-----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, EMN6wrjmgCBIbbfxJGo2oz/GwFSy15ZZ23yZZQz5qMkppoiGrK8UY8NwNBsEoLqx sk1CsOxPvTk69lKXlxQaXg== 0000914760-99-000077.txt : 19990331 0000914760-99-000077.hdr.sgml : 19990331 ACCESSION NUMBER: 0000914760-99-000077 CONFORMED SUBMISSION TYPE: 10KT405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: AMERIHOST PROPERTIES INC CENTRAL INDEX KEY: 0000778423 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 363312434 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KT405 SEC ACT: SEC FILE NUMBER: 000-15291 FILM NUMBER: 99578657 BUSINESS ADDRESS: STREET 1: 2400 E DEVON AVE STE 280 CITY: DES PLAINES STATE: IL ZIP: 60018 BUSINESS PHONE: 7082984500 MAIL ADDRESS: STREET 1: 2400 E DEVON AVE STREET 2: SUITE 280 CITY: DES PLAINES STATE: IL ZIP: 60018 FORMER COMPANY: FORMER CONFORMED NAME: AMERICA POP INC DATE OF NAME CHANGE: 19871111 10KT405 1 ================================================================================ - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1998 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File No. 0-15291 AMERIHOST PROPERTIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 36-3312434 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2400 EAST DEVON AVE., SUITE 280, DES PLAINES, ILLINOIS 60018 - ------------------------------------------------------ ----- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (847) 298-4500 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Each Class on which registered ------------------- ------------------- NONE NONE Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.005 per share ---------------------------------------- (Title of class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| While it is difficult to determine the number of shares owned by non-affiliates (within the meaning of the term under the applicable regulations of the Securities and Exchange Commission), the registrant estimates that the aggregate market value of the registrant's Common Stock held by non-affiliates on March 26, 1999 (based upon an estimate that 82.8% of the shares are so owned by non-affiliates and upon the closing price for the Common Stock of $3.13) was $15,706,459. As of March 26, 1999, 6,067,850 shares of the Registrant's Common Stock were outstanding. The following documents are incorporated into this Form 10-K by reference: None ================================================================================ PART I ITEM 1. BUSINESS. GENERAL Amerihost Properties, Inc. and its subsidiaries (collectively, where appropriate, "Amerihost," or the "Company") is engaged in the development and construction of AmeriHost Inn(R) hotels, its proprietary hotel brand, and the ownership, operation and management of both AmeriHost Inn(R) hotels and other hotels. The AmeriHost Inn(R) brand was created by the Company to provide for the consistent, cost-effective development and operation of mid-price hotels in various markets. All AmeriHost Inn(R) hotels are designed and developed using the Company's 60 to 120 room, interior corridor and indoor pool prototype design and are located in tertiary and secondary markets. As of December 31, 1998, the Company owned, operated or managed 91 hotels located in 18 states. Of these hotels, 75 hotels are operated or managed under the Company's proprietary brand, the AmeriHost Inn(R). Of the 91 hotels, the Company owns a 100% or majority ownership interest in 69 hotels and a minority equity interest, ranging from 10% to 50%, in 16 hotels. Of the 85 hotels in which the Company has an ownership interest, 72 are AmeriHost Inn(R) hotels and 13 are other brands, which in most cases were acquired, renovated and repositioned in their respective marketplaces between 1987 and 1993. The majority of the other brand hotels are franchised through Days Inn, Hampton Inn, Holiday Inn and Ramada Inn. The Company also managed six hotels at December 31, 1998 for unaffiliated third parties whereby the Company has no ownership interest. Three of the six managed hotels operate as AmeriHost Inn(R) hotels. As of December 31, 1998, an additional six AmeriHost Inn(R) hotels were under construction. The Company has 100% ownership in five of these hotels, and a minority ownership interest in one. The table below sets forth information regarding the hotels at December 31, 1998.
Open Under Hotels Construction Total Hotels Rooms Hotels Rooms Hotels Rooms ------ ----- ------ ----- ------ ----- 100% or majority ownership: AmeriHost Inn(R)hotels 61 3,866 5 306 66 4,172 Other brands 8 1,050 -- -- 8 1,050 ----- ----- ----- ----- ----- ----- 69 4,916 5 306 74 5,222 ----- ----- ----- ----- ----- ----- Minority ownership interest: AmeriHost Inn(R)hotels 11 702 1 72 12 774 Other brands 5 473 -- -- 5 473 ----- ----- ----- ----- ----- ----- 16 1,175 1 72 17 1,247 ----- ----- ----- ----- ----- ----- Managed only hotels: AmeriHost Inn(R)hotels 3 182 -- -- 3 182 Other brands 3 573 -- -- 3 573 ----- ----- ----- ----- ----- ----- 6 755 -- -- 6 755 ----- ----- ----- ----- ----- ----- Totals: AmeriHost Inn(R)hotels 75 4,750 6 378 81 5,128 Other brands 16 2,096 -- -- 16 2,096 ----- ----- ----- ----- ----- ----- 91 6,846 6 378 97 7,224 ===== ===== ===== ===== ===== =====
Since 1993, the Company's growth strategy has focused on the expansion and increased ownership of the AmeriHost Inn(R) hotel brand through new development and construction. During 1997 and 1998, 34 newly constructed AmeriHost Inn(R) hotels were opened, 20 of which are 100% owned by the Company, and 14 are or were owned by joint ventures in which the Company has a minority ownership interest. Historically, the AmeriHost Inn(R) hotels achieved a revenue per available room ("RevPAR") higher than that realized by the Company's other owned hotels, including those operated under national franchise affiliations. These favorable operating results experienced by the AmeriHost Inn(R) hotels led to the Company's decision to focus on expanding this brand rather than acquiring or developing hotels under other brand affiliations. The Company intends to continue expanding the development of AmeriHost Inn(R) hotels. The Company entered into a sale/leaseback arrangement for 30 of its hotels in 1998, of which 26 were closed by December 31, 1998. This transaction provided capital for additional expansion of the AmeriHost Inn(R) brand and other fee based revenue sources, while allowing the Company to continue realizing the benefits of its hotel operations. A large portion of the proceeds from this transaction were used for the purchase of AmeriHost Inn(R) hotels from entities in which the Company had a minority ownership interest. For new construction projects, the Company offers "turn-key" development services, having the in-house expertise to manage a project from inception through completion, including market research, site selection, architectural services, the securing of financing and construction management. The construction contracts entered into between the Company and the entities owning the hotels have generally been one of two types, providing either for the Company to receive costs plus developer's and construction overhead fees or a fixed fee. The Company has used its development and construction expertise for its own account, for joint ventures in which the Company has an ownership interest, and for unaffiliated parties. The Company offers complete operational and financial management services, including sales, marketing, quality control, training, purchasing and accounting. This expertise is used for the Company's own account, as well as for joint ventures and unaffiliated entities pursuant to written management contracts. However, under certain management contracts, the Company's joint venture partners or co-managers are responsible for the day-to-day operational management, while the Company provides full financial management and operational consulting and assistance. The Company is currently managing or co-managing all of the hotels in which it has a minority ownership interest, and is also managing four hotels for unaffiliated third parties. These hotels are managed under contracts ranging from 1 to 10 years, with optional renewal periods of equal length, and contain provisions under which the Company is paid fees equal to a percentage of total gross revenues for its services and, in some instances, additional incentive fees based upon hotel performance. The Company has developed centralized systems and procedures which it believes allow it to manage the hotels effectively and efficiently. The Company intends to actively pursue management contracts with additional third parties, while continuing to manage hotels for current as well as future joint ventures. The Company also provides employee leasing services to hotels in which the Company has a minority ownership interest and to hotels owned by unaffiliated third parties which are managed by the Company. Under its employee leasing program, the Company employs all of the personnel working at the participating hotels and leases them to the hotels pursuant to written agreements. Employee leasing affords the Company greater control over payroll costs and allows the participating hotels to benefit from economies of scale on personnel-related costs. The Company's employee leasing agreements typically provide for one year terms, with automatic one year renewals. The Company generally receives fees from each participating hotel in an amount equal to the gross payroll costs for the leased employees, including all related taxes and benefits, plus a percentage of the gross payroll. All revenues attributable to development, construction, management and employee leasing services with respect to hotels in which the Company has a 100% or majority ownership interest have been eliminated in consolidation. AMERIHOST INN(R) HOTELS AmeriHost Inn(R) hotels, the Company's proprietary brand, are designed and constructed using the Company's 60 to 120 room, interior corridor and indoor pool prototype design. The AmeriHost Inn(R) hotel's amenities and services include 24-hour front desk and message service, facsimile machines, whirlpool, exercise room, meeting room, a covered entrance and extensive exterior lighting for added security. The standard AmeriHost Inn(R) guest room features an electronic card-key lock, in-room safe, in-room coffee maker, telephone with data port for personal computer, a work area and a 25" color television with premium cable service or movies on demand. In addition, each Amerihost Inn(R) hotel typically includes two to 12 whirlpool suites which, in addition to the standard amenities, include in-room whirlpools, microwave ovens, compact refrigerators and an expanded sitting area. AmeriHost Inn(R) hotels do not contain food and beverage facilities normally associated with full-service hotels. Food service for hotel guests is generally available from adjacent or nearby free-standing restaurants which are independently owned and operated. The AmeriHost Inn(R) hotels are operated or managed by the Company in accordance with strict guidelines designed to provide guests with a consistent lodging experience. The Company believes the quality and consistency of the amenities and services provided by its AmeriHost Inn(R) hotels increase guest satisfaction and repeat business. The quality of the AmeriHost Inn(R) product and the consistency of the amenities and services have assisted the chain in becoming one of only a few hotel chains in the U.S. to have achieved an American Automobile Association ("AAA") Three Diamond rating at all of its hotels. The Company targets smaller communities in tertiary and secondary markets with established demand generators such as major traffic arteries, office complexes, industrial parks, shopping malls, colleges and universities or tourist attractions, as the principal location for the development and construction of AmeriHost Inn(R) hotels. An AmeriHost Inn(R) hotel is typically positioned to attract both business and leisure travelers seeking consistent amenities and quality rooms at reasonable rates, generally ranging from $45 to $70 per night. The Company's in-house design staff, centralized purchasing program, strict cost controls, and low average land costs all contribute to a favorable cost structure in developing and constructing new AmeriHost Inn(R) hotels. Furthermore, due to the centralization of all accounting, purchasing, payroll and other administrative functions, each hotel is operated efficiently and effectively with a minimal on-site staff. These factors assist the Company in maximizing its return on invested capital, while offering an excellent value to its guests. OTHER OWNED HOTELS The Company's non-AmeriHost Inn(R) hotels were primarily acquired by the Company through joint ventures prior to 1993, in most instances at prices below estimated replacement costs. The other hotels have been owned, operated and managed by the Company independently, or as part of a national franchise system such as Days Inn, Hampton Inn, Holiday Inn, and Ramada Inn. The Company believes that franchises in these locations are important in maintaining occupancy levels, which are supported by the Franchisor's national reservation systems and marketing efforts and brand name recognition. The Company's non-AmeriHost Inn(R) hotels typically are also located in secondary and tertiary markets, with nearby demand generators such as airports, major traffic arteries, office complexes, industrial parks, shopping malls, colleges and universities or tourist attractions. The non-AmeriHost Inn(R) hotels contain 60 to 215 rooms, generate average daily rates ranging from $35 to $65 per night and offer a variety of amenities and services. Approximately one-third of these hotels contain food and beverage facilities. As part of the Company's strategy to focus its ownership primarily on AmeriHost Inn(R) hotels, the Company intends to pursue selective sales of certain of these other hotels, if and when attractive terms are available. During 1997, the Company sold one wholly-owned hotel and two hotel partnerships in which the Company was a general partner sold their hotels, resulting in cash distributions to the Company upon their sale. During 1998, five hotel partnership in which the Company was a general partner sold its hotel, resulting in proceeds to the Company upon the sale. These proceeds were, and any proceeds from future sales, if and when completed, are expected to be used by the Company to develop additional AmeriHost Inn(R) hotels or pursue other growth objectives of the Company. HOTEL PROPERTIES At December 31, 1998, the Company owned and/or managed 91 hotels in 18 states, concentrated in the midwestern and southern United States. The Company had an additional six hotels under construction located generally in the same geographical areas. Because the hotel industry is seasonal, the revenues generated by the hotels managed by the Company will increase or decrease depending upon the time of year. Since the Company's management fees are based upon a percentage of the hotels' total gross revenues, the Company is further susceptible to these seasonal variations. Given the location of the properties the Company manages, the revenues are typically lower in the first and fourth quarters of each year. The following is a list of hotel properties under the Company's management at December 31, 1998 by state:
Date State Hotel (1) Rooms Operations Began - ----- --------- ------- ---------------- California AmeriHost Inn(R)Anderson 61 01/20/97 AmeriHost Inn(R)Corning 60 05/29/98 AmeriHost Inn(R)Yreka 61 08/04/97 ------ 182 Florida Hampton Inn Ft. Myers 123 09/30/92 ------ Georgia AmeriHost Inn(R)Eagles Landing, Stockbridge 60 08/08/95 AmeriHost Inn(R)LaGrange 59 03/01/95 AmeriHost Inn(R)Smyrna 60 12/21/95 Days Inn Northwest, Atlanta 107 11/01/91 Days Inn Peachtree, Atlanta 142 11/01/91 ------ 428 Illinois AmeriHost Inn(R)Effingham (3) 61 02/07/97 AmeriHost Inn(R)Harvard 60 07/01/96 AmeriHost Inn(R)Jacksonville 60 06/14/96 AmeriHost Inn(R)Macomb 60 05/19/95 AmeriHost Inn(R)Players Riverboat Hotel, Metropolis 120 02/25/94 AmeriHost Inn(R)Rochelle 61 03/07/97 AmeriHost Inn(R)Sycamore 60 05/31/96 AmeriHost Inn(R)Tuscola 59 08/17/94 Days Inn Niles 149 01/01/90 Days Inn Shorewood 116 10/01/89 ------ 806 Indiana AmeriHost Inn(R)Decatur 60 08/30/98 AmeriHost Inn(R)Hammond 86 03/29/96 AmeriHost Inn(R)Huntington 62 08/21/98 AmeriHost Inn(R)Muncie (3) 60 04/07/95 AmeriHost Inn(R)Plainfield 60 09/01/92 Days Inn Crawfordsville (2) 60 01/30/89 Days Inn Plainfield (2) 64 05/01/90 Days Inn Portage 118 04/01/91 Days Inn Sullivan 60 08/14/87 Ramada Inn Lafayette 144 02/02/94 ------ 774 Iowa AmriHost Inn(R)Boone 60 08/21/98 AmeriHost Inn(R)Le Mars 63 01/07/98 AmeriHost Inn(R)Mt. Pleasant 63 07/02/97 AmeriHost Inn(R)Storm Lake 61 08/13/97 AmeriHost Inn(R)Waverly 60 08/28/96 ------ 307
Date State Hotel (1) Rooms Operations Began - ----- ----- ------- ---------------- Kentucky AmeriHost Inn(R)Murray 60 11/01/96 ------ Louisiana Days Inn Kenner, New Orleans 324 11/01/91 ------ Michigan AmeriHost Inn(R)Coopersville 60 12/31/95 AmeriHost Inn(R)Dundee 60 08/14/98 AmeriHost Inn(R)Grand Blanc 60 07/17/96 AmeriHost Inn(R)Grand Rapids North, Walker 60 07/05/95 AmeriHost Inn(R)Grand Rapids South 61 06/11/97 AmeriHost Inn(R)Hudsonville 61 11/24/97 AmeriHost Inn(R)Ionia 60 04/22/98 AmeriHost Inn(R)Marshall 61 04/02/97 AmeriHost Inn(R)Monroe 63 09/19/97 AmeriHost Inn(R)Muskegon, Norton Shores 61 11/04/96 AmeriHost Inn(R)Port Huron 61 07/01/97 ------ 668 Mississippi AmeriHost Inn(R)Batesville 60 04/26/96 AmeriHost Inn(R)Tupelo 61 07/25/97 Days Inn Vicksburg Landing 89 05/13/95 ------ 210 Missouri AmeriHost Inn(R)Mexico 61 12/06/97 AmeriHost Inn(R)Warrenton 63 11/07/97 ------ 124 Ohio AmeriHost Inn(R)Ashland 62 08/09/96 AmeriHost Inn(R)Athens (2) 102 11/04/89 AmeriHost Inn(R)Cambridge (2) 72 02/06/98 AmeriHost Inn(R)Canal Winchester (2) 60 04/17/98 AmeriHost Inn(R)Delaware 73 05/16/97 AmeriHost Inn(R)Jeffersonville North (2) 60 07/20/96 AmeriHost Inn(R)Jeffersonville South (2) 60 10/14/94 AmeriHost Inn(R)Kenton (2) 60 08/02/96 AmeriHost Inn(R)Lancaster (2) 60 09/04/92 AmeriHost Inn(R)Logan (2) 60 04/16/93 AmeriHost Inn(R)Mansfield 60 11/19/94 AmeriHost Inn(R)Marysville 79 06/01/90 AmeriHost Inn(R)Norwalk (3) 61 07/25/97 AmeriHost Inn(R)Oxford 61 02/01/91 AmeriHost Inn(R)St. Mary's (2) 61 11/25/97 AmeriHost Inn(R)Upper Sandusky 60 04/12/95 AmeriHost Inn(R)Wilmington (2) 61 02/21/97 AmeriHost Inn(R)Wooster East 58 01/18/94 AmeriHost Inn(R)Wooster North 60 10/20/95 AmeriHost Inn(R)Zanesville (2) 60 07/30/96 Days Inn Dayton South 215 01/20/92 Days Inn New Philadelphia (2) 104 06/04/92 Ramada Inn Middletown 120 07/03/92 ------ 1,729
Date State Hotel (1) Rooms Operations Began - ----- ----- ------- ---------------- Oklahoma AmeriHost Inn(R)Enid 60 06/11/98 ------ Pennsylvania AmeriHost Inn(R)Grove City 61 04/27/97 AmeriHost Inn(R)Shippensburg 60 08/09/96 Holiday Inn Altoona 144 08/31/92 Holiday Inn Oil City 106 12/02/92 ------ 371 Tennessee AmeriHost Inn(R)Jackson 61 04/01/98 ------ Texas AmeriHost Inn(R)Allen 60 07/25/96 AmeriHost Inn(R)McKinney 61 01/07/97 AmeriHost Inn(R)San Marcos 61 05/23/97 ------ 182 West Virginia AmeriHost Inn(R)New Martinsville (2) 60 05/03/96 AmeriHost Inn(R)Mineral Wells (2) 61 12/30/96 AmeriHost Inn(R)Parkersburg (2) 79 06/26/95 ------ 200 Wisconsin AmeriHost Inn(R)Green Bay 60 10/12/96 AmeriHost Inn(R)Kimberly 63 06/30/97 AmeriHost Inn(R)Mosinee 53 04/30/93 AmeriHost Inn(R)Whitewater 61 09/08/97 ------ 237 TOTAL ROOMS 6,846 TOTAL PROPERTIES 91 (1) Unless otherwise noted, the Company owns a direct or indirect equity or leasehold interest in the hotel. (2) Indicates properties which are co-managed with an unaffiliated third party. (3) Property was sold, or the management contract was terminated in 1999.
