shall be deemed to be contracts made under and governed by the internal laws of the State of Illinois (but giving effect to federal laws applicable to national banks), and for all purposes shall be construed in accordance with the laws of such State, without giving effect to the choice of law provisions of such State. 13.11 Enforceability. Wherever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by, unenforceable or invalid under any jurisdiction, such provision shall as to such jurisdiction, be severable and be ineffective to the extent of such prohibition or invalidity, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 13.12 Survival of Borrower Representations. All covenants, agreements, representations and warranties made by the Borrower herein shall, notwithstanding any investigation by the Bank, be deemed material and relied upon by the Bank and shall survive the making and execution of this Agreement and the Loan Documents and the issuance of the Note[S], and shall be deemed to be continuing representations and warranties until such time as the Borrower has fulfilled all of its Obligations to the Bank, and the Bank has been paid in full. The Bank, in extending financial accommodations to the Borrower, is expressly acting and relying on the aforesaid representations and warranties. 13.13 Extensions of Bank's Commitment and Note. This Agreement shall secure and govern the terms of any extensions or renewals of the Bank's commitment hereunder and the Note pursuant to the execution of any modification, extension or renewal note executed by the Borrower and accepted by the Bank in its sole and absolute discretion in substitution for the Note. 13.14 Time of Essence. Time is of the essence in making payments of all amounts due the Bank under this Agreement and in the performance and observance by the Borrower of each covenant, agreement, provision and term of this Agreement. 13.15 Counterparts. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same instrument. 38 13.16 Facsimile Signatures. The Bank is hereby authorized to rely upon and accept as an original any Loan Documents or other communication which is sent to the Bank by facsimile, telegraphic or other electronic transmission (each, a "Communication") which the Bank in good faith believes has been signed by Borrower and has been delivered to the Bank by a properly authorized representative of the Borrower, whether or not that is in fact the case. Notwithstanding the foregoing, the Bank shall not be obligated to accept any such Communication as an original and may in any instance require that an original document be submitted to the Bank in lieu of, or in addition to, any such Communication. 13.17 Notices. Except as otherwise provided herein, the Borrower waives all notices and demands in connection with the enforcement of the Bank's rights hereunder. All notices, requests, demands and other communications provided for hereunder shall be in writing, sent by certified or registered mail, postage prepaid, by facsimile, telegram or delivered in person, and addressed as follows: If to the Borrower: Arlington Hospitality, Inc. 2355 South Arlington Heights Road Arlington Heights, Illinois 60005 Attention: Legal Department If to the Bank: LaSalle Bank National Association 2355 South Arlington Heights Road Arlington Heights, Illinois 60005 Attention: Alan L. Clark First Vice President or, as to each party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this subsection. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. 13.18 Indemnification. The Borrower agrees to defend (with counsel satisfactory to the Bank), protect, indemnify and hold harmless each Indemnified Party from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, expenses and distributions of any kind or nature (including, without limitation, the disbursements and the reasonable fees of counsel for each Indemnified Party thereto, which shall also include, without limitation, attorneys' fees and time charges of attorneys who may be employees of the Bank, any parent corporation or affiliated corporation of the Bank), which may be imposed on, incurred by, or asserted against, any Indemnified Party (whether direct, indirect or consequential and whether based on any federal, state or local laws or regulations, including, without limitation, securities, Environmental Laws and commercial laws and regulations, under common law or in equity, or based on contract or otherwise) in any manner relating to or arising out of this Agreement or any of the Loan Documents, or any act, event or transaction related or attendant thereto, the preparation, execution and delivery of this Agreement and the Loan Documents, including, but not limited to, the making or issuance and management of the Loans, the use or intended use of the proceeds of the Loans, the enforcement of the Bank's rights and remedies under this Agreement, the Loan Documents, the Note[S], any other instruments and documents delivered hereunder, or under any other agreement 39 between the Borrower and the Bank; provided, however, that the Borrower shall not have any obligations hereunder to any Indemnified Party with respect to matters caused by or resulting from the willful misconduct or gross negligence of such Indemnified Party. To the extent that the undertaking to indemnify set forth in the preceding sentence may be unenforceable because it violates any law or public policy, the Borrower shall satisfy such undertaking to the maximum extent permitted by applicable law. Any liability, obligation, loss, damage, penalty, cost or expense covered by this indemnity shall be paid to each Indemnified Party on demand, and, failing prompt payment, shall, together with interest thereon at the Default Rate from the date incurred by each Indemnified Party until paid by the Borrower, be added to the Obligations of the Borrower and be secured by the Collateral. The provisions of this SECTION 13.18 shall survive the satisfaction and payment of the other Obligations and the termination of this Agreement. 