The table below shows the average occupancy, average daily rate ("ADR") and revenue per available room ("RevPAR") experienced by the Company in 1998 in various locations. These statistics include all hotels open as of December 31, 1998.
Average Average Revenue Per Occupancy Daily Rate Available Room --------- ---------- -------------- Ohio (23 hotels) 55.7% $55.08 $30.72 Illinois, Iowa and Wisconsin (19 hotels) 58.3% $49.77 $29.04 Michigan and Pennsylvania (15 hotels) 59.3% $54.76 $32.48 Georgia, Mississippi and West Virginia (11 hotels) 60.9% $53.47 $32.60 Indiana and Kentucky (11 hotels) 56.5% $50.30 $28.46 Texas and California (6 hotels) 55.4% $52.27 $28.99 Other hotels (6 hotels located in Tennessee, Florida, Louisiana, Missouri and Oklahoma) 57.0% $44.53 $25.40 All hotels 57.6% $51.96 $29.96
LODGING INDUSTRY The United States lodging industry's performance is strongly correlated to economic activity, with changes in gross national product growth affecting both room supply and demand, resulting in cyclical changes in average occupancy rates, average daily rates, and revenue per available room. The general downturn in the economy and the oversupply of rooms during the late 1980's and early 1990's resulted in decreased economic performance in the lodging industry. Since the early 1990's, the United States lodging industry has shown significant improvement. The primary element contributing to the industry's improved performance has been increased economic activity, which has resulted in growth in the demand for hotel rooms. This growth in hotel room demand has resulted in positive trends industry-wide for room revenues. Although industry analysts expect slight declines in industry-wide occupancy over the next few years, they still expect industry-wide revenues to expand given the anticipated demand growth and strong average daily rate increases. According to Smith Travel Research, the overall United States hotel room occupancy declined 0.8% in 1998, while average daily rates increased 4.4%. GROWTH STRATEGY The Company's growth strategy is to increase revenues, EBITDA (as defined below) and net income per share by: (i) developing, operating and owning or leasing additional AmeriHost Inn(R) hotels; (ii) developing and managing hotels for affiliated and unaffiliated parties; (iii) maintaining or enhancing occupancy and average daily rate results at all of its hotels; and (iv) controlling operating and corporate overhead expenses. EBITDA is used by the Company as a supplemental performance measure along with net income to report its operating results. EBITDA is defined as net income, adjusted to eliminate the impact of (i) interest expense; (ii) interest and other income; (iii) leasehold rents for hotels, which the Company considers to be financing costs similar to interest; (iv) income tax expense (benefit); (v) depreciation and amortization; and (vi) gains or losses from property transactions. The Company's primary growth strategy is to focus on the expansion of its proprietary brand, the AmeriHost Inn(R). During 1998, the Company opened six wholly-owned AmeriHost Inn(R) hotels and had another five under construction at December 31, 1998. The Company also continued the development of AmeriHost Inn(R) hotels through joint ventures. During 1998, such joint ventures opened five AmeriHost Inn(R) hotels and one additional hotel was under construction at December 31, 1998. The Company acquired a 100% ownership interest during 1998 in 26 AmeriHost Inn(R) hotels in which the Company already held a minority ownership interest. The Company may seek to increase its ownership interest in additional existing AmeriHost Inn(R) hotels in which the Company has less than a 100% ownership interest, if available on favorable economic terms. These hotels had been built by the Company using the AmeriHost Inn(R) standard prototype. Due to the expansion of the AmeriHost Inn(R) brand over the past few years, and the recognition the brand has received for the consistency of guest services and amenities, the Company has decided to begin selling franchises in 1999. The Company has satisfied all Federal Trade Commission requirements and is currently able to sell franchises in 32 states. The remaining states have additional filing and registration requirements which must be satisfied prior to selling franchises in those states. The Company is currently in the process of satisfying these requirements and expects to be effective in all 50 states. The AmeriHost Inn(R) franchise agreement is a long-term agreement, providing for a franchise fee, marketing fee and reservation fee based on the hotel's revenue. Due to the Company's expertise in all areas of hotel development and management, the Company anticipates making these services available to the franchisee, including site selection, operational management, and property accounting, in addition to the franchise agreement. Although the Company believes that it can sell a significant number of franchises, there can be no assurance that the franchising segment will contribute significantly to the growth and profitability of the Company. The Company intends to continue using its hotel development and management expertise to build and operate hotels for itself, as well as for future joint ventures in which the Company holds a minority ownership interest. In addition, the Company is also focused on actively pursuing development contracts and management contracts with unaffiliated entities. This may include building and managing non-AmeriHost Inn(R) hotels. During 1998, the Company began construction on nine AmeriHost Inn(R) hotels, and completed construction of 11 hotels, all of which were AmeriHost Inn(R) hotels. The Company intends to continue developing and constructing AmeriHost Inn(R) hotels in communities located in tertiary and secondary markets which already have established demand generators, such as major traffic arteries, office complexes, industrial parks, shopping malls, colleges and universities or tourist attractions. Typically, the Company seeks communities where an active economic development program is in place, which suggests long-term growth potential for additional lodging demand. In most cases, the local community is interested in a new hotel because existing facilities are dated or inconvenient. The Company provides comfortable, professionally managed accommodations which are typically not available in that community. The Company has an in-house development staff dedicated to identifying and evaluating new development opportunities. Once a market has been identified and a site has been selected, the Company initiates its due diligence process prior to the construction of one of its hotels. Such due diligence typically consists of environmental surveys, feasibility and engineering studies and the securing of zoning and building permits. The Company also maintains an in-house construction and design department, which enables it to manage all phases of construction. The Company's in-house architects and design personnel prepare the blueprints for each AmeriHost Inn(R) hotel through the use of computer assisted drafting equipment, thereby reducing architectural fees. In most cases, the Company hires a general contractor to construct the hotel for a fixed price, eliminating much of the risk typically associated with construction. The Company's project managers oversee the general contractor through each phase of construction in order to assure the quality and timing of the construction. With few exceptions, such as the interior color scheme, each AmeriHost Inn(R) hotel is the same in every detail, including the overall layout, the room sizes and the indoor pool area. The replication of its prototype design allows for accurate budgeting of its construction and overhead costs. Historically, the Company has financed its hotel development and construction through a combination of equity and debt financing, with the equity financing typically provided by the Company and/or its joint venture partners, and the debt financing typically provided by local or regional banks. All of the AmeriHost Inn(R) hotels currently under construction are being financed in this manner. The Company intends to increase its revenue, EBITDA and net income per share through the continued development of its AmeriHost Inn(R) brand hotel and the continued implementation of its operating and marketing strategies. The Company believes that it can develop and operate additional AmeriHost Inn(R) hotels having occupancies and average daily rates similar to those the Company has achieved at its existing AmeriHost Inn(R) hotels. Moreover, the Company believes that the development of additional AmeriHost Inn(R) hotels and expanded geographic diversity will continue to enhance the awareness of the AmeriHost Inn(R) brand and thus improve revenues at existing, as well as future, AmeriHost Inn(R) hotels. The Company believes that leveraging its expertise in hotel development and management by providing these services to unaffiliated parties will also assist the Company in reaching its financial objectives. OPERATING STRATEGY The Company's operating strategy is to provide its customers with a consistent lodging experience by offering a package of amenities and services which meet or exceed the customer's expectations during each stay. The Company has developed uniform standards and procedures for each aspect of the development, construction, operation and marketing of its AmeriHost Inn(R) hotels, from site selection to operational management. The Company's operational management activities are overseen by a Senior Vice President of Operations who supervises regional and area managers, who in turn oversee the general managers of the hotels. Each regional manager is responsible for 6 to 10 hotels, depending on each hotel's size and location. In addition to having responsibilities as the general manager of a specific hotel, each area manager is responsible for overseeing the general managers at 1 to 2 additional hotels. In addition to these managers, the Company has centralized sales and marketing personnel who assist and direct the general managers and other on-site personnel in their marketing efforts. The Company also has internal auditors who perform audits of each hotel at least two times each year, including tests of financial items such as cash and receivables, as well as operational, security and ADA (Americans with Disabilities Act) compliance matters, and who are also responsible for developing and conducting a variety of educational and training seminars for general managers and other on-site personnel. The Company has designed a financial management system whereby all accounting and operating information is processed in the Company's centralized accounting office at its headquarters. The system includes cash management, accounts payable and the generation of daily financial and operating information and monthly financial statements which allow senior management and the regional, area and general managers to closely monitor performance and to quickly react to changes in operational conditions. The Company provides each hotel with standardized forms and procedures to ensure uniform and efficient financial reporting. The Company's financial management system relieves certain management and reporting burdens from the individual hotel managers, enabling them to focus on the operation and marketing of the hotel. The centralized financial management system also enhances the quality and timing of internal financial reports. All payroll functions are also centralized at the Company's headquarters through its employee leasing subsidiary, allowing the Company to have greater control over payroll costs. In addition, since all of the approximately 1,800 hotel personnel are employed by the same company, the costs of certain payroll related expenses are lower than if each hotel maintained its own employees, and the Company is able to offer a more attractive health insurance program to its employees. MARKETING STRATEGY The Company believes it has a unique marketing strategy which is to actively seek involvement in and ties to the local communities in which its hotels are located. The local businesses and residential communities are each hotel's best referral source. When staying in smaller communities where the Company's hotels are located, visitors typically seek recommendations from family, friends and business associates. The general managers of the hotels are expected to devote a majority of their time toward marketing activities with local businesses and the community. In an effort to promote community awareness and build strong relationships with business leaders and local residents, general managers are very active in local civic groups and frequently sponsor special events. In addition, the hotels typically sponsor various local social and community events and permit the use of their facilities by local clubs and civic organizations. This community involvement, combined with a professional marketing program, allows the hotel to showcase its facilities for both business and leisure purposes. By focusing on the local community as its primary referral source, the Company believes that each hotel can build a strong sales force of local residents. With respect to AmeriHost Inn(R) hotels, the Company's primary marketing strategy is to consistently develop and operate AmeriHost Inn(R) hotels using its prototype design under the trademarked AmeriHost Inn(R) diamond-shaped logo. The Company believes that a consistent product offering, including the same design features, amenities and quality guest services, will promote guest loyalty, referrals and repeat business. The amenities and services featured in the AmeriHost Inn(R) prototype design are not consistently found in the hotels of competitors in the markets which the Company targets. By providing amenities and services on a consistent basis, along with centralized administrative and financial reporting systems, the Company believes it is able to operate profitable hotels while offering an excellent value to its guests. During the fall of 1997, the Company introduced its toll-free reservation number. By dialing 800-434-5800, a guest can make a reservation at any one of the AmeriHost Inn(R) hotels throughout the country. The Company anticipates that the reservation system will significantly increase the number of reservations as the brand awareness increases. In an effort to boost brand awareness, the Company has also implemented a regional marketing campaign using various media including radio and newspaper. The markets and media selected for the marketing activities were based on extensive research done by the Company and an advertising consultant. The Company and its joint venture partners have committed that 1% of each hotel's room revenues will be used for the regional marketing program. JOINT VENTURES The Company continued to develop new hotels through joint ventures in 1998 whereby the Company and other investors agree to jointly undertake the development, construction, acquisition or renovation of a hotel property. As of December 31, 1998, the Company had 19 projects with joint venture partners, including multiple projects with certain joint venture partners. The Company's joint ventures have taken various forms, including general partnerships, limited partnerships, and limited liability companies. Each joint venture has been formed with respect to a particular hotel project and reflects the characteristics of that project, including the relative contributions, in cash, property or services, of its partners. In most instances, the joint venture has taken the form of a limited partnership, with a wholly-owned subsidiary of the Company as a general partner with sole or joint management authority. The Company's subsidiary, as general partner, has typically received a partnership interest ranging from 15% to 30% for contributing the Company's expertise. In certain cases, the subsidiary has also contributed a minimal amount of cash. The limited partners (which may include the Company or its affiliates in some instances) have typically contributed the cash equity required to fund the project and have received interests proportionate to their contributions. A typical joint venture agreement provides that the profits and losses of the entity will be allocated among the partners in proportion to their respective interests. However, the distribution of operating cash flow and asset sale proceeds to the Company in proportion to its ownership interest is often subordinate to the prior return of capital and other distributions payable to the other joint venture partners. In addition, in three recent joint venture arrangements, the equity interests held by the joint venture partners are exchangeable into shares of the Company's common stock and the Company has guaranteed minimum annual distributions to the joint venture partners. As the general partner, the Company's subsidiary generally has the sole or primary management authority with respect to the joint venture. However, in some instances, the joint venture agreement or applicable law may provide to the other joint venture partners the right to amend the joint venture agreement, approve a transfer of the general partner's partnership interest, remove the general partner for cause, or dissolve the joint venture. The joint venture agreements do not typically restrict the right of the Company or its affiliates to engage in related or competitive business activities. COMPETITION There is significant competition in the mid-price lodging industry. There are numerous hotel chains that operate on a national or regional basis, as well as other hotels, motor inns and other independent lodging establishments throughout the United States. Competition is primarily in the areas of price, location, quality, services and amenities. Many of the Company's competitors have recognized trade names, greater resources and longer operating histories than the Company. However, the Company believes that its management is sufficiently experienced, and the markets which the Company targets for development typically offer lesser competition, enabling the Company to compete successfully. There are a number of companies which develop, construct and renovate hotels. Some of these companies perform these services only for their own account, while others actively pursue contracts for these services with third party owners. The Company believes that it can develop, construct and renovate hotels at costs which are competitive. The Company believes that its use of a well-developed prototype, significant experience (the Company has managed the development and construction of approximately 90 hotels) and volume purchasing of furniture and amenities result in development costs which are lower than those experienced by many competitors building comparable hotels. The Company also believes that its ability to offer additional services, such as hotel management, provides some competitive advantages. There are many hotel management companies which provide management services to hotels similar to the services provided by the Company. While the quantity of competition may be high, the Company believes that the quality of its services, including its information and management systems and employee leasing operations, will enable the Company to compete successfully. The Company believes that its focus on tertiary and secondary markets also lessens competition for the types of services provided by the Company. The Company believes that the relationship between the development and construction costs and the average daily rates achieved by the AmeriHost Inn(R) hotels is more favorable than that experienced by many of the Company's competitors. In addition, a significant portion of the purchasing and accounting functions related to the hotels is handled in the Company's headquarters, thus enabling the local general managers and their staffs to focus their efforts on marketing and sales. The centralization of many functions also assists in keeping costs lower due to certain economies of scale. This allows the AmeriHost Inn(R) hotels to operate efficiently and compete effectively. FRANCHISE AGREEMENTS At December 31, 1998, the Company had franchise agreements (collectively, the "Franchise Agreements") with Days Inn of America, Inc., Promus Hotels, Inc. (regarding Hampton Inns), Holiday Inns, Inc., Holiday Inns Franchising, Inc. and Ramada Franchise Systems, Inc. Although the terms of the various Franchise Agreements differ, each requires the Company to pay a monthly royalty fee for the right to operate the hotel under the "flag" of that Franchisor and to have access to the other benefits provided by such Franchisor, including access to reservation systems, marketing plans and use of trademarks. The royalty fees are typically based on gross revenues attributable to room rentals, plus marketing and reservation contributions, and typically range between 8% and 10% of gross room revenues. In addition, the Company and/or the joint venture which owns a hotel operated pursuant to a Franchise Agreement will have ongoing obligations to maintain the quality and condition of the hotel to the standards required by the Franchisor. The term of a Franchise Agreement typically is between 10 and 20 years, with a substantial penalty for early termination by the Company with either party typically having the right to terminate after five years. The Company believes that it is generally in compliance with its Franchise Agreements, and the loss of any one of the Franchise Agreements would not have a material impact on the Company. EMPLOYEES As of December 31, 1998, the Company and its subsidiaries had 1,820 full and part-time employees: Hotel Management: Operations 25 Accounting and finance 17 Property general managers 92 Hotel Development: 11 Hotel Operations: 1,179 Corporate: General and administrative 9 Officers 3 Employee Leasing: General and administrative 3 Operations 481 1,820 To date, the Company has not experienced any work stoppages or significant employee-related problems. The Company believes that its relationship with its employees is good. ITEM 2. PROPERTIES. The Company's corporate offices and the offices of its wholly-owned subsidiaries are located in approximately 18,100 square feet of space at 2400 East Devon Avenue, Suite 280, Des Plaines, Illinois 60018. These offices are occupied under a lease that expires on December 31, 2000. At December 31, 1998, the Company had a 100% or majority ownership or leasehold interest in 69 operating hotels and five hotels under construction, located in 15 states. The land, building, furniture, fixtures and equipment and construction in progress for these hotels is reflected in the Company's Consolidated Balance Sheet at December 31, 1998. These assets were substantially pledged to secure the related long-term mortgage debt. See Item 1 and Notes 6 and 7 to the Consolidated Financial Statements under Item 14. In addition to the foregoing, the Company has an equity interest in partnerships which own and/or lease property. See Note 4 to Consolidated Financial Statements under Item 14. ITEM 3. LEGAL PROCEEDINGS The Company is subject to claims and suits in the ordinary course of business. In management's opinion, currently pending legal proceedings and claims against the Company will not, individually or in the aggregate, have a material adverse effect on the Company's financial condition, results of operations or liquidity. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year ended December 31, 1998. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the Nasdaq National Market under the symbol HOST. As of March 25, 1999, there were 1,380 holders of record of the Company's Common Stock. The following table shows the range of reported high and low closing prices per share. High($) Low($) FISCAL 1997 First quarter 7.63 5.31 Second quarter 7.88 6.06 Third quarter 7.13 6.19 Fourth quarter 6.88 5.13 FISCAL 1998 First quarter 5.81 3.94 Second quarter 5.38 4.38 Third quarter 4.63 3.09 Fourth quarter 4.50 2.56 FISCAL 1999 First quarter (through March 25, 1999) 3.81 3.13 The Company has not declared or paid any cash dividends on its Common Stock. The Company currently intends to retain any earnings for use in its business and therefore does not anticipate paying any cash dividends in the foreseeable future. Any future determination to pay cash dividends will be made by the Board of Directors in light of the Company's earnings, financial position, capital requirements and such other factors as the Board of Directors deems relevant. In addition, pursuant to the terms of the Company's 7% Subordinated Notes (the "7% Notes"), no dividends may be paid on any capital stock of the Company until the 7% Notes have been paid in full. (See Notes 7 and 8 to the Consolidated Financial Statements under Item 14.) The Board of Directors has the authority to issue up to 100,000 shares of Preferred Stock in one or more series and to fix the rights, preferences, privileges and restrictions granted to or imposed upon any unissued shares of Preferred Stock, including without limitation, dividend rates, conversion rights, voting rights, redemption and sinking fund provisions, and liquidation provisions, and to fix the number of shares constituting any series and the designations of such series, without any further vote or action by the shareholders. The Board of Directors, without shareholder approval, may issue Preferred Stock with voting and conversion rights which could adversely affect the voting power of the holders of Common Stock. The issuance of Preferred Stock, while providing flexibility in connection with possible acquisitions and other corporate purposes, could, among other things, adversely affect the voting power of the holders of Common Stock and could have the effect of delaying, deferring or preventing a change in control of the Company. The Company has no present plans to issue any Preferred Stock. ITEM 6. SELECTED FINANCIAL DATA. The selected consolidated financial data presented below have been derived from the Company's consolidated financial statements. The consolidated financial statements for all years presented have been audited by the Company's independent certified public accountants, whose report on such consolidated financial statements for each of the three years in the period ended December 31, 1998 is included herein under Item 14. The information set forth below should be read in conjunction with the consolidated financial statements and notes thereto under Item 14 and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
(in thousands, except per share data) Fiscal Year Ended December 31, 1998 1997 1996 1995 1994 ---- ---- ---- ---- ---- STATEMENT OF OPERATIONS DATA: Revenue $ 68,618 $ 62,666 $ 68,342 $ 51,962 $ 43,347 Operating costs and expenses 54,286 52,285 54,360 41,317 37,076 Depreciation and amortization expense 5,487 4,532 3,479 2,268 1,141 Leasehold rents - hotels 4,192 1,729 2,122 1,976 1,661 Corporate general and administrative 1,569 2,140 1,928 2,111 2,013 Operating income (loss) 3,084 1,980 6,453 4,290 1,456 Interest expense, net 5,592 3,299 2,142 1,195 427 Income (loss), before extraordinary item and cumulative effect of change in accounting principle(1) $ (1,167) $ (966) $ 3,395 $ 2,138 $ 571 ======== ======== ======== ======== ======== Net income (loss) $ (2,796) $ (966) $ 3,395 $ 2,138 $ 571 ======== ======== ======== ======== ======== Earnings (loss) per share, before extraordinary item and cumulative effect of change in accounting principle(1): Basic $ (0.19) $ (0.15) $ 0.57 $ 0.37 $ 0.10 ======= ======= ======== ======== ======== Diluted $ (0.20) $ (0.19) $ 0.49 $ 0.34 $ 0.10 ======= ======= ======== ======== ======== Earnings (loss) per share: Basic $ (0.45) $ (0.15) $ 0.57 $ 0.37 $ 0.10 ======= ======= ======== ======== ======== Diluted $ (0.45) $ (0.19) $ 0.49 $ 0.34 $ 0.10 ======= ======= ======== ======== ======== Weighted average shares outstanding: Basic 6,180 6,283 6,008 5,839 5,498 ======== ======== ======== ======== ======== Diluted 6,513 6,659 6,839 6,371 5,525 ======== ======== ======== ======== ======== BALANCE SHEET DATA: Total assets $115,281 $ 92,668 $ 66,901 $ 52,453 $ 34,404 Long-term debt, including current portion 71,841 60,235 34,339 25,014 13,542 Working capital (6,924) (2,208) 366 1,854 4,182 Shareholders' equity 18,316 21,593 20,912 17,267 13,672 OTHER DATA: EBITDA (2) $ 12,790 $ 6,023 $ 12,447 $ 8,862 $ 4,143 Cash provided by operating activities 5,408 1,858 7,558 1,918 2,215 Cash provided by (used in) investing activities 15,555 (28,463) (11,347) (13,506) (8,764) Cash (used in) provided by financing activities (18,819) 25,926 5,447 9,933 7,690 Capital expenditures 42,183 29,343 14,049 12,539 7,872 (1) The Company recorded an extraordinary item of $333,000 in 1998, net of income taxes, relating to the early extinguishment of mortgage debt on hotels sold in connection with a sale/leaseback transaction. The Company recorded a cumulative effect of a change in accounting principle of $1,296,000 in 1998, net of income taxes, relating to the adoption of Statement of Position No. 98-5, "Reporting on the Costs of Start-up Activities." (2) EBITDA is not defined by generally accepted accounting principles ("GAAP"), however the Company believes it provides relevant information about its operations and is necessary for an understanding of the Company's operations, given its significant investment in real estate. EBITDA should not be considered as an alternative to operating income (as determined in accordance with GAAP) as an indicator of the Company's operating performance or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. EBITDA is defined as net income, adjusted to eliminate the impact of (i) interest expense; (ii) interest and other income; (iii) leasehold rents for hotels, which the Company considers to be financing costs similar to interest; (iv) income tax expense (benefit); (v) depreciation and amortization; and (vi) gains or losses from property transactions. EBITDA for 1997, when calculated to exclude non-recurring charges for costs associated with contractual terminations and costs incurred in connection with a potential merger or acquisition which was not consummated, would have been approximately $7.9 million. EBITDA for 1996, when calculated to exclude a non-recurring charge for costs associated with a public offering of common stock which was not consummated, would have been approximately $12.9 million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL The Company is engaged in the development of AmeriHost Inn(R) hotels, its proprietary brand, and the ownership, operation and management of AmeriHost Inn(R) hotels and other mid-price hotels. As of December 31, 1998, there were 75 AmeriHost Inn(R) hotels open, of which 60 were wholly-owned or leased, one was majority-owned, 11 were minority-owned, and three were managed for unrelated third parties. A total of 12 AmeriHost Inn(R) hotels were opened during 1998. The Company intends to use the AmeriHost Inn(R) brand when expanding its hotel operations segment. All of the hotels currently under construction will be AmeriHost Inn(R) hotels. As of December 31, 1998, six AmeriHost Inn(R) hotels were under construction, of which five will be wholly-owned, and one will be minority-owned. Same room revenues for all AmeriHost Inn(R) hotels (including minority owned and managed only) increased approximately 9.4% during 1998, compared to 1997, attributable to an increase of $.35 in average daily rate, and an 8.7% increase in occupancy. These results relate to the 63 AmeriHost Inn(R) hotels that were operating for at least thirteen full months at December 31, 1998. Revenues from hotel operations consist of the revenues from all hotels in which the Company has a 100% or majority ownership or leasehold interest ("Consolidated" hotels). Investments in other entities in which the Company has a minority ownership interest are accounted for using the equity method. As a result of the Company's focus on increasing the number of Consolidated hotels, the Company expects that revenues from the hotel operations segment will increase over time as a percentage of the Company's overall revenues. Development and construction revenues consist of one-time fees for new construction and renovation activities performed by the Company for minority-owned hotels and unrelated third parties. The Company also receives revenue from management and employee leasing services provided to minority-owned hotels and unrelated third parties. The results for 1998 were consistent with the Company's primary objective of increasing the number of wholly-owned or leased, Consolidated AmeriHost Inn(R) hotels. Due to the Company's focus on developing and constructing a significant number of Consolidated AmeriHost Inn(R) hotels during 1997 and 1998, as well as acquiring the remaining ownership interests in a significant number of AmeriHost Inn(R) hotels which were previously minority-owned, the Company recognized lower revenues and profits from the development and construction of hotels for minority-owned and unrelated third parties during 1998. In addition, the Company disposed of several non-AmeriHost Inn(R) hotels during the past twelve months, as part of the Company's plan to invest all available resources into the AmeriHost Inn(R) hotel brand. Although this strategy has a short-term negative impact on revenues and earnings, the Company believes that the long-term benefits will be substantial. Revenues from Consolidated AmeriHost Inn(R) hotels increased 125.8% to $33.1 million in 1998, from revenues of $14.7 million in 1997, due to the addition of 31 Consolidated AmeriHost Inn(R) hotels during the past twelve months. Revenues from the hotel management and employee leasing segments decreased by 23.7% in total during 1998, due primarily to the acquisition of the remaining ownership interest in 25 minority-owned joint venture hotels, all of which are AmeriHost Inn(R) hotels. Revenues from Consolidated non-AmeriHost Inn(R) hotels decreased 17.4% during 1998, compared to 1997, as a result of the disposition of four Consolidated non-AmeriHost Inn(R) hotels during 1997 and one Consolidated non-AmeriHost Inn(R) hotel during 1998. Total revenues increased 9.5%, to $68.6 million in 1998, from $62.7 million in 1997. The Company recorded a net loss of ($1.2) million in 1998, before an extraordinary item and the cumulative effect of an accounting change, or ($0.20) per diluted share, compared to a net loss of ($966,443), or ($0.19) per diluted share in 1997. The Company incurred an extraordinary item in 1998 in the amount of $332,738, or ($0.05) per diluted share, net of income tax benefit, due to the write off of deferred loan costs associated with the prepayment of mortgage debt, and a cumulative effect of a change in accounting principle related to the write-off of start-up and pre-opening costs in 1998 in the amount of $1.3 million, or ($0.20) per diluted share, net of income tax benefit. The Company sold one Consolidated non-AmeriHost Inn(R) hotel, an excess parcel of land , and equipment during 1998, and two Consolidated non-AmeriHost Inn(R) hotels during 1997, resulting in total gains, net of minority interests, of $305,484 and $1.7 million, respectively. The gains in 1997 were offset by a non-recurring charge of $1.7 million from the termination of a consulting agreement with Urban 2000 Corp. (a company owned by the Company's Chairman of the Board and a former officer/director) and the severance fees paid in connection with the departure of an officer/director. The Company uses EBITDA as a supplemental performance measure along with net income to report its operating results. EBITDA is defined as net income before extraordinary items, adjusted to eliminate the impact of (i) interest expense; (ii) interest and other income; (iii) leasehold rents for hotels, which the Company considers to be financing costs similar to interest; (iv) income tax expense (benefit), (v) depreciation and amortization; and (vi) gains or losses from property transactions. EBITDA should not be considered as an alternative to operating income (as determined in accordance with Generally Accepted Accounting Principles, "GAAP") as an indicator of the Company's operating performance or to cash flows from operating activities (as determined in accordance with GAAP) as a measure of liquidity. EBITDA, as defined by the Company is included herein due to numerous requests by investors and analysts. Management believes that investors and analysts find it to be a useful tool for measuring the Company's ability to service debt. EBITDA increased 112.4% to $12.8 million in 1998, from $6.0 million in 1997. After eliminating the impact of the non-recurring charge in 1997, EBITDA increased 65.6% in 1998, compared to 1997. On June 30, 1998, the Company completed the sale of 26 AmeriHost Inn(R) hotels to PMC Commercial Trust ("PMC") for $62.2 million. Net proceeds to the Company, after the assumption of mortgage debt by PMC, the repayment of mortgage debt and closing costs, were approximately $20.2 million. The Company completed the sale of four additional AmeriHost Inn(R) hotels to PMC in 1999. Upon the respective sales to PMC, 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. This deferral will be recognized over the initial term of the lease as a reduction of leasehold rent expense. The net proceeds from the PMC transaction were used primarily for the purchase of the remaining ownership interests in existing AmeriHost Inn(R) hotel joint ventures and the purchase of the hotel assets directly from AmeriHost Inn(R) joint ventures. The Company acquired the remaining ownership interests in 15 AmeriHost Inn(R) hotel joint ventures for approximately $8.4 million, net of cash acquired, and purchased 11 AmeriHost Inn(R) hotels from existing joint ventures in which the Company was a minority owner, for approximately $26.7 million including the assumption of $13.1 million in mortgage debt. Amerihost had an ownership interest in 85 hotels at December 31, 1998 versus 79 hotels at December 31, 1997 (excluding hotels under construction). This increased ownership was achieved primarily through the development of AmeriHost Inn(R) hotels for the Company's own account and for minority-owned entities. These figures include a net increase of 30 Consolidated hotels, from 39 at December 31, 1997 to 69 at December 31, 1998. RESULTS OF OPERATIONS The following table sets forth the percentages of revenues of the Company represented by components of net income for 1998, 1997 and 1996.
Percentage of Total Revenue Year Ended December 31, -------------------------------------- 1998 1997 1996 -------- -------- ------ Revenue 100.0% 100.0% 100.0% Operating costs and expenses 79.1 83.4 79.5 ------ ----- ------- 20.9 16.6 20.5 Depreciation and amortization 8.0 7.2 5.2 Leasehold rents - hotels 6.1 2.8 3.1 Corporate general and administrative 2.3 3.4 2.8 Operating income 4.5 3.2 9.4 Interest expense (8.9) ( 6.5) ( 4.0) Interest and other income 1.1 1.4 1.1 Equity in income and losses of affiliates (0.4) ( 0.8) 1.2 Gain on sale of assets 0.5 2.7 1.3 Non-recurring expenses 0.0 (3.0) ( 0.6) Income (loss) before minority interests and income taxes (3.2) ( 3.0) 8.4 Minority interests in operations of consolidated subsidiaries and partnerships 0.4 0.3 - Income (loss) before income taxes (2.8) ( 2.7) 8.4 Income tax benefit (expense) 1.1 1.2 ( 3.4) Income (loss) before extraordinary item and cumulative effect of change in accounting principle (1.7)% (1.5)% 5.0% ====== ====== ======
1998 Compared to 1997 Revenues increased 9.5% to $68.6 million during 1998, from $62.7 million during 1997. The increase in revenue from the Consolidated AmeriHost Inn(R) hotels was partially offset by the decreases from the hotel management and employee leasing segments, a decrease from the hotel development and construction segment, as well as the decrease from non-AmeriHost Inn(R) hotel operations. Hotel operations revenue increased 48.5% to $47.3 million during 1998, from $31.9 million during 1997. Revenues from Consolidated AmeriHost Inn(R) hotels increased 125.8% to $33.1 million during 1998, from $14.7 million during 1997. This increase was attributable primarily to the addition of 31 Consolidated AmeriHost Inn(R) hotels in 1998, including the addition of six newly constructed Consolidated AmeriHost Inn(R) hotels, and the acquisition of additional ownership interest in 25 existing hotels causing them to become Consolidated AmeriHost Inn(R) hotels, as well as an increase in same room revenues of 9.3%. The increase in Consolidated AmeriHost Inn(R) hotel revenue was offset by a 17.4% decrease in Consolidated other brand hotel revenue during 1998, compared to 1997. This decrease was the result of the sale of one non-AmeriHost Inn(R) Consolidated hotel in 1998, and the sale or lease termination of four non-AmeriHost Inn(R) hotels in 1997. The hotel operations segment included the operations of 69 Consolidated hotels (including 61 AmeriHost Inn(R) hotels) comprising 4,916 rooms at December 31, 1998, compared to 39 Consolidated hotels (including 30 AmeriHost Inn(R) hotels) comprising 3,124 rooms at December 31, 1997. After considering the Company's ownership interest in the majority-owned Consolidated hotels, this translates to 4,647 and 2,804 equivalent owned rooms as of December 31, 1998 and 1997, respectively, or an increase of 65.7%. Recently, the Company has experienced an increase in competition in certain markets, primarily from newly constructed hotels. As a result, there is increased downward pressure on occupancy levels and average daily rates. The Company believes that as the number of AmeriHost Inn(R) hotels increases, the greater the benefits will be at all locations from marketplace recognition and repeat business. In addition, the Company typically builds new hotels in growing markets where it anticipates a certain level of additional hotel development. Hotel development activity is summarized as follows:
1998 1997 1996 ------------------------------------------------------------------------------------------ Unaffiliated & Unaffiliated & Unaffiliated & Minority- Consolidated Minority- Consolidated Minority- Consolidated Owned (1) Hotels (2) Owned (1) Hotels (2) Owned (1) Hotels (2) --------- ---------- --------- ---------- --------- ---------- Under construction at beginning of year 4 4 7 12 14 3 Starts 2 7 6 6 9 12 Completions 5 6 9 14 16 3 Under construction at end of year 1 5 4 4 7 12 ===== ===== ===== ===== ===== ==== (1) hotels developed/constructed for unaffiliated third parties and entities in which the Company holds a minority ownership interest (2) hotels developed/constructed for the Company's own account and for entities in which the Company holds a majority ownership interest