13.19 Waiver of Existing Defaults. Bank waives Borrower's failure as of December 31, 2002 to be in compliance with its covenants regarding Total Liabilities to Net Worth and consolidated EBITDA to consolidated Debt Service Charges as set forth in Sections 10.2 and 10.3 of the Loan Agreement and any Event of Default created thereby solely as of such date. This shall be a limited waiver and shall not constitute a waiver of any subsequent covenant violations or any other defaults of Borrower, if any, not expressly described herein, whether of a different or like nature, nor shall it constitute a course of conduct or dealing. 40 IN WITNESS WHEREOF, the Borrower and the Bank have executed this Amended and Restated Loan and Security Agreement as of the date first above written. ARLINGTON HOSPITALITY, INC., a Delaware corporation ATTEST: By: By: Name: --------------------- Name: Title: --------------------- Title: --------------------- and By: Name: Title: Agreed and accepted: LASALLE BANK NATIONAL ASSOCIATION, a national banking association By: Name: Title: 41 EXHIBIT A --------- AMENDED AND RESTATED -------------------- REVOLVING NOTE -------------- Chicago, Illinois $6,500,000.00 Dated: April 30, 2003 Due: April 30, 2004 FOR VALUE RECEIVED, ARLINGTON HOSPITALITY, INC., a Delaware corporation (together with its respective successors and assigns, individually and collectively, the "Borrower"), promises to pay to the order of LASALLE BANK NATIONAL ASSOCIATION, a national banking association (the "Bank"), the principal sum of SIX MILLION FIVE HUNDRED THOUSAND AND 00/100 DOLLARS ($6,500,000.00), or, if less, the aggregate unpaid principal amount of all advances made by the Bank to the Borrower hereunder, on April 30, 2004. This Note constitutes the Amended and Restated Revolving Note issued pursuant to an Amended and Restated Loan and Security Agreement dated as of April 30, 2003, which amended and restated a certain Loan and Security Agreement dated as of February 1, 2002, as amended by a certain First Amendment to Loan and Security Agreement dated as of August 9, 2002 and a certain Second Amendment to Loan and Security Agreement dated as of December 10, 2002 (collectively, the "Loan Agreement") by and between the Borrower and the Bank, to which Loan Agreement reference is hereby made for a statement of the terms and conditions under which the Revolving Loans evidenced hereby may be made and a description of the terms and conditions upon which this Note may be prepaid in whole or in part, but shall not constitute payment of the Revolving Note dated February 1, 2002, as replaced by a Substitute Revolving Note dated December 10, 2002, or constitute a novation thereof. In case an Event of Default, as defined in the Loan Agreement, shall occur, the entire unpaid principal and accrued interest may be automatically due and payable or may be declared due and payable as provided in the Loan Agreement. The unpaid principal shall bear interest from the date hereof until paid as set forth in the Loan Agreement. Interest shall be payable in accordance with the terms of the Loan Agreement. This Note is subject to optional and mandatory prepayment in certain circumstances, all as set forth in the Loan Agreement. In the event that any installment of the principal of, or interest on, this Note, is not paid when due (whether at stated maturity, by acceleration or otherwise), the entire principal amount outstanding shall bear interest at an annual rate equal to the Prime Rate (as defined in the Loan Agreement) plus five percent (5%) per annum, from the due date until all overdue amounts have been paid in full. Payments of both principal and interest are to be made in lawful money of the United States of America at the offices of the Bank at 135 South LaSalle Street, Chicago, Illinois 60603, or at such other place as the holder shall designate in writing to the maker. This Note is secured by a security interest in Collateral (as defined in the Loan Agreement) and by those certain Mortgages (as defined in the Loan Agreement) dated of even date herewith, each made by a Subsidiary (as defined in the Loan Agreement) for the benefit of the Bank. The maker and all endorsers hereby severally waive presentment for payment, protest and demand, notice of protest, demand and of dishonor and nonpayment of this Note. Borrower hereby agrees to pay all reasonable fees and expenses incurred by the Bank or any subsequent holder, including the reasonable fees of counsel, in connection with protection and enforcement of the rights of the Bank or any subsequent holder under this Note, including without limitation the collection of any amounts due under this Note and the protection and enforcement of such rights in any bankruptcy, reorganization or insolvency proceeding involving the Borrower. This Note is binding upon Borrower and its successors and assigns and shall inure to the benefit of the Bank and its successors and assigns. This Note is made under and governed by the laws of the State of Illinois, without regard to conflicts of laws principles. IN WITNESS WHEREOF, Borrower has executed this Amended and Restated Revolving Note as of the day and year first above written. ARLINGTON HOSPITALITY, INC. a Delaware corporation By:_______________________________ Its:_______________________________ and By:_______________________________ Its:_______________________________ 2 EX-99.1 4 a32381_x991q103.txt CERTIFICATION OF CEO AND CFO EXHIBIT 99.1 Certification of CEO and CFO 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 on Form 10-Q of Arlington Hospitality, Inc. (the "Company") for the period ending March 31, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), Jerry H. Herman, as Chief Executive Officer of the Company, and James B. Dale, as Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their 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. /s/ Jerry H. Herman ----------------------------------- Name: Jerry H. Herman ------------------------------ Title: Chief Executive Officer ----------------------------- /s/ James B. Dale ----------------------------------- Name: James B. Dale ------------------------------ Title: Chief Financial Officer ----------------------------- May 15, 2003 -----END PRIVACY-ENHANCED MESSAGE-----