Hotel development revenue decreased 38.7% to $9.0 million during 1998, from $14.6 million during 1997. 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 six hotels for minority-owned entities or unrelated third parties during 1998, compared to 13 hotels during 1997. The Company also had several additional projects in various stages of pre-construction development during both years. Hotel management revenue decreased 25.5% to $2.3 million during 1998, from $3.0 million during 1997. The number of hotels managed for third parties and minority-owned entities decreased from 49 hotels, representing 3,957 rooms, at December 31, 1997 to 22 hotels, representing 1,930 rooms, at December 31, 1998. The addition of management contracts for five newly constructed hotels (312 rooms) was more than offset by the termination of four management contracts (310 rooms) with minority-owned entities as a result of the sale of the hotels (non-AmeriHost Inn(R) hotels), the termination of 25 management contracts (1,629 rooms) with minority-owned hotels which became Consolidated hotels due to the Company acquiring additional ownership interests, and the termination of three management contracts for non-AmeriHost Inn(R) hotels with unrelated third parties (400 rooms). Employee leasing revenue decreased 23.3% to $10.1 million during 1998, from $13.1 million during 1997, due primarily to the reduction in hotels managed for minority-owned entities and unrelated third parties as described above, and the associated decrease in payroll costs which is the basis for the employee leasing revenue. Total operating costs and expenses increased 3.8% to $54.3 million (79.1% of total revenues) during 1998, from $52.3 million (83.4% of total revenues) during 1997. Operating costs and expenses in the hotel operations segment increased 42.8% to $34.8 million during 1998, from $24.3 million during 1997. These increases resulted primarily from the net addition of 30 Consolidated hotels to this segment and are directly related to the 125.8% increase in Consolidated AmeriHost Inn(R) revenues during 1998, offset by the 17.4% decrease in non-AmeriHost Inn(R) hotel revenues during 1998. Hotel operations segment operating costs and expenses as a percentage of segment revenue decreased to 73.5% during 1998, from 76.4% during 1997. Operating costs and expenses as a percentage of revenues for the Consolidated AmeriHost Inn(R) hotels decreased to 70.8% during 1998, from 75.5% during 1997, due primarily to the significant number of stabilized AmeriHost Inn(R) hotels acquired during 1998 which were operating after their pre-stabilization period in 1998. Operating costs and expenses for the hotel development segment decreased 38.3% to $8.5 million during 1998, from $13.7 million during 1997, consistent with the 38.7% decrease in hotel development revenues in 1998. Operating costs and expenses in the hotel development segment as a percentage of segment revenue remained relatively consistent at 94.4% in 1998 compared to 93.7% in 1997, as the level of hotel development and construction activity performed for minority-owned entities and unrelated third parties was consistent between both years. Construction activity has significantly higher operating costs compared to the pre-construction development activity. Hotel management segment operating costs and expenses decreased 8.2% to $1.3 million during 1998, from $1.4 million during 1997. This decrease was due to the decrease in the number of hotels managed for minority-owned and unrelated entities, and the allocation of certain general and administrative expenses. Employee leasing operating costs and expenses decreased 23.8% to $9.7 million during 1998, from $12.8 million during 1997, which is consistent with the 23.3% decrease in segment revenue for 1998. Depreciation and amortization expense increased 21.1% to $5.5 million during 1998, from $4.5 million during 1997. The increase was primarily attributable to the net addition of 30 Consolidated hotels to the hotel operations segment and the resulting depreciation and amortization therefrom, offset by the decrease in depreciation from non-AmeriHost Inn(R) hotels as a result of the sale/dispositions, and the completion of the sale and leaseback of 26 hotels on June 30, 1998. Leasehold rents - hotels increased 142.5% to $4.2 million during 1998, from $1.7 million during 1997. This increase was due primarily to the sale and leaseback transaction with PMC on June 30, 1998, partially offset by the sale of two leased Consolidated non-AmeriHost Inn(R) hotels and the termination of the lease for another Consolidated non-AmeriHost Inn(R) hotel in the first and second quarters of 1997. The Company anticipates leasehold rents - hotels to continue increasing going forward as a result of the sale/leaseback transaction. Corporate general and administrative expense decreased 26.7% to $1.6 million during 1998, from $2.1 million during 1997, and can be attributed primarily to the recognition of compensation expense in 1997 for options issued at an exercise price below the then current market price, operational efficiencies and the allocation of certain expenses. The Company's operating income increased 55.8% to $3.1 million during 1998, from $2.0 million during 1997. The following discussion of operating income by segment is exclusive of any corporate general and administrative expense. Operating income from Consolidated AmeriHost Inn(R) hotels increased 255.0% to $4.8 million during 1998, from $1.3 million during 1997. This increase in operating income was due to the increased number of Consolidated AmeriHost Inn(R) hotels and the increase in same room revenues as a significant number of recently opened Consolidated AmeriHost Inn(R) hotels were still operating in 1997 during their pre-stabilization period when revenues are typically lower. Operating income from the hotel development segment decreased 49.1%, to $426,427 during 1998 from $838,452 during 1997. The fluctuation in hotel development operating income was due to the timing of hotels developed and constructed for third parties and minority-owned entities during 1998, compared with 1997, and the overall decrease in the number of hotels developed and constructed for minority-owned entities and unrelated third parties. Operating income from the hotel management segment decreased 57.1% to $543,748 in 1998 from $1.3 million in 1997. This decrease was due primarily to the decrease in hotel management contracts with minority-owned entities (as a result of the Company acquiring the remaining ownership interest in these hotels) and unaffiliated entities. Employee leasing operating income decreased 1.0% to $317,668 during 1998, from $320,826 during 1997, due to the decrease in employee leasing agreements with minority-owned entities and unrelated third parties. Interest expense increased 50.8% to $6.1 in 1998 from $4.1 million during 1997. The increase attributable to the additional mortgage financing of newly constructed and acquired Consolidated AmeriHost Inn(R) hotels, was partially offset by the sale and leaseback transaction with PMC, whereby the Company did not recognize any interest expense after the hotels were sold on June 30, 1998. The Company's share of equity in income (loss) of affiliates improved to ($240,868) during 1998, from ($516,583) during 1997. The fluctuation in equity of affiliates during 1998, compared to 1997, was primarily due to the sale of four minority owned hotels at a significant gain and the acquisition of a significant number of minority owned hotels by the Company resulting in 100% ownership positions. The Company recorded an income tax benefit, before an extraordinary item and a cumulative effect of a change in accounting principle, of $780,000 in 1998 compared to a benefit of $737,000 in 1997, which is directly attributable to the pre-tax loss incurred in 1998. The Company expensed $332,738 in 1998 as an extraordinary item, net of income tax benefit, in deferred loan costs associated with the early extinguishment of mortgage debt in connection with a sale/leaseback transaction. In addition, the Company expensed $1.3 million in 1998, net of income tax benefit, in previously capitalized start-up and pre-opening costs as a cumulative effect of a change in accounting principle to comply with Statement of Position No. 98-5, "Reporting on the Costs of Start-Up Activities." The Company expensed $1.7 million during 1997 in costs associated with the termination of a consulting agreement and an employment agreement. The Company considers these costs non-recurring in nature. 1997 Compared to 1996 Revenues decreased 8.3% to $62.7 million in 1997 from revenues of $68.3 million in 1996. Increases in revenues from the Consolidated AmeriHost Inn(R) hotels, the hotel management segment and the employee leasing segment were more than offset by decreases in the hotel development and construction segment and the non-AmeriHost Inn(R) hotel operations segment. Hotel operations revenue increased 4.1% to $31.9 million in 1997 from $30.6 million in 1996. Revenue from Consolidated AmeriHost Inn(R) hotels increased 71.9% in 1997 compared to 1996. This increase was attributable primarily to the addition of 16 Consolidated AmeriHost Inn(R) hotels during 1997, including the addition of 14 newly constructed Consolidated AmeriHost Inn(R) hotels, the acquisition of additional ownership interest in one existing hotel causing it to become a Consolidated AmeriHost Inn(R) hotel, and the conversion of one Consolidated hotel to an AmeriHost Inn(R) hotel. The increases in AmeriHost Inn(R) hotel revenue during 1997 was offset by a decrease of 22.0% in other brand hotel revenue, resulting from the sale of three non-AmeriHost Inn(R) Consolidated hotels, the conversion of one hotel to an AmeriHost Inn(R) hotel, and the termination of the lease for another non-AmeriHost Inn(R) hotel during 1997. The hotel operations segment included the operations of 39 Consolidated hotels (including 30 AmeriHost Inn(R) hotels) comprising 3,124 rooms at December 31, 1997, compared to 28 Consolidated hotels (including 14 AmeriHost Inn(R) hotels) comprising 2,703 rooms at December 31, 1996. After considering the Company's ownership interest in the majority-owned Consolidated hotels, this translates to 2,804 and 2,338 equivalent owned rooms as of December 31, 1997 and 1996, respectively, or an increase of 19.9. Hotel development revenue decreased 36.2% to $14.6 million during 1997 from $22.9 million 1996. The decrease was due to the decrease in hotel development and construction activity performed for unrelated entities or entities in which the Company holds a minority ownership interest. The Company was constructing 13 hotels for minority-owned entities or unrelated third parties during 1997, including nine hotels which opened during 1997, compared to 23 hotels during 1996. The Company also had several additional projects in various stages of pre-construction development during both years. Hotel management revenue increased 8.6% to $3.0 million during 1997 from $2.8 million during 1996. The number of hotels managed for third parties and minority-owned entities increased from 44 hotels, representing 3,745 rooms, at December 31, 1996 to 49 hotels, representing 3,957 rooms, at December 31, 1997. The addition of management contracts for nine newly constructed hotels (561 rooms) was partially offset by the elimination of revenues for one management contract (60 rooms) with a minority-owned hotel which became a Consolidated AmeriHost Inn(R) hotel due to the Company acquiring additional ownership interest, and the termination of three management contracts for non-AmeriHost Inn(R) hotels with unrelated third parties (289 rooms). The management contracts terminated, all of which were for hotels other than the AmeriHost Inn(R) brand, were typically for larger hotels compared to the nine hotels added during 1997. Employee leasing revenue increased 9.3% to $13.1 million during 1997 from $12.0 million during 1996, due primarily to the addition of hotels managed for minority-owned entities as described above, and the related increase in payroll costs which is the basis for the employee leasing revenue. Total operating costs and expenses decreased 3.8% to $52.3 million (83.4% of total revenues) during 1997 from $54.4 million (79.5% of total revenues) during 1996. Operating costs and expenses in the hotel operations segment increased 12.3% to $24.3 million during 1997 from $21.7 million during 1996. This increase resulted primarily from the net addition of 11 Consolidated hotels to this segment and is directly related to the 71.9% increase in Consolidated AmeriHost Inn(R) hotel revenue during 1997, offset by the 22.0% decrease in non-AmeriHost Inn(R) hotel revenue. Hotel operations segment operating costs and expenses as a percentage of segment revenue increased to 76.4% during 1997 from 70.8% during 1996. The increase from consolidated AmeriHost Inn(R) hotels was due primarily to a greater number of hotels in 1997 operating during their initial stabilization period, when revenues are typically lower. The increase from non-AmeriHost Inn(R) hotels was due to a decrease in same room revenue and additional expenses associated with the sale/disposition of four hotels. Operating costs and expenses for the hotel development segment decreased 30.2% to $13.7 million during 1997 from $19.7 million during 1996, consistent with the 36.2% decrease in hotel development revenues for 1997. Operating costs and expenses in the hotel development segment as a percentage of segment revenue increased to 93.7% during 1997 from 85.7% during 1996. The activity in 1997 consisted primarily of construction activity which has higher operating costs in relation to the revenue recognized. The activity in 1996 also consisted of a significant level of construction activity, however 1996 also included was a greater level of development activity which has lower operating costs in relation to the revenue recognized. In addition, the activity in 1996 included contracts whereby the Company acted as construction manager, whereby the Company only records the net construction management fee as revenue. Hotel management segment operating costs and expenses increased 5.4% to $1.4 million during 1997, from $1.3 million during 1996. The increase in hotel management segment operating expenses was consistent with the 8.6% increase in segment revenues for 1997, offset by the termination in the first quarter of 1997 of certain contractual payments which had been made to co-managers and the allocation of preopening costs associated with the significant number of hotels opened during 1997. Employee leasing operating costs and expenses increased 9.5% to $12.8 million during 1997 from $11.7 million during 1996, which is consistent with the 9.3% increase in segment revenue for 1997. Depreciation and amortization expense increased 30.3% to $4.5 million during 1997 from $3.5 million during 1996. This increase was primarily attributable to the net addition of 11 Consolidated hotels to the hotel operations segment and the resulting depreciation and amortization therefrom. Leasehold rents - hotels decreased 18.5% to $1.7 million during 1997 from $2.1 million during 1996. The decrease in 1997 compared to 1996 was primarily due to the sale of two leased Consolidated non-AmeriHost Inn(R) hotels, the exercise of the lease purchase option for a Consolidated non-AmeriHost Inn(R) hotel, and the termination of the lease for another Consolidated non-AmeriHost Inn(R) hotel, partially offset by an increase in percentage rents for certain hotels which are based on the hotel's operating revenues. Corporate general and administrative expense increased 11.0% to $2.1 million during 1997 from $1.9 million during 1996, and can be attributed primarily to the Company's overall growth and the allocation of costs associated with hotel development activity. The Company's operating income decreased 69.3% to $2.0 million during 1997 from $6.5 million during 1996. The following discussion of operating income by segment is exclusive of any corporate overhead cost allocation. Operating income from the hotel operations segment decreased 52.6% to $1.8 million in 1997 from $3.8 million in 1996, resulting from the impact of the significant number of Consolidated AmeriHost Inn(R) hotels operating in 1997 during their initial stabilization period as well as the sale of four non-AmeriHost Inn(R) hotels during 1997 and late 1996. Operating income from the hotel development segment decreased 73.9% to $838,452 during 1997 from $3.2 million during 1996. The decrease in hotel development operating income was due to the decrease in hotels developed and constructed for third parties and minority-owned entities during 1997. Operating income from the hotel management segment increased 10.1% to $1.3 million during 1997 from $1.2 million during 1996. This increase was due primarily to the net addition of five hotel management contracts with minority-owned and unaffiliated entities during 1997. Employee leasing operating income increased 3.6% to $320,826 during 1997 from $309,805 during 1996, due to the increase in employee leasing agreements with minority-owned entities. Interest expense increased 46.5% to $4.1 million during 1997 from $2.8 million during 1996. This increase was primarily attributable to the additional mortgage financing of newly constructed Consolidated AmeriHost Inn(R) hotels. The Company's share of equity in income (loss) of affiliates decreased to ($516,583) during 1997 from $809,443 during 1996. The decrease in equity in income of affiliates during 1997 was primarily due to the significant number of newly constructed minority-owned hotels which were operating during their initial stabilization period, when revenues are typically lower, the increasing impact of seasonality as the number of minority-owned hotels increases, and the sale of a minority-owned hotel during the third quarter of 1996. The Company expensed $1.7 million in 1997 in costs associated with the termination of a consulting agreement with a company owned by the Chairman of the Board of Directors and a former director, and the termination of an employment agreement with this former director. In addition, the Company expensed $177,044 in 1997 in costs associated with a potential merger or acquisition which was not consummated. During 1996, the Company expensed $403,657 in costs associated with a public offering of the Company's Common Stock which was not consummated. The Company considers these costs non-operational costs which are non-recurring in nature. The Company recorded an income tax benefit of $737,000 in 1997 compared to income tax expense of $2.4 million in 1996, which is directly attributable to the pre-tax loss incurred in 1997. LIQUIDITY AND CAPITAL RESOURCES The Company has four main sources of cash from operating activities: (i) revenues from hotel operations; (ii) fees from development, construction and renovation projects; (iii) fees from management contracts; and (iv) fees from employee leasing services. Cash from hotel operations is typically received at the time the guest checks out of the hotel. Approximately 10% of the Company's hotel operations revenues is generated through other businesses and contracts and is usually paid within 30 to 45 days from billing. Fees from development, construction and renovation projects are typically received within 15 to 45 days from billing. Due to the procedures in place for processing its construction draws, the Company typically does not pay its contractors until the Company receives its draw from the equity or lending source. Management fee revenues typically are received by the Company within five working days from the end of each month. Cash from the Company's employee leasing segment typically is received 24 to 48 hours prior to the pay date. During 1998, the Company generated cash from operations of $5.4 million, compared to $1.9 million during 1997, or an increase in cash provided by operations of $3.5 million. The increase in cash flow from operations during 1998, when compared to 1997, can be attributed to a non-recurring payment of $1.7 million in contractual termination costs in 1997, and the significant number of previously minority-owned hotels which were acquired by the Company later in 1998, as the number of Consolidated hotels increased from 39 hotels at December 31, 1997 to 69 hotels at December 31, 1998, and the timing of collections from hotel development and construction activity for minority-owned entities, offset by the increasing impact of seasonality, and the significant number of hotels operating during their pre-stabilization period. 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. During 1998, the Company received $15.6 million from investing activities compared to using $28.5 million during 1997. During 1998, the Company received $64.8 million from the sale of 27 hotels and property and equipment, received $1.5 million in collections of notes receivable, used $42.2 million to purchase property and equipment for Consolidated AmeriHost Inn(R) hotels, and used $8.4 million for the acquisition of additional partnership interests. During 1997, the Company used cash primarily for the purchase of $29.3 million in property and equipment for Consolidated AmeriHost Inn(R) hotels, used $2.4 million for investments in and advances to affiliates, net of distributions and collections, and received $3.4 million from the sale of hotels. Cash used in financing activities was $18.8 million during 1998 compared to cash provided by financing activities of $25.9 million during 1997. In 1998, the primary factors were principal repayments of $49.9 million in long-term debt, including the repayment of mortgages in connection with the sale of hotels, offset by $31.6 million in proceeds from the mortgage financing of Consolidated hotels and the assumption of mortgage debt in connection with the acquisition of hotels, and net proceeds of $671,504 from the Company's operating line-of-credit. In 1997, the contributing factors were proceeds of $25.9 million from the mortgage financing of Consolidated hotels, net of principal repayments, net proceeds of $1.2 million from the exercise of common stock purchase options, and $417,715 in net payments against the Company's operating line-of-credit. At December 31, 1998, the Company had $2.0 million outstanding under its operating line-of-credit. The operating line-of-credit (i) has a limit of $7.0 million (ii) is collateralized by a security interest in certain of the Company's assets, including its interest in various joint ventures; (iii) bears interest at an annual rate equal to the lending bank's base rate plus 1/2% (with a minimum interest rate of 7.5%); and (iv) matures October 15, 1999. At December 31, 1998, the Company also had outstanding $2.25 million of its 7% Subordinated Notes which are unsecured obligations due October 9, 1999 and which pay interest quarterly. Pursuant to the terms of the 7% Subordinated Notes, no dividends may be paid on any capital stock of the Company until the 7% Subordinated Notes have been paid in full. At the Company's sole discretion, the 7% Subordinated Notes may be prepaid at any time without penalty. The Company plans to repay the 7% Subordinated Notes when due with operational cash flow and, if necessary, proceeds from the line-of-credit. In March 1998, the Company's Board of Directors authorized the repurchase, from time to time on the open market, of up to $1.0 million of Common Stock over the next year. Through December 31, 1998, the Company repurchased 122,900 shares of the Company's Common Stock for approximately $478,000. The Company expects cash from operations to be sufficient to pay all operating and interest expenses in 1999. YEAR 2000 The Year 2000 issue is the result of computer systems that use two digits rather than four to define the applicable year, which may prevent such systems from accurately processing dates ending in the year 2000 and after. This could result in system failures or in miscalculations causing disruption of operations, including, but not limited to, an inability to process transactions, to send and receive electronic data, or to engage in routine business activities and operations. In 1997, the Company established a Year 2000 task force to develop and implement a Year 2000 compatibility program. The Company has developed a Year 2000 compatibility plan, and has completed the audit, assessment and scope phases of the plan. The Company has completed an inventory of the software applications that it uses and has determined which applications are not Year 2000 compatible. The Company's compatibility plan includes purchasing and installing software releases which are Year 2000 compatible as well as testing these systems. The Company's goal is to be substantially Year 2000 compatible by August 1, 1999, to allow for any remaining testing during the remainder of 1999. In addition, the Company has begun evaluating computer hardware, such as personal computers, as well as furniture and equipment used at the Company's hotels. The Company is presently in the process of evaluating these systems for Year 2000 compatibility. The Company's goal is to complete the remediation of these systems by June 30, 1999. In addition to reviewing its internal systems, the Company has had formal communications with its significant customers, vendors and freight companies concerning Year 2000 compliance, including electronic commerce. There can be no assurance that the systems of other companies that interact with the Company will be sufficiently Year 2000 compatible so as to avoid an adverse impact on the Company's operations, financial condition and results of operations. The Company does not believe that its products and services involve any Year 2000 risks. The Company does not presently anticipate that the costs to address the Year 2000 issue will have a material adverse effect on the Company's financial condition, results of operation or liquidity. The Company presently anticipates that it will complete its Year 2000 assessment and remediation by August 1, 1999. However, there can be no assurance that the Company will be successful in implementing its Year 2000 remediation plan according to the anticipated schedule. In addition, the Company may be adversely affected by the inability of other companies whose systems interact with the Company to become Year 2000 compatible and by potential interruptions of utility, communication or transportation systems as a result of Year 2000 issues. Although the Company expects its internal systems to be Year 2000 compliant as described above, the Company intends to prepare a contingency plan that will specify what it plans to do if it or important external companies are not Year 2000 compatible in a timely manner. The Company expects to prepare its contingency plan during 1999. THIS IS A YEAR 2000 READINESS DISCLOSURE STATEMENT WITHIN THE MEANING OF THE YEAR 2000 INFORMATION AND READINESS DISCLOSURE ACT (P.L. 105-271). This report contains certain forward-looking statements which involve risks and uncertainties. When used in this report, the words "believe," "anticipate," "think," "intend," "goal," "forecast," "expect," and similar expressions identify forward-looking statements. Forward-looking statements include, but are not limited to, statements concerning anticipated income from operations and net income for fiscal 1999. Such statements are subject to certain risks and uncertainties which would cause actual results to differ materially from those expressed or implied by such forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements which speak only as of the date of this report. SEASONALITY The lodging industry, in general, is seasonal by nature. The Company's hotel revenues are generally greater in the second and third calendar quarters than in the first and fourth quarters due to weather conditions in the markets in which the Company's hotels are located, as well as general business and leisure travel trends. This seasonality can be expected to continue to cause quarterly fluctuations in the Company's revenues, and is expected to have a greater impact as the number of Consolidated hotels increases. Quarterly earnings may also be adversely affected by events beyond the Company's control such as extreme weather conditions, economic factors and other general factors affecting travel. In addition, hotel construction is seasonal, depending upon the geographic location of the construction projects. Construction activity in the Midwest may be slower in the first and fourth calendar quarters due to weather conditions. INFLATION Management does not believe that inflation has had, or is expected to have, any significant adverse impact on the Company's financial condition or results of operations for the periods presented. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company, to date, has not engaged in derivative and hedging activities. 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(R) hotels are based on current expectations. These statements are forward looking in nature and involve a number of risks and uncertainties. Actual results may differ materially. Among the factors that could cause actual results to differ materially are the following: the availability of sufficient capital to finance the Company's business plan on terms satisfactory to the Company; competitive factors, such as the introduction of new hotels or renovation of existing hotels in the same markets; changes in travel patterns which could affect demand for the Company's hotels; changes in development and operating costs, including labor, construction, land, equipment, and capital costs; general business and economic conditions; and other risk factors described from time to time in the Company's reports filed with the Securities and Exchange Commission. The Company wishes to caution readers not to place undue reliance on any such forward looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995 and, as such, speak only as of the date made. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company's exposure to market risk for changes in interest rates relates primarily to the Company's long-term debt obligations. The Company has no 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The consolidated financial statements filed as a part of this Form 10-K are included under "Exhibits, Financial Statements and Reports on Form 8-K" under Item 14. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. There have been no disagreements on accounting and financial disclosure matters which are required to be described by Item 304 of Regulation S-K. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The Company's executive officers and directors are: Name Age Position ---- --- -------- H. Andrew Torchia 55 Chairman of the Board and Director Michael P. Holtz 42 President, Chief Executive Officer and Director James B. Dale 35 Senior Vice President of Finance, Treasurer, Chief Financial Officer Craig S. Arnson 39 In-House Counsel, Secretary Russell J. Cerqua 42 Director Reno J. Bernardo 67 Director Salomon J. Dayan 53 Director Richard A. Chaifetz 45 Director Stuart N. Emanuel 55 Director H. Andrew Torchia, a co-founder of the Company, has been a Director of the Company since its inception in 1984. Mr. Torchia was President and Chief Executive Officer of the Company from 1985 until 1989, when he became Chairman of the Board. Mr. Torchia is also the President and 51% stockholder of Urban 2000 Corp. ("Urban"), a hotel development consulting firm, which was initially the sole shareholder of the Company and is currently a principal stockholder. See "Principal Stockholders" under Item 12. Mr. Torchia also owns a 50% interest in Rosemont Hotel 398.LP which owns the Best Western at O'Hare. Mr. Torchia has 30 years of experience in hotel development, operations and franchising. Prior to founding the Company, Mr. Torchia served as head of regional development for Best Western International and as head of independent franchise sales organizations for Quality Inns International and Days Inns. Michael P. Holtz has been a Director of the Company since August 1985. From 1985 to 1989, Mr. Holtz served as the Company's Treasurer and Secretary. In 1986, Mr. Holtz was promoted to Chief Operating Officer of the Company with direct responsibility for the Company's day-to-day operations. In 1989, Mr. Holtz was elected President and Chief Executive Officer of the Company. Mr. Holtz is responsible for development and implementation of all Company operations including hotel development, finance and management. Mr. Holtz has over 20 years experience in the operation, development and management of hotel properties. James B. Dale was promoted to Chief Financial Officer in 1998 from Senior Vice President of Finance. Mr. Dale began his employment with the Company in May 1994 as the Company's first Corporate Controller. He has been responsible for overseeing all aspects of the Company's property and corporate accounting departments, including preparation of all SEC filings. Prior to joining the Company, Mr. Dale was an Audit Manager with BDO Seidman, LLP, the Company's external auditors, with nearly nine years of experience in auditing, financial reporting and taxation. Mr. Dale is a Certified Public Accountant and is a member of the American Institute of Certified Public Accountants and the Illinois CPA Society. Craig S. Arnson has been Secretary of the Company since 1998, and is responsible for all legal activities related to the Company's development and acquisition projects. Additionally, he provides legal support for the construction and operations divisions. Mr. Arnson's previous experience includes positions as Midwestern Regional Manager of Hernand & Partners, a legal consulting firm in Chicago, Vice President and Director of Marketing of Certus Financial Corporation, an investment management firm in San Francisco and Vice President of The Mortgage Acquisition Corporation, also located in San Francisco. From 1985 to 1992, Mr. Arnson practiced real estate law in Chicago with the firms of Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd., Neal, Gerber & Eisenberg, and Schwartz, Cooper, Greenberger & Krauss. Mr. Arnson is licensed to practice law in the State of Illinois. Russell J. Cerqua served as the Executive Vice President of Finance, Chief Financial Officer, Treasurer and Secretary of the Company from 1987 through 1998, where his primary responsibilities include internal and external financial reporting, corporate financing, development of financial management systems, and financial analysis. Mr. Cerqua continues to serve as a Director of the Company. Mr. Cerqua is currently the Chief Financial Officer of Metro Technologies, L.L.C. Prior to joining the Company, Mr. Cerqua was an audit manager with Laventhol & Horwath, the Company's former independent certified public accountants. Mr. Cerqua was involved in public accounting for over 9 years, with experience in auditing, financial reporting and taxation. Mr. Cerqua is a Certified Public Accountant. Reno J. Bernardo served as the Senior Vice President of Construction of the Company from 1987 through March 1994, when he retired. His primary responsibilities included managing construction of new properties and directing renovation projects. In 1989, Mr. Bernardo became a Director of the Company and continues to serve in this capacity. From 1985 to 1986, Mr. Bernardo was Vice President of Construction with Devcon Corporation, a hotel construction company. From 1982 to 1985, Mr. Bernardo was Project Superintendent with J.R. Trueman and Associates, a hotel construction company, and a subsidiary of Red Roof Inns, where his responsibilities included supervision of the development and construction of several Red Roof Inns. Salomon J. Dayan, M.D. has been a director of the Company since August 1996. Since 1980, Dr. Dayan, a physician certified in internal and geriatric medicine, has been the Chief Executive Officer of Salomon J. Dayan Ltd., a multi-specialty medical group which he founded and which is dedicated to the care of the elderly in hospital and nursing home settings. Since 1986, Dr. Dayan has been the Medical Director and Executive Director of Healthfirst, a corporation which operates multiple medical ambulatory facilities in the Chicago, Illinois area, and since 1994 he has also been an assistant professor at Rush Medical Center in Chicago. Dr. Dayan is currently the Chairman of the Board of Directors of Greater Chicago Financial Corporation, a bank holding company owning interest in two banks. Dr. Dayan also has numerous investments in residential and commercial real estate. Richard A. Chaifetz has been a director of the Company since August 1997. Dr. Chaifetz has been Chairman, President and Chief Executive Officer of ComPsych Behavioral Health Corporation since its inception in 1987. ComPsych is a leading domestic and international provider of employee assistance and managed behavioral health services to corporate America. Dr. Chaifetz, a licensed psychologist, is also a majority shareholder in several other health care and service companies. In addition, Dr. Chaifetz is a member of the board of directors of several private and not-for-profit organizations. Stuart N. Emanuel has been a director of the Company since October 1998. Mr. Emanuel is President of Interim Technology Consulting Group, a subsidiary of Interim Services, a world leader in staffing and consulting. He has operating responsibility for 23 branches in the U.S., Europe, and Asia. Prior to his current position, Mr. Emanuel has served as Vice President of Sales, Regional Vice President, and Executive Vice President. He has held a variety of executive positions in his 30 years in business and has also been involved in several entrepreneurial ventures as well as two successful turnarounds. In addition to numerous charitable and civic organizations, Mr. Emanuel is Chairman of the Board of Interim Technology (Asia), Pte. Ltd. and a director of Xananthon Inc., a Salt Lake City high technology company. ITEM 11. EXECUTIVE COMPENSATION The following table sets forth certain information concerning the annual and long-term compensation for services as officers to the Company for the fiscal years ended December 31, 1998, 1997 and 1996, of those persons who were, at December 31, 1998 (i) the Chairman of the Board of Directors, (ii) the chief executive officer, and (iii) the other three most highly compensated executive officers of the Company (the "Named Officers"). See "Compensation of Directors" under Item 11.
SUMMARY COMPENSATION TABLE Long-Term Compensation Annual Compensation Restricted Securities Name and Principal Stock Underlying All Other Position Year Salary Bonus Awards Options(#)(1) Compensation(2) H. Andrew Torchia (3) 1998 $ - $ - $ - - $ 15,000 Chairman of the Board 1997 - - - - 15,000 1996 - - - - 15,000 Michael P. Holtz 1998 325,000 - - 364,100 12,633 President and Chief 1997 334,615 - - 50,000 12,375 Executive Officer 1996 375,000 - - - 10,000 James B. Dale 1998 98,462 - - - 1,031 Senior Vice President Finance, Treasurer, and Chief Financial Officer Craig S. Arnson 1998 102,650 2,750 - - 1,094 Senior Vice President In-House Counsel, Secretary Russell J. Cerqua (4) 1998 151,673 - - - 11,517 Former Executive Vice President 1997 165,577 10,000 - 15,625 12,369 Finance, Secretary, Treasurer 1996 160,000 - - - 10,000 and Chief Financial Officer (1) All options were fully vested as of December 31, 1998, except for 254,100 options held by Mr. Holtz. (2) Represents life insurance premiums paid by the Company on behalf of the Named Officers. Amounts for 1997 include the Company's 401(k) matching contributions of $2,375 and $2,369 for Messrs. Holtz and Cerqua, respectively. Amounts for 1998 include the Company's 401(k) matching contributions of $2,633, $1,031, $1,094 and $1,517 for Messrs. Holtz, Dale, Arnson, and Cerqua, respectively. (3) Mr. Torchia, Chairman of the Board and a Director of the Company, received no annual compensation for services as an officer of the Company in 1996, 1997 or 1998. (4) Mr. Cerqua resigned his positions in September 1998.
STOCK OPTIONS The following table summarizes the number and terms of stock options granted to each of the Named Officers during the year ended December 31, 1998. OPTION GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term % of Total Options Granted to Exercise or Options Employees in Base Price Expiration Name Granted(1) Fiscal Year ($/Sh) Date 5% ($) 10% ($) - ------------------------------------- --------------- ------------ ------------ ---------- --------- Michael P. Holtz 364,100 98.4% $5.75 July 2008 224,073 1,686,903
The following table provides information concerning the exercise of stock options during 1998, and the year-end value of unexercised options for each of the Named Officers of the Company. OPTION EXERCISES AND YEAR-END VALUE TABLE
Number of Unexercised Value of Unexercised Shares Options Held at in-the-Money Options at Acquired Value December 31, 1998 December 31, 1998 (1) Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable H. Andrew Torchia - - 185,063 - $ 30,000 $ - Michael P. Holtz - - 580,000 254,100 179,063 - James B. Dale - - 17,500 3,000 - - Craig S. Arnson - - 19,000 5,000 - - Russell J. Cerqua - - 198,958 - 65,645 - Reno J. Bernardo - - 2,000 1,000 - - Salomon J. Dayan - - 32,000 1,000 - - Richard A. Chaifetz - - 1,000 1,000 - - Stuart N. Emanuel - - - - - - (1) The closing sale price of the Company's Common Stock on such date on the Nasdaq National Market was $3.81.
EMPLOYMENT AGREEMENT The Company's President and Chief Executive Officer, Michael P. Holtz, provides services to the Company under the terms of an employment agreement dated January 1, 1995 and amended February 4, 1997. Mr. Holtz's annual base compensation was reduced in 1997 to $325,000 from $425,000 pursuant to an amendment dated February 4, 1997. On April 22, 1997, Mr. Holtz exercised his option to renew his agreement for an additional three-year period ending December 31, 2000. On January 1, 1998, Mr. Holtz received options to purchase a minimum of 364,100 shares of the Company's common stock at the market price on date of issuance under the Company's 1996 Omnibus Incentive Stock Plan, of which 110,000 vested immediately, 121,000 will vest on July 1, 1999 and 133,100 will vest on July 1, 2000. In December of each year, the Compensation Committee will determine (i) a performance bonus to be paid for the then-current year and (ii) Mr. Holtz's base salary for the following year, which base salary will not be less than Mr. Holtz's then-existing base salary. Under the terms of the amended employment agreement, all stock awards were eliminated. The employment agreement entitles the executive officer to receive severance payments, equal to two years' compensation, if his employment is terminated by the Company without cause or if he elects to terminate such employment for a "good reason," including a change of control of the Company. For purposes of the employment agreements, a change of control means (i) any change in the Company's Board of Directors such that a majority of the Board of Directors is composed of members who were not members of the Board of Directors on the date the employment agreements were made or (ii) removal of the executive from membership on the Board of Directors by a vote of a majority of the shareholders of the Company or failure of the Board of Directors to nominate the executive for re-election to Board membership. In June 1998, Mr. Holtz agreed that a change in a majority of the members described in (i) above shall no longer constitute a "good reason" for electing to terminate his employment agreement. The executive officer is also entitled to severance payments, equal to one year's compensation, if he voluntarily terminates his employment with the Company for a reason other than a "good reason" and provides appropriate notice of such resignation. In September 1998, Mr. Cerqua resigned from his positions as Executive Vice President of Finance, Secretary, Treasurer, and Chief Financial Officer. COMPENSATION OF DIRECTORS Each nonemployee Director of the Company received an annual retainer fee of $9,000 ($750 per month) in 1998. Each nonemployee Director of the Company also received $250 for each Board of Directors meeting attended in person, $150 for each Board of Directors meeting conducted by telephone and $150 for each committee meeting. Each Director is reimbursed for all out-of-pocket expenses related to attendance at Board meetings. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding beneficial ownership of the Company's Common Stock as of March 25 1999, by (i) each person who is known by the Company to own beneficially more than 5% of the Company's Common Stock, (ii) each of the Company's Directors, (iii) each of the Named Officers and (iv) all Directors and executive officers as a group.
Shares Beneficially Owned As of March 25, 1999 Name Number Percent - ----------------------------- ------------------ ---------- Michael P. Holtz 786,907 (1) 11.8% H. Andrew Torchia (8) 667,801 (1)(2) 10.6 Wellington Management Company 615,000 (3) 10.1 Massachusetts Financial Services Company 527,000 (4) 8.7 Advisory Research, Inc. 422,400 (5) 7.0 Dimensional Fund Advisors, Inc. 379,100 (6) 6.3 Raymond and Liliane R. Dayan 364,774 (7) 6.0 Salomon J. Dayan 345,659 (1) 5.6 Russell J. Cerqua 257,413 (1) 4.1 Richard A. Chaifetz 83,800 (1) 1.4 Reno J. Bernardo 53,612 (1) 0.9 James B. Dale 24,775 (1) 0.4 Craig S. Arnson 26,500 (1) 0.4 Stuart N. Emanuel 200 - ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (9 PERSONS) 2,246,667 30.9% ============ ======= (1) Includes shares subject to options exercisable presently or within 60 days as follows: Mr. Holtz, 580,000 shares, Mr. Torchia, 218,750 shares (including options for 68,750 shares owned by Urban 2000 Corp., see (2) below), Dr. Dayan, 156,676 shares, Mr. Cerqua, 198,958 shares, Dr. Chaifetz, 1,000 shares, Mr. Bernardo, 2,000 shares, Mr. Dale, 23,500 shares, and Mr. Arnson, 24,000 shares. (2) Includes 375,832 shares owned by Urban 2000 Corp., options to purchase 68,750 shares owned by Urban which are exercisable presently or within 60 days, and 7,676 shares owned by Niles 1290 Corp., a wholly-owned subsidiary of Urban 2000 Corp. Mr. Torchia is the President and 51% stockholder of Urban 2000 Corp. Mr. Torchia disclaims beneficial ownership of all but an aggregate of 195,589 shares and options exercisable into 35,063 shares owned directly, or indirectly, by Urban. (3) Based upon information provided in its Schedule 13G dated December 31, 1998, Wellington Management Company ("WMC"), in its capacity as investment advisor, may be deemed beneficial owner of 615,000 shares of the Company which are owned by numerous investment counseling clients. Of the shares shown above, WMC has shared voting power for 615,000 shares and shared investment power for 615,000 shares. (4) Based upon information provided in its Schedule 13G dated February 11, 1999, Massachusetts Financial Services Company ("MFS"), in its capacity as investment manager, may be deemed beneficial owner of 527,000 shares of the Company which are also beneficially owned by MFS Series Trust II - MFS Emerging Growth Stock Fund, shares of which are owned by numerous investors. MFS has sole voting and investment power for the 527,000 shares. (5) Based upon information provided in its Schedule 13G dated February 8, 1999, Advisory Research, Inc. ("ARI"), in its capacity as investment advisor, may be deemed beneficial owner of 422,400 shares of the Company which are owned by numerous investment counseling clients. Of the shares shown above, ARI has shared voting and investment power for 422,400 shares. (6) Based upon information provided in its Schedule 13G dated February 11, 1999, Dimensional Fund Advisors, Inc. ("DFA"), in its capacity as investment advisor, may be deemed beneficial owner of 379,100 shares of the Company which are owned by numerous investment counseling clients. Of the shares shown above, DFA has sole voting and investment power for 379,100 shares. (7) Based upon information provided in their Schedule 13D dated August 25, 1997, Mr. and Mrs. Dayan beneficially own 364,744 shares of the Company. Of the shares shown above, Mr. and Mrs. Dayan have sole voting and investment power for 364,774 shares. (8) The address of this stockholder is c/o Amerihost Properties, Inc., 2400 East Devon, Suite 280, Des Plaines, Illinois.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. In the past, certain of the Company's directors and executive officers have, directly or indirectly, invested in joint ventures with the Company. For example, Mr. Torchia, through Urban, has invested an aggregate of approximately $157,000 as limited partners and approximately $49,000 as a general partner in four joint ventures since 1991. In addition, Dr. Dayan, a director of the Company, has invested approximately $1.6 million in seven joint ventures since 1988. Dr. Dayan and each of the Company's directors and executive officers who have made such investments have done so on the same terms as all other investors in such joint ventures. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K. Financial Statements: The following consolidated financial statements are filed as part of this Report on Form 10-K for the fiscal year ended December 31, 1998. (a)(1) Financial Statements: Report of Independent Certified Public Accountants...... F-1 Consolidated Balance Sheets at December 31, 1998 and 1997............................................... F-2 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996................. F-4 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996.. F-5 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996................. F-6 Notes to Consolidated Financial Statements.............. F-8 (a)(2) Financial Statement Schedules: No financial statement schedules are submitted as part of this report because they are not applicable or are not required under regulation S-X or because the required information is included in the financial statements or notes thereto. (a)(3) Exhibits: The following exhibits were included in the Registrant's Report on Form 10-K filed on March 26, 1993, and are incorporated by reference herein: Exhibit No. Description 3.1 Amended and Restated Certificate of Incorporation of Amerihost Properties, Inc. 3.2 By-laws of Amerihost Properties, Inc. 4.2 Specimen Common Stock Purchase Warrant for Employees 4.3 Specimen 7% Subordinated Note 4.4 Specimen Common Stock Purchase Warrant for 7% Subordinated Noteholders 4.5 Form of Registration Rights Agreement for 7% Subordinated Noteholders The following exhibits were included in the Registrant's Amendment No. 1 to Form S-2 filed on July 3, 1996, and are incorporated by reference herein: Exhibit No. Description 10.4 Employment Agreement between Amerihost Properties, Inc. and Michael P. Holtz The following exhibits were included in the Registrant's Proxy Statement for Annual Meeting of Shareholders filed on July 25, 1996, and are incorporated by reference herein: Exhibit No. Description 10.2 1996 Omnibus Incentive Stock Plan (Annex A) 10.3 1996 Stock Option Plan for Nonemployee Directors (Annex B) The following exhibits were included in the Registrant's Report on Form 10-K filed March 24, 1997; and are incorporated herein by reference: Exhibit No. Description 10.9 Amendment of Employment Agreement between Amerihost Properties, Inc. and Michael P. Holtz The following exhibits are included in this Report on Form 10-K filed March 30, 1999: Exhibit No. Description 10.5 Agreement of Purchase and Sale between PMC Commercial Trust and Amerihost Properties, Inc., including exhibits thereto 21.1 Subsidiaries of the Registrant 23.1 Consent of BDO Seidman, LLP 27.0 Financial Data Schedule Reports on Form 8-K: There were no reports on Form 8-K filed during the quarter ended December 31, 1998. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMERIHOST PROPERTIES, INC. By: /s/ Michael P. Holtz Michael P. Holtz Chief Executive Officer By: /s/ James B. Dale James B. Dale Chief Financial Officer March 29, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. /s/ H. Andrew Torchia /s/ Michael P. Holtz H. Andrew Torchia, Director Michael P. Holtz, Director March 29, 1999 March 29, 1999 /s/ Russell J. Cerqua /s/ Richard A. Chaifetz Russell J. Cerqua, Director Richard A. Chaifetz, Director March 29, 1999 March 29, 1999 /s/ Salomon J. Dayan /s/ Reno J. Bernardo Salomon J. Dayan, Director Reno J. Bernardo, Director March 29, 1999 March 29, 1999 /s/ Stuart N. Emanuel Stuart N. Emanuel, Director March 29, 1999 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To The Board of Directors of Amerihost Properties, Inc. We have audited the accompanying consolidated balance sheets of Amerihost Properties, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Amerihost Properties, Inc. and subsidiaries at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, in 1998 the Company adopted Statement of Position (SOP) Number 98-5, "Reporting on the Costs of Start-Up Activities." BDO Seidman, LLP Chicago, Illinois March 22, 1999 AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1998 1997 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 4,493,834 $ 2,349,503 Accounts receivable (including $290,859 and $1,375,936 from related parties) 2,931,216 3,440,241 Notes receivable, current portion (Note 2) 168,061 1,459,986 Prepaid expenses and other current assets 902,457 209,779 Refundable income taxes 1,261,194 2,342,734 Costs and estimated earnings in excess of billings on uncompleted contracts with related parties (Note 3) 649,858 1,913,103 --------------- -------------- Total current assets 10,406,620 11,715,346 --------------- -------------- Investments in and advances to unconsolidated hotel joint ventures (Notes 4 and 6) 5,331,247 5,319,689 --------------- -------------- Property and equipment (Notes 6, 7 and 13): Land 11,170,463 10,365,676 Buildings 68,405,566 49,156,742 Furniture, fixtures and equipment 19,081,593 15,366,291 Construction in progress 6,743,319 3,549,408 Leasehold improvements 1,156,174 1,223,206 --------------- -------------- 106,557,115 79,661,323 Less accumulated depreciation and amortization 15,219,135 9,345,991 --------------- -------------- 91,337,980 70,315,332 --------------- -------------- Notes receivable, less current portion (Note 2) 1,181,962 1,355,395 Deferred income taxes (Note 9) 3,904,000 - Other assets, net of accumulated amortization of $2,325,451 and $4,255,609 (Note 5) 3,118,979 3,962,336 --------------- -------------- 8,204,941 5,317,731 $ 115,280,788 $ 92,668,098 =============== ============== See notes to consolidated financial statements.
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, December 31, 1998 1997 ------------ ------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,638,250 $ 4,780,444 Bank line-of-credit (Note 6) 1,961,213 1,289,709 Accrued payroll and related expenses 1,180,674 1,004,265 Accrued real estate and other taxes 2,285,333 885,610 Other accrued expenses and current liabilities 756,308 843,805 Current portion of long-term debt (Note 7) 5,508,498 5,119,194 --------------- -------------- Total current liabilities 17,330,276 13,923,027 --------------- -------------- Long-term debt, net of current portion (Note 7) 66,332,566 55,116,028 --------------- -------------- Deferred income taxes (Note 9) - 108,000 --------------- -------------- Deferred income (Note 13) 13,164,007 927,444 --------------- -------------- Commitments (Notes 8, 12 and 13) Minority interests 138,131 1,000,740 Shareholders' equity (Notes 8 and 12): Preferred stock, no par value; authorized 100,000 shares; none issued - - Common stock, $.005 par value; authorized 25,000,000 shares; issued and outstanding 6,089,550 shares at December 31, 1998, and 6,212,925 shares at December 31, 1997 30,448 31,065 Additional paid-in capital 17,380,295 17,860,655 Retained earnings 1,341,940 4,138,014 18,752,683 22,029,734 Less: Stock subscriptions receivable (Note 8) (436,875) (436,875) 18,315,808 21,592,859 $ 115,280,788 $ 92,668,098 =============== ==============
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1998 1997 1996 ------------------ ------------------- ----------- Revenue (NOTE 10): Hotel operations: AmeriHost Inn(R)hotels $ 33,095,525 $ 14,655,498 $ 8,526,923 Other hotels 14,232,886 17,223,293 22,088,368 Development and construction 8,968,111 14,639,746 22,937,267 Management services 2,251,962 3,023,944 2,784,031 Employee leasing 10,069,705 13,123,035 12,005,759 ---------------- --------------- --------------- 68,618,189 62,665,516 68,342,348 ---------------- --------------- --------------- Operating costs and expenses: Hotel operations: AmeriHost Inn(R)hotels 23,419,321 11,066,502 5,081,856 Other hotels 11,348,680 13,276,726 16,586,188 Development and construction 8,463,341 13,719,250 19,651,500 Management services 1,306,864 1,423,814 1,350,991 Employee leasing 9,748,110 12,798,585 11,689,461 ---------------- --------------- --------------- 54,286,316 52,284,877 54,359,996 14,331,873 10,380,639 13,982,352 Depreciation and amortization 5,486,529 4,532,500 3,478,878 Leasehold rents - hotels (Note 13) 4,192,348 1,728,933 2,121,876 Corporate general and administrative 1,568,561 2,139,647 1,928,134 Operating income 3,084,435 1,979,559 6,453,464 Other income (expense): Interest expense (6,113,369) (4,053,933) (2,767,828) Interest income 521,250 755,115 625,386 Other income 227,822 136,018 141,941 Equity in net income and losses of affiliates (240,868) (516,583) 809,443 Gain on sale of assets 305,484 1,697,999 907,105 Non-recurring expenses (Note 16) - (1,874,492) (403,657) Income (loss) before minority interests and income taxes (2,215,246) (1,876,317) 5,765,854 Minority interests in operations of consolidated subsidiaries and partnerships 267,801 172,874 (13,200) Income (loss) before income taxes (1,947,445) (1,703,443) 5,752,654 Income tax benefit (expense) (Note 9) 780,000 737,000 (2,358,000) Income (loss) before extraordinary item and cumulative effect of change in accounting principle (1,167,445) (966,443) 3,394,654 Extraordinary item - early extinguishment of debt, net of income tax benefit (Note 17) (332,738) - - Cumulative effect of change in accounting principle, net of income tax benefit (Note 1) (1,295,891) - - Net income (loss) $ (2,796,074) $ (966,443) $ 3,394,654 ================ =============== =============== Income (loss) per share - Basic, before extraordinary item and accounting change $ (0.19) $ (0.15) $ 0.57 Net income (loss) per share - Basic $ (0.45) $ (0.15) $ 0.57 Income (loss) per share - Diluted, before extraordinary item and accounting change $ (0.20) $ (0.19) $ 0.49 Net income (loss) per share - Diluted $ (0.45) $ (0.19) $ 0.49 See notes to consolidated financial statements.
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Stock subscrip- Common stock Additional Retained tions Total paid-in earnings and notes shareholders' Shares Amount capital (Deficit) receivable equity BALANCE AT JANUARY 1, 1996 5,977,213 $ 29,886 $ 16,920,237 $ 1,709,803 $ (1,393,167) $ 17,266,759 Shares issued for compensation and investment 10,583 53 47,194 -- -- 47,247 Exercise of common stock warrants 49,125 246 202,723 -- -- 202,969 Net income for the year ended December 31, 1996 -- -- -- 3,394,654 -- 3,394,654 BALANCE AT DECEMBER 31, 1996 6,036,921 30,185 17,170,154 5,104,457 $ (1,393,167) 20,911,629 Shares issued for compensation 9,350 47 49,092 -- -- 49,139 Exercise of common stock options 508,750 2,544 2,259,281 -- -- 2,261,825 Acquisition of common stock (157,073) (786) (1,094,964) -- -- (1,095,750) Compensation recognized relating to employee stock options granted -- -- 301,465 -- -- 301,465 Tax benefit relating to the exercise of non-qualified options -- -- 356,533 -- -- 356,533 Repayment of notes receivable from officers (Note 8) (185,023) (925) (1,180,906) -- 956,292 (225,539) Net loss for the year ended December 31, 1997 -- -- -- (966,443) -- (966,443) BALANCE AT DECEMBER 31, 1997 6,212,925 31,065 17,860,655 4,138,014 (436,875) 21,592,859 Acquisition of common stock (Note 8) (123,550) (618) (480,810) -- -- (481,428) Shares issued for compensation 175 1 450 -- -- 451 Net loss for the year ended December 31, 1998 -- -- -- (2,796,074) -- (2,796,074) BALANCE AT DECEMBER 31, 1998 6,089,550 $ 30,448 $ 17,380,295 $ 1,341,940 $ (436,875) $ 18,315,808 ========= ======= ============ ============ ============ ============ See notes to consolidated financial statements.
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996 ------------------ ------------------- ----------- Cash flows from operating activities: Cash received from customers $ 71,281,629 $ 65,006,272 $ 68,751,159 Cash paid to suppliers and employees (58,610,075) (57,063,416) (57,127,365) Interest received 976,771 546,889 546,369 Interest paid (6,089,595) (3,994,403) (2,665,921) Income taxes paid (2,150,460) (939,572) (1,946,099) Contract and employment termination costs - (1,697,448) - Net cash provided by operating activities 5,408,270 1,858,322 7,558,143 --------------- --------------- --------------- Cash flows from investing activities: Distributions, and collections on advances, from affiliates 2,805,517 2,274,863 6,609,091 Purchase of property and equipment (42,182,698) (29,343,109) (14,049,010) Purchase of investments in, and advances to, minority owned affiliates (2,790,036) (4,658,738) (4,471,603) Acquisitions of partnership interests, net of cash acquired (8,358,145) 156,067 (580,809) Increase in notes receivable - (6,000) (51,464) Collections on notes receivable 1,465,378 139,050 49,455 Preopening and management contract costs (223,230) (416,195) (488,280) Proceeds from sale of assets 64,838,108 3,390,576 1,762,221 Other - - (127,058) Net cash provided by (used in) investing activities 15,554,894 (28,463,486) (11,347,457) --------------- --------------- --------------- Cash flows from financing activities: Proceeds from issuance of long-term debt 31,593,918 34,813,511 8,822,046 Principal payments on long-term debt (49,875,365) (8,880,899) (2,367,671) Net proceeds from (repayments of) line of credit 671,504 (417,715) (609,612) Decrease in minority interest (731,691) (578,300) (197,000) Proceeds from issuance of common stock 451 1,166,075 202,969 Aborted stock offering and merger costs - (177,044) (403,657) Common stock repurchases (477,650) - - Net cash (used in) provided from financing activities (18,818,833) 25,925,628 5,447,075 Net increase (decrease) in cash 2,144,331 (679,536) 1,657,761 Cash and cash equivalents, beginning of year 2,349,503 3,029,039 1,371,278 Cash and cash equivalents, end of year $ 4,493,834 $ 2,349,503 $ 3,029,039 =============== =============== =============== See notes to consolidated financialstatements.
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31,
1998 1997 1996 ------------------ ------------------- ----------- Reconciliation of net income (loss) to net cash provided by operating activities: Net income (loss) $ (2,796,074) $ (966,443) $ 3,394,654 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 5,486,529 4,532,500 3,478,878 Equity in net (income) loss of affiliates and amortization of deferred income 240,868 516,583 (809,443) Minority interests in net income of subsidiaries (267,801) (172,874) 13,200 Amortization of deferred interest and loan discount 45,393 39,760 39,760 Bad debt expense - 200,000 - Compensation recognized through issuance of common stock and common stock options - 350,604 30,210 Gains on sale of investments, property and equipment (305,484) (1,697,999) (907,105) Aborted stock offering and merger costs - 177,044 403,657 Deferred income taxes (4,012,000) 279,000 212,000 Amortization of deferred gain (643,726) - - Extraordinary item and cumulative effect of change in accounting principle 2,157,195 - - Changes in assets and liabilities, net of effects of acquisitions: Decrease (increase) in accounts receivable 1,017,942 1,613,450 (1,797,183) Increase in prepaid expenses and other current assets (612,070) (188,264) (107,006) Decrease (increase) in refundable income taxes 1,081,540 (1,955,572) 199,901 Decrease in costs and estimated earnings in excess of billings 1,263,245 170,156 1,817,620 Decrease (increase) in other assets 1,494,948 (1,137,535) (604,246) (Decrease) increase in accounts payable (46,020) (557,958) 1,506,912 Increase in accrued payroll and other accrued expenses and current liabilities 713,282 220,601 383,277 (Decrease) increase in accrued interest (21,619) 14,137 56,514 Increase in deferred income 612,122 421,132 246,543 Net cash provided by operating activities $ 5,408,270 $ 1,858,322 $ 7,558,143 =============== ============== =============
AMERIHOST PROPERTIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Organization: Amerihost Properties, Inc. and its subsidiaries (collectively, where appropriate, "Amerihost," or the "Company") was incorporated under the laws of Delaware on September 19, 1984. The Company is engaged in the development and construction of AmeriHost Inn(R) hotels, its proprietary hotel brand, and the ownership, operation and management of both AmeriHost Inn(R) hotels and other hotels. The AmeriHost Inn(R) brand was created by the Company to provide for the consistent, cost-effective development and operation of mid-price hotels in various markets. All AmeriHost Inn(R) hotels are designed and developed using the Company's 60 to 120 room, interior corridor and indoor pool prototype design and are located in tertiary and secondary markets. Principles of consolidation: The consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries, and entities in which the Company has a majority ownership interest. All significant intercompany accounts and transactions have been eliminated. Construction accounting: Development fee revenue from construction/renovation projects is recognized using the percentage-of-completion method over the period beginning with the execution of contracts and ending with the commencement of construction/renovation. Construction fee revenue from construction/renovation projects is recognized on the percentage-of-completion method, generally based on the ratio of costs incurred to estimated total contract costs. Revenue from contract change orders is recognized to the extent costs incurred are recoverable. Profit recognition begins when construction reaches a progress level sufficient to estimate the probable outcome. Provision is made for anticipated future losses in full at the time they are identified. Cash equivalents: The Company considers all investments with an initial maturity of three months or less to be cash equivalents. Concentrations of credit risk: Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments, accounts receivable and notes receivable. The Company invests temporary cash balances in financial instruments of highly rated financial institutions generally with maturities of less than three months. A substantial portion of accounts receivable are from hotel guests staying at the Company's hotels located in the midwestern United States, where collateral is generally not required, from these same hotels for hotel management and payroll fees, and from hotel operators for the development and construction of hotels pursuant to written contracts. 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Fair values of financial instruments: The carrying values reflected in the consolidated balance sheet at December 31, 1998 reasonably approximate the fair values for cash and cash equivalents, accounts and contracts receivable and payable, and variable rate long-term debt. The majority of the notes receivable are collateralized by shares of the Company's common stock, investments in hotels, a second mortgage on a hotel property, and personal guarantees. Construction/renovation and working capital notes are repaid to the Company within a relatively short period after their origination. The notes receivable bear interest at rates approximating the current market rates and the carrying value approximates their fair value. The Company estimates that the fair value of its fixed rate long-term debt at December 31, 1998 approximates the carrying value considering the property specific nature of the notes and in certain cases, the subordinated nature of the debt. In making such assessments, the Company considered the current rate at which the Company could borrow funds with similar remaining maturities and discounted cash flow analyses as appropriate. Investments: Investments in entities in which the Company has a non-majority ownership interest are accounted for using the equity method, under which method the original investment is increased (decreased) by the Company's share of earnings (losses), and is reduced by dividends or distributions when received. Property and equipment: Property and equipment are stated at cost. Repairs and maintenance are charged to expense as incurred and renewals and betterments are capitalized. Depreciation is being provided for assets placed in service, principally by use of the straight-line method over their estimated useful lives. Leasehold improvements are being amortized by use of the straight-line method over the term of the lease. Construction period interest in the amount of $176,920, $548,469 and $167,433 was capitalized in 1998, 1997 and 1996, respectively, and is included in property and equipment. For each classification of property and equipment, depreciable periods are as follows: Building 31.5-39 years Furniture, fixtures and equipment 5-7 years Leasehold improvements 3-10 years 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Other assets: Investment in leases: Investment in leases represents the amounts paid for the acquisition of leasehold interests for certain hotels. These costs are being amortized by use of the straight-line method over the terms of the leases. Costs of management contracts acquired and preopening costs: The costs of management contracts acquired included amounts paid to acquire hotel management contracts. Preopening costs include hiring, training, and other costs incurred in connection with new hotel openings and new management contracts. These amounts were being amortized by use of the straight-line method over periods ranging from two to five years. These costs were expensed in 1998 pursuant to the adoption of Statement of Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities," which requires these costs to be expensed as incurred. All previously capitalized costs, net of an income tax benefit of approximately $864,000, are reflected as a cumulative effect of a change in accounting principle. The impact of the accounting change on income before extraordinary item, and net income, was not material for the year ended December 31, 1998. The pro forma effect on earnings of accounting for start-up activities pursuant to SOP No. 98-5 are as follows:
1997 1996 ---------------- ------- Pro forma net income (loss) $ (1,729,842) $ 3,032,426 Pro forma net income (loss) per share: Basic $ (0.28) $ 0.50 Diluted $ (0.31) $ 0.43
Deferred loan costs: Deferred loan costs represent the costs incurred in issuing the 7% subordinated notes and other mortgage notes. These costs are being amortized by use of the interest method over the life of the debt. Franchise fees: Franchise fees represent the initial franchise fees paid to franchisors for certain hotels and are being amortized by use of the straight-line method over the terms of the franchise licenses, ranging from 10 to 20 years. Deferred income: Deferred income includes the gain on the sale and leaseback of 26 hotels to a real estate investment trust consummated on June 30, 1998 (Note 13). This deferred gain is being amortized on a straight-line basis over the 10-year term of the lease as an adjustment to leasehold rent expense. 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Deferred income also includes that portion of development, construction and renovation fees earned from entities in which the Company holds an ownership interest. The portion of fees deferred is equal to the Company's proportional ownership interest in the entity and is being amortized over the life of the operating assets. The balance of the fees are recorded in income as earned. Income taxes: Deferred income taxes are provided on the differences in the bases of the Company's assets and liabilities as determined for tax and financial reporting purposes and relate principally to depreciation of property and equipment and deferred income. Earnings per share: The Company calculates earnings per share in accordance with Financial Accounting Standards Board ("FASB") Statement No. 128, "Earnings Per Share" (FAS 128). 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. The Company excluded stock options which had an anti-dilution effect on the EPS computations. Diluted EPS gives effect to all dilutive potential common shares outstanding for the period. The calculation of basic and diluted earnings per share for each of the three years ended December 31 is as follows:
1998 1997 1996 Income (loss), before extraordinary item and cumulative effect of change in accounting principle $ (1,167,445) $ (966,443) $ 3,394,654 Extraordinary item (Note 17) (332,738) - - Accounting change (Note 1) (1,295,891) - - Net income (loss) (2,796,074) (966,443) 3,394,654 Impact of convertible partnership interests (157,333) (325,291) (71,699) ------------- -------------- --------------- Net income (loss) available to common shareholders $ (2,953,407) $ (1,291,734) $ 3,322,955 ============= ============== ============== Average common shares outstanding 6,180,279 6,282,874 6,007,597 Dilutive effect of: Convertible partnership interests 332,579 376,225 111,042 Stock options - - 720,568 Dilutive common shares outstanding 6,512,858 6,659,099 6,839,207 ============= ============== ==============
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
1998 1997 1996 --------------- ---------------- ------- Income (loss) per share - Basic, before extraordinary item and accounting change $ (0.19) $ (0.15) $ 0.57 Extraordinary item (0.05) - - Accounting change (0.21) - - Net income (loss) per share - Basic $ (0.45) $ (0.15) $ 0.57 ============ ============= ============== Income (loss) per share - Diluted, before extraordinary item and accounting change $ (0.20) $ (0.19) $ 0.49 Extraordinary item (0.05) - - Accounting change (0.20) - - Net income (loss) per share - Diluted $ (0.45) $ (0.19) $ 0.49 ============ ============= ==============
Advertising: The costs of advertising, promotion and marketing programs are charged to operations in the year incurred. These costs were approximately $1,883,000, $899,000 and $686,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and reported amounts of revenue and expenses during the reported periods. Actual results may differ from those estimates. Reclassifications: Certain reclassifications have been made to the 1996 and 1997 financial statements in order to conform to the 1998 presentation. Asset impairments: The Company periodically reviews the carrying value of certain of its long-lived assets in relation to historical results, current business conditions and trends to identify potential situations in which the carrying value of assets may not be recoverable. If such reviews indicate that the carrying value of such assets may not be recoverable, the Company would estimate the undiscounted sum of the expected cash flows of such assets to determine if such sum is less than the carrying value of such assets to ascertain if a permanent impairment exists. If a permanent impairment exists, the Company would determine the fair value by using quoted market prices, if available for such assets, or if quoted market prices are not available, the Company would discount the expected future cash flows of such assets. 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED): Impact of New Accounting Standards: In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Company, to date, has not engaged in derivative and hedging activities. 2. NOTES RECEIVABLE:
Notes receivable consists of: 1998 1997 --------------- ------- Diversified Innkeepers, Inc. (a) $ 1,250,023 $ 1,316,495 Mortgage note receivable (b) - 1,353,886 Other notes 100,000 145,000 -------------- -------------- 1,350,023 2,815,381 Less current portion 168,061 1,459,986 -------------- -------------- Notes receivable, less current portion $ 1,181,962 $ 1,355,395 ============== ============== (a) In connection with the purchase of management contracts from Diversified Innkeepers, Inc. in 1991, the Company executed notes to provide financing to the shareholders of Diversified in the amount of $1,500,000, collateralized by 125,000 shares of the Company's common stock, a limited partnership interest in a hotel, a second mortgage on another hotel property, and a personal guarantee by the shareholders. The note was modified in October 1995, providing for monthly payments of $16,250, including interest at the rate of 10% per annum, and is due the earlier of the termination of the related management contracts or September 30, 2000. (b) Promissory note receivable which was received in connection with the sale of the Days Inn Bowling Green, Ohio. The note provided for monthly payments of $15,040 including interest at the rate of 10% per annum. The note was repaid in 1998.
3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS: Information regarding contracts-in-progress is as follows at December 31, 1998 and 1997:
1998 1997 --------------- -------- Costs incurred on uncompleted contracts $ 1,747,128 $ 4,761,447 Estimated earnings 503,912 1,345,196 -------------- -------------- 2,251,040 6,106,643 Less billings to date 1,601,182 4,193,540 Costs and estimated earnings in excess of billings on uncompleted contracts $ 649,858 $ 1,913,103 ============== ==============
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES: The Company has ownership interests, ranging from 1% to 50%, in general partnerships, limited partnerships and limited liability companies formed for the purpose of owning and operating hotels. These investments are accounted for using the equity method. The Company had investments in 19 hotels at December 31, 1998 with a total balance of ($180,467), and investments in 43 hotels at December 31, 1997 with a total balance of $623,751. The Company advances funds to hotels in which the Company has a minority ownership interest for working capital and construction purposes. The advances bear interest ranging from the prime rate to 10% per annum and are due on demand. The Company expects the partnerships to repay these advances through cash flow generated from hotel operations and mortgage financing. The advances were $5,511,714 and $4,695,938 at December 31, 1998 and 1997, respectively, and are included in investments in and advances to unconsolidated hotel joint ventures on the accompanying balance sheets. During 1998 and 1996, the Company acquired additional partnership interests in 15 and two hotels, respectively, which resulted in these hotels being 100% or majority owned by the Company subsequent to the acquisition dates. The following is a summary of the acquisitions:
1998 1996 -------------- -------------- Fair value of assets acquired $ 39,451,675 $ 3,492,552 Cash paid and redemption of note receivable (8,358,145) (580,809) --------------- -------------- Liabilities assumed $ 31,093,530 $ 2,911,743 ============== ==============
In addition, the Company purchased 11 hotels from entities in which the Company held a minority ownership position, for a total purchase price of $26.7 million, including the assumption of $13.1 million in mortgage debt. These 26 acquisitions have been accounted for by the purchase method of accounting. The purchase price was allocated to the acquired hotel assets, primarily property and equipment, based upon an estimate of fair values at the date of acquisition. The operating results of the acquired hotels are included in the Company's consolidated results of operations from the dates of acquisition. The unaudited consolidated results of operations on a pro forma basis as though the hotels had been acquired as of the beginning of 1997 are as follows:
1998 1997 --------------- ------- Pro forma net sales $ 79,789,162 $ 81,478,912 Pro forma loss before extraordinary item and cumulative effect of change in accounting principle (1,857,930) (2,344,831) Pro forma net loss (3,486,559) (2,344,831) Pro forma loss per share - Basic, before extraordinary item and accounting change $ (0.30) $ (0.37) Extraordinary item (0.05) - Accounting change (0.21) - -------------- --------------- Pro forma net loss per share - Basic $ (0.56) $ (0.37) ============== ==============
4. INVESTMENT IN AND ADVANCES TO UNCONSOLIDATED HOTEL JOINT VENTURES (CONTINUED):
1998 1997 --------------- ------- Pro forma loss per share - Diluted, before extraordinary item and accounting change $ (0.31) $ (0.40) Extraordinary item (0.05) - Accounting change (0.20) - --------------- --------------- Pro forma net loss per share - Diluted $ (0.56) $ (0.40) ============== ==============
The proforma financial information is not necessarily indicative of the operating results that would have occurred had the acquisitions been consummated as of the above date, nor are they indicative of future operating results. The following represents unaudited condensed financial information for all of the Company's investments in affiliated companies accounted for under the equity method at December 31, 1998, 1997 and 1996.
1998 1997 1996 -------------- --------------- --------- Current assets $ 2,174,945 $ 4,338,114 $ 3,893,360 Noncurrent assets 38,398,391 88,712,619 86,363,804 Current liabilities 10,028,804 4,939,989 5,060,920 Noncurrent liabilities 27,363,973 75,359,216 64,218,232 Equity 3,180,559 12,751,528 20,978,012 Gross revenue 14,995,050 33,427,950 28,990,672 Gross operating profit 4,787,471 12,100,004 13,175,668 Depreciation and amortization 2,653,699 6,025,447 4,296,057 Net income (loss) (630,097) (2,042,178) 1,585,133
5. OTHER ASSETS: Other assets, net of accumulated amortization, at December 31, 1998 and 1997 are comprised of the following:
1998 1997 Deposits, franchise fees and other assets $ 1,542,712 $ 1,551,142 Deferred loan costs 1,190,668 885,732 Investment in leases 385,599 493,286 Management contracts and preopening costs (Note 1) - 1,032,176 -------------- -------------- Total $ 3,118,979 $ 3,962,336 ============== ==============
6. BANK LINE-OF-CREDIT: The Company has a $7,000,000 bank operating line-of-credit, of which $1,961,213 and $1,289,709 was outstanding at December 31, 1998 and 1997, respectively. The operating line-of-credit is collateralized by a security interest in certain of the Company's assets, including its interests in various joint ventures, bears interest at an annual rate equal to the bank's base lending rate (7.75% at December 31, 1998) plus one-half of one percent with a floor of 7.5%, and matures October 15, 1999. The line-of-credit note contains two financial covenants, one requiring a minimum net worth and the other requiring a maximum debt to net worth ratio. 7. LONG-TERM DEBT: Long-term debt consists of:
1998 1997 --------------- ----------- Mortgage notes maturing 1999 through 2019, with a weighted average interest rate of 8.75% $ 69,454,739 $ 57,816,261 7% Subordinated Notes ($2,250,000 face amount) due October 1999, with an effective interest rate of 9%, net of unamortized discount of $34,045 and $79,438 at December 31, 1998 and 1997, respectively 2,215,955 2,170,562 Other 170,370 248,399 -------------- -------------- 71,841,064 60,235,222 Less current portion 5,508,498 5,119,194 -------------- -------------- $ 66,332,566 $ 55,116,028 ============== ==============
The mortgage notes are collateralized by certain hotel properties. The notes generally provide for monthly payments of principal and interest based on loan amortization schedules, with interest at fixed rates ranging from 7.50% to 10.50% (weighted average interest rate of 8.16% at December 31, 1998), and floating rates ranging from prime plus 0.5% to prime plus 2.0% (weighted average interest rate of 9.32% at December 31, 1998). Construction loans of $2,668,504 at December 31, 1998 provide for interest only during the construction period and convert to long-term permanent mortgage notes upon completion of the hotels. Construction loans of $1,984,526 at December 31, 1997 converted to permanent mortgage notes during 1998. The construction loans have been included in the mortgage note balances at December 31, 1998 and 1997. Certain of the mortgage notes provide for financial covenants, principally minimum net worth requirements and minimum debt to equity ratios. In addition, pursuant to the terms of the subordinated notes, no dividends may be paid until such notes have been repaid in full. At December 31, 1998, the Company was not in compliance with the minimum debt to equity ratio covenant contained in two of the mortgage loans. The Company has obtained waivers from the lender regarding these violations. The Company was not in compliance with the minimum debt service coverage ratio contained in a third mortgage loan of approximately $1.6 million, however the lender has not waived the violation. The Company has included the balance of this mortgage in current maturities of long-term debt as of December 31, 1998. Resolution of this matter is not expected to have a material impact on the operations of the Company. 7. LONG-TERM DEBT (CONTINUED): The aggregate maturities of long-term debt, excluding construction loans, are approximately as follows: Year Ending December 31, Amount ------------------------ ------------- 1999 $ 5,508,498 2000 3,276,129 2001 3,225,814 2002 4,040,823 2003 6,132,997 Thereafter 46,988,299 $ 69,172,560 8. SHAREHOLDERS' EQUITY: Authorized shares: The Company's corporate charter authorizes 25,000,000 shares of Common Stock with a par value of $0.005 per share and 100,000 shares of Preferred Stock without par value. The Preferred Stock may be issued in series and the Board of Directors shall determine the voting powers, designations, preferences and relative participating optional or other special rights and the qualifications, limitations or restrictions thereof. Common Stock: In March 1998, the Company's Board of Directors authorized the repurchase, from time to time on the open market, of up to $1.0 million of Common Stock over the next year. Through December 31, 1998, the Company repurchased 122,900 shares of the Company's Common Stock for approximately $477,651. Stock options and warrants: In connection with a financial relations consulting agreement, the Company issued options in 1998 to acquire 5,000 shares of common stock at an exercise price of $4.50 per share, expiring March 2001. In connection with the issuance of debt, the Company has issued warrants for the purchase of common stock. At December 31, 1998, warrants to purchase 113,125 shares of common stock are outstanding with exercise prices ranging from $3.56 to $4.38 per share and are exercisable through January 2000. The Company has issued options to acquire shares of the Company's common stock to certain of its partners in various hotel joint ventures referred to in Note 4. At December 31, 1998, options to purchase 60,000 shares of common stock are outstanding with exercise prices ranging from $6.13 to $8.00 per share and are exercisable through April 2001. 8. SHAREHOLDERS' EQUITY (CONTINUED): Limited partnership conversion rights: The Company is a general partner in three partnerships where the limited partners have the right at certain times and under certain conditions to convert their limited partnership interests into 249,350 shares of the Company's common stock. Stock subscriptions receivable: In connection with the Diversified transaction (Note 2), the Company issued 125,000 stock options which were exercised in January 1993, in consideration for a secured promissory note in the amount of $436,875 with interest at 6.5% per annum, collateralized by the 125,000 shares of common stock issued upon the exercise of the options and limited partnership interests. The total principal balance is due the earlier of September 30, 1999, or the date the stock is sold or the related management contracts are terminated. This note receivable has been classified as a reduction of shareholders' equity on the accompanying balance sheets. Notes receivable: In December 1994, two of the Company's officers executed notes in the amount of $956,292 to the Company for the purchase of a note and related receivables. The officer notes provided for interest to be accrued at 8% per annum, with the principal balance and all accrued interest due December 31, 1997 and were collateralized by a total of 273,369 shares of the Company's Common Stock. These notes receivable and related interest receivable were repaid by the officers in 1997 through the tender of 185,023 shares of the Company's common stock. 9. TAXES ON INCOME: The provisions for income taxes (benefit) in the consolidated statements of operation are as follows:
1998 1997 1996 -------------- --------------- ------- Current $ 3,232,000 $ (1,016,000) $ 2,146,000 Deferred (4,012,000) 407,000 212,000 Valuation allowance decrease - (128,000) - ------------- -------------- --------- Income tax (benefit) expense, before extraordinary item and cumulative effect of change in accounting principle (780,000) (737,000) 2,358,000 Extraordinary item (231,000) - - Accounting change (864,000) - - Income tax (benefit) expense $ (1,875,000) $ (737,000) $ 2,358,000 ============= ============== =============
9. TAXES ON INCOME (CONTINUED): Temporary differences between the financial statement carrying amounts and tax bases of assets and liabilities that give rise to a net deferred income tax asset (liability) relate to the following:
1998 1997 --------------- ------- Deferred income recognized for tax purposes and deferred for financial reporting purposes $ 396,000 $ 354,000 Gain on sale/leaseback transaction recognized for tax purposes and deferred for financial reporting purposes 3,444,000 - Differences in the basis of property and equipment due to majority owned partner- ships consolidated for financial reporting purposes but not for tax purposes 619,000 648,000 -------------- ------------- 4,459,000 1,002,000 -------------- ------------- Gain from installment sale recognized for financial reporting purposes and deferred for tax purposes - (117,000) Cumulative depreciation differences (555,000) (993,000) -------------- ------------- (555,000) (1,110,000) Net deferred income tax asset (liability) $ 3,904,000 $ (108,000) ============== =============
The following reconciles income tax expense (benefit) at the federal statutory tax rate with the effective rate:
1998 1997 1996 ------------ ------------- ------------ Income taxes (benefit) at the federal statutory rate (34.0%) (34.0%) 34.0% State taxes, net of federal tax benefit (6.0%) (1.8%) 7.0% Decrease in valuation allowance - (7.5%) - ------------ ------------ ------------ Effective tax rate (40.0%) (43.3%) 41.0% =========== ============ ============
10. RELATED PARTY TRANSACTIONS: The following table summarizes related party revenue from various unconsolidated partnerships in which the company has an ownership interest:
1998 1997 1996 Development/acquisition revenue $ 8,968,111 $ 14,268,017 $ 21,500,972 Hotel management revenue 1,705,202 1,817,210 1,841,588 Employee leasing revenue 7,763,485 7,980,384 5,937,611 Interest income 73,008 335,172 366,545
10. RELATED PARTY TRANSACTIONS (CONTINUED): In January 1991, the Company entered into an agreement with Urban 2000 Corp. ("Urban"), a company owned by the Chairman and another Officer/Director of the Company who resigned in 1997. This agreement provided for monthly payments to Urban of $20,000 for business development consulting services. No additional amounts were paid to Urban for reimbursement of expenses. The Company also paid additional fees for transactions brought to the Company by Urban. Urban received $74,050 and $206,154 in transaction fees from the Company in 1997 and 1996, respectively. The Chairman was not compensated by the Company in his capacity as an officer. As of January 31, 1997, the Company and Urban agreed to terminate this consulting agreement. In connection with the termination of this agreement, the Company recognized $1,289,141 in related termination costs in 1997. 11. BUSINESS SEGMENTS: Effective in 1998, the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," which establishes standards for the way companies report information about operating segments in both interim and annual financial statements and related disclosures. The adoption did not change the Company's reportable segments. The Company's business is primarily involved in four segments: (1) hotel operations, consisting of the operations of all hotels in which the Company has a 100% or majority ownership or leasehold interest, (2) hotel development, consisting of development, construction and renovation activities, (3) hotel management, consisting of hotel management activities and (4) employee leasing, consisting of the leasing of employees to various hotels. Results of operations of the Company's business segments are reported in the consolidated statements of operations. The following represents revenues, operating costs and expenses, operating income, identifiable assets, capital expenditures and depreciation and amortization for each business segment, which is the information utilized by the Company's decision makers in managing the business: Revenues 1998 1997 1996 -------- -------------- --------------- -------- Hotel operations $ 47,328,411 $ 31,878,791 $ 30,615,291 Hotel development 8,968,111 14,639,746 22,937,267 Hotel management 2,251,962 3,023,944 2,784,031 Employee leasing 10,069,705 13,123,035 12,005,759 ------------- -------------- ------------- $ 68,618,189 $ 62,665,516 $ 68,342,348 ============= ============== ============= Operating costs and expenses Hotel operations $ 34,768,001 $ 23,723,516 $ 21,088,806 Hotel development 8,463,341 13,719,250 19,651,500 Hotel management 1,306,864 2,043,526 1,930,229 Employee leasing 9,748,110 12,798,585 11,689,461 ------------- -------------- ------------- $ 54,286,316 $ 52,284,877 $ 54,359,996 ============= ============== =============
11. BUSINESS SEGMENTS (CONTINUED):
Operating income 1998 1997 1996 ---------------- -------------- --------------- -------- Hotel operations $ 3,467,430 $ 2,422,728 $ 4,385,720 Hotel development 426,426 838,452 3,217,224 Hotel management 543,748 647,230 571,680 Employee leasing 317,668 320,826 309,805 Corporate (1,670,837) (2,249,677) (2,030,965) -------------- -------------- ------------- $ 3,084,435 $ 1,979,559 $ 6,453,464 ============= ============== ============= Identifiable assets Hotel operations $ 104,076,512 $ 82,530,247 $ 55,456,702 Hotel development 2,309,240 2,824,933 6,228,166 Hotel management 899,660 1,612,596 1,640,692 Employee leasing 978,985 1,415,174 1,169,755 Corporate 7,016,391 4,285,148 2,405,841 ------------- -------------- ------------- $ 115,280,788 $ 92,668,098 $ 66,901,156 ============= ============== ============= Capital Expenditures Hotel operations $ 42,039,772 $ 29,272,953 $ 13,856,662 Hotel development 54,065 7,288 57,036 Hotel management 58,659 40,830 62,756 Employee leasing 3,288 4,228 4,956 Corporate 26,914 17,810 67,600 ------------- -------------- ------------- $ 42,182,698 $ 29,343,109 $ 14,049,010 ============= ============== ============= Depreciation/Amortization Hotel operations $ 4,900,632 $ 4,003,613 $ 3,018,890 Hotel development 78,343 82,044 68,545 Hotel management 401,351 333,188 282,121 Employee leasing 3,927 3,624 6,493 Corporate 102,276 110,031 102,829 ------------- -------------- ------------- $ 5,486,529 $ 4,532,500 $ 3,478,878 ============= ============== =============
12. STOCK BASED COMPENSATION: The Company applies APB No. 25, Accounting for Stock Issued to Employees, and related interpretations, in accounting for options granted to employees. 12. STOCK BASED COMPENSATION (CONTINUED): In August 1996, the Company established qualified incentive stock option plans for employees and directors. Under the plan for employees, on an annual basis, options for up to 3% of its common stock, as defined, can be granted. Under the plan for directors, a total of 50,000 options can be granted. The exercise price per share may not be less than the fair market value per share on the date the options are granted. Generally, options vest over a period of up to two years and are exercisable for a period of ten years from the date of grant. The Company has granted to various key employees, non-qualified options to purchase shares of common stock with exercise prices ranging from $3.56 to $6.50 per share. The exercise price is the market price on the date of grant. At December 31, 1998, options to purchase 1,062,833 shares of common stock are outstanding. These options are currently exercisable and expire through September 2007. In 1997, the Company granted to two officers, options to purchase 65,625 shares of common stock with an exercise price of $1.53 per share. These options are currently exercisable and expire in February 2007. Pursuant to APB Opinion 25, the Company recognized $301,465 in compensation expense in 1997 as a result of this below-market grant. The following table summarizes the employee stock options granted, exercised and outstanding:
Weighted Average Shares Exercise Price Options outstanding January 1, 1996 1,551,083 $ 4.47 Forfeitures (11,500) 6.38 Options granted 2,000 7.81 ------------- ----------- Options outstanding December 31, 1996 1,541,583 4.46 Options exercised (433,750) 4.61 Forfeitures (43,000) 4.93 Options granted 181,125 4.62 ------------- ----------- Options outstanding December 31, 1997 1,245,958 4.42 Forfeitures (129,000) 5.82 Options granted 488,600 5.72 ------------- ---------- Options outstanding December 31, 1998 1,605,558 $ 4.71 ============= ========== Options exercisable December 31, 1998 1,366,458 $ 4.52 ============= ==========
The weighted-average grant-date fair value of stock options granted to employees during the year and the weighted-average significant assumptions used to determine those fair values, using a modified Black-Sholes option pricing model, and the pro forma effect on earnings of the fair value accounting for employee stock options under Statement of Financial Accounting Standards No. 123 are as follows: 12. STOCK BASED COMPENSATION (CONTINUED):
1998 1997 1996 -------------- -------------- ----------- Grant-date fair value per share: Options issued at market $ 2.76 $ 2.90 $ 2.70 Options issued below market - 4.96 - Weighted average exercise prices: Options issued at market $ 5.72 $ 6.37 $ 7.81 Options issued below market - 1.53 - Significant assumptions (weighted-average): Risk-free interest rate at grant date 5.74% 6.14% 5.51% Expected stock price volatility 0.41 0.37 0.62 Expected dividend payout n/a n/a n/a Expected option life (years) (a) 6.00 5.63 5.00 Net income (loss): As reported $ (2,796,074) $ (966,443) $ 3,394,654 Pro forma $ (3,422,385) $ (1,626,473) $ 2,994,790 1998 1997 1996 -------------- -------------- ----------- Net income (loss) per share - Basic: As reported $ (0.45) $ (0.15) $ 0.57 Pro forma $ (0.55) $ (0.26) $ 0.50 Net income (loss) per share - Diluted: As reported $ (0.45) $ (0.19) $ 0.49 Pro forma $ (0.55) $ (0.29) $ 0.43 (a) The expected option life considers historical option exercise patterns and future changes to those exercise patterns anticipated at the date of grant.
The following table summarizes information about employee stock options outstanding at December 31, 1998:
Options Outstanding Options Exercisable Weighted Average Weighted Weighted Range of Number Remaining Average Number Average Exercise Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price $ 1.53 to 4.75 878,125 6.76Years $ 3.56 871,125 $ 3.55 $ 5.75 to 7.81 727,433 8.83 6.09 495,333 6.21 -------------- ------------ ----- -------- ---------- -------- $ 1.53 to 7.81 1,605,558 7.70 $ 4.71 1,366,458 $ 4.52 ============== =========== ===== ======= ========== =======
13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS: Office lease: The Company entered into an operating lease for its existing office facilities which expires December 2000. The lease provides for monthly payments of approximately $19,000 plus common area maintenance and real estate tax prorations. Sale/leaseback of hotels: On June 30, 1998, the Company completed the sale of 26 AmeriHost Inn(R) hotels to PMC Commercial Trust ("PMC") for $62.2 million. The Company completed the sale of four additional AmeriHost Inn(R) hotels to PMC in 1999. Upon the respective sales to PMC, the Company entered into agreements to lease back the hotels for an initial term of ten years, with two five year renewal options. The lease payments are fixed at 10% of the sale price for the first three years. Thereafter, the lease payments are subject to a CPI increase with a 2% annual maximum. In accordance with the standards for accounting for sale/leaseback transactions, the gain on the sale of the hotels will be recognized over the initial term of the lease as a reduction of leasehold rent expense. Hotel leases: Including the sale/leaseback hotels, the Company leases 31 hotels as of December 31, 1998, 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 $9,500 to $25,000. The Company leases or subleases three of these hotels from partnerships in which the Company owns equity interests, up to 16.33%. These three leases also provide for additional rent payments ranging from $36,000 to $72,000 per annum, plus percentage rents equal to 10% of room revenues in excess of stipulated amounts. The leases and sub-leases expire through June 30, 2008. The five leases, other than the PMC leases, provide for an option to purchase the hotel. Some of the purchase prices are based upon a multiple of gross room revenues for the preceding twelve months with a specified maximum, and the others are based on a fixed amount. At December 31, 1998, the aggregate purchase price for these leased hotels was approximately $16,230,000. During 1997, the Company exercised options to purchase two hotels previously under lease. Total rent expense for all operating leases was approximately $4,407,000, $1,939,000 and $2,322,000 in 1998, 1997 and 1996, respectively, including approximately $993,000, $1,103,000 and $1,280,000 in 1998, 1997 and 1996, respectively, to entities in which the Company has a minority ownership interest. Minimum future rent payments under all operating leases are as follows: 13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED):
Year Ending December 31, Affiliated Non-Affiliated Total 1999 $ 724,000 $ 6,983,000 $ 7,707,000 2000 - 6,983,000 6,983,000 2001 - 6,796,000 6,796,000 2002 - 6,921,000 6,921,000 2003 - 6,964,000 6,964,000 Thereafter - 32,661,000 32,661,000 ------------- -------------- ------------- $ 724,000 $ 67,308,000 $ 68,032,000 ============= ============== =============
Limited partnership guaranteed distributions: The Company is a general partner in three partnerships where the Company has guaranteed minimum annual distributions to the limited partners in the amount of 10% of their original capital contributions. Guarantees: The Company has provided approximately $16.1 million in guarantees as of December 31, 1998 on mortgage loan obligations for 11 joint ventures in which the Company holds a minority equity interest, which expire at various dates through February 2019. Other partners have also guaranteed portions of the same obligations. The partners of one of the partnerships have entered into a cross indemnity agreement whereby each partner has agreed to indemnify the others for any payments made by any partner in relation to the guarantee in excess of their ownership interest. The Company is secondarily liable for the obligations and liabilities of the limited partnerships and limited liability corporations in which it holds a general partnership or managing member ownership interest as described in Note 4. Construction in progress: At December 31, 1998, the Company had approximately $3,997,000 remaining to pay contractors for the construction of six hotels, a portion of which is included in accounts payable. These commitments will be funded through construction and long-term mortgage financing currently in place. Employment agreements: The Company has entered into an employment agreement with an executive officer expiring December 31, 2000, providing for an annual base salary of $325,000. The employment agreement provides for a cash bonus to be determined annually by the compensation committee of the Board of Directors, stock options and severance pay should the officer be terminated without cause. 13. COMMITMENTS, CONTINGENCIES AND OTHER MATTERS (CONTINUED): Legal matters: The Company and certain of its subsidiaries are defendants in various litigation matters arising in the ordinary course of business. In the opinion of management, the ultimate resolution of all such litigation matters is not likely to have a material effect on the Company's financial condition, results of operation or liquidity. 14. SUPPLEMENTAL CASH FLOW DATA: The following represents the supplemental schedule of noncash investing and financing activities for the years ended December 31, 1998, 1997 and 1996:
1998 1997 1996 -------------- --------------- --------- Notes receivable received from sale of hotel $ 100,000 $ 1,400,000 ============== ============= Reduction of notes receivable and related interest in exchange for common stock $ 3,779 $ 1,181,831 $ 52,860 ============= ============== ============= Reduction of notes payable assumed by buyer upon sale of hotel $ 62,141 ============== Liabilities assumed in connection with acquisition of hotel partnership interests $ 31,093,530 ============= Purchase of investments and other assets through issuance of common stock, assumption and issuance of notes payable, and reduction of notes receivable $ 549,556 =============
15. FOURTH QUARTER ADJUSTMENTS: During the fourth quarter of 1997, the Company expensed approximately $177,000 in costs associated with a potential merger or acquisition of the Company. During the fourth quarter of 1996, the Company expensed approximately $404,000 in costs associated with a public offering of the Company's Common Stock which was not consummated. 16. NON-RECURRING EXPENSES: The Company expensed $1,697,448 in 1997 in costs associated with (i) the termination of a consulting agreement with a company owned by the Chairman of the Board of Directors and a former director, and (ii) the termination of an employment agreement with this former director. In addition, the Company expensed $177,044 in costs associated with a potential merger or acquisition which was not consummated. During 1996, the Company expensed $403,657 in costs associated with a public offering of the Company's Common Stock which was not consummated. The Company considers these costs non-operational costs which are non-recurring in nature. 17. EXTRAORDINARY ITEM: During the year ended December 31, 1998, the Company recorded an extraordinary loss of $333,000, net of income tax benefit of approximately $231,000, relating to the early extinguishment of mortgage debt on hotels sold in connection with the sale/leaseback transaction (Note 13). EX-10.5 2 EXHIBIT 10.5 AGREEMENT OF PURCHASE AND SALE BETWEEN PMC COMMERCIAL TRUST AND AMERIHOST PROPERTIES, INC. (INCLUDING EXHIBITS THERETO) THIS AGREEMENT, made as of the 21st day of May, 1998 (the "Effective Date"), by and among the various corporations identified on Exhibit "A" attached hereto and made part hereof (collectively "Seller"), each having an address at 2400 E. Devon Avenue, Suite 280, Des Plaines, Illinois 60018, and PMC COMMERCIAL TRUST, a Texas real estate investment trust, having an address at 17290 Preston Road, 3rd Floor, Dallas, Texas 75252 ("Purchaser"); WITNESSETH: ARTICLE ONE PURCHASE AND SALE OF THE PROPERTY Seller hereby agrees to assign, transfer, convey and sell to Purchaser, and Purchaser hereby agrees to purchase from Seller, upon the terms and conditions set forth in this Agreement, all of Seller's respective right, title and interest in and to those certain thirty (30) motel/hotels commonly known respectively by the street addresses set forth on Exhibit "B" attached hereto and made a part hereof and as more particularly described below (hereinafter referred to, collectively, as the "Property"). As used herein, the term "Property" shall also refer to each and every one of the thirty (30) individual motel/hotels, and the term "Seller" shall also refer to each and every one of the signatories hereto, depending on the context in which the defined term is utilized. Capitalized terms not defined in context are defined in Article Eighteen hereof. Each Property shall include, respectively: 1 1.1 those certain parcels of land located in the cities, counties and states more particularly described on Exhibits "B-1" through "B-30" (collectively, the "Land"); 1.2 all buildings and improvements (the "Improvements") located on, over or beneath the Land (the Land and Improvements hereinafter referred to, collectively, as the "Real Estate"); 1.3 all Personal Property, and 1.4 all Appurtenances and Appurtenant Easements. ARTICLE TWO PURCHASE PRICE 2.1 Purchase Price. The purchase price (the "Purchase Price") for the Property shall be SEVENTY-THREE MILLION AND NO/100 DOLLARS ($73,000,000.00), payable as follows: (a) Five Hundred Thousand and No/100 Dollars ($500,000.00) (the "Deposit"), by check, subject to collection, payable to the order of Escrow Agent (as hereinafter defined) upon execution of this Agreement, to be held in escrow pursuant to the provisions of Article Fifteen hereof; interest accruing thereon, if any, shall follow the disposition of the principal sum; and; (B) Seventy-two Million, Five Hundred Thousand and No/100 Dollars ($72,500,000.00), less any interest accrued on the Deposit as of the Closing (as hereinafter defined), representing the balance of the Purchase Price, shall be paid at the Closing, payable (1) by wire transfer of immediately available federal funds to an account designated by Seller, or (2) in the form of a credit 2 equal to the amount of indebtedness secured by each Existing Mortgage (as hereinafter defined) and assumed by Purchaser, or both. Purchaser and Seller shall execute mutually acceptable escrow instructions, consistent with the provisions of this Agreement, in connection with the escrow to be created pursuant hereto. 2.2 Allocation of Purchase Price. The Purchase Price shall be allocated among the Property as set forth on Exhibit "C" attached hereto and made part hereof, and the values so determined shall be reflected in the documentary fee or transfer taxes, if any, paid at the Closing. 2.3 Assumption of Mortgages. Various mortgages, deeds of trust or deeds to secure debt, as the case may be, encumber one or more of the motel/hotels which comprise the Property (each an "Existing Mortgage"). To the extent permissible under the terms and provisions of a particular Existing Mortgage, Purchaser may assume the obligations of the mortgagor or grantor thereunder, and the borrower under the note(s) secured thereby, and shall receive a credit against the Purchase Price equal to the amount of indebtedness at the date of Closing so assumed by Purchaser. Purchaser shall pay Seller at the Closing, without credit against the Purchase Price, any and all prepayment premiums or penalties payable upon the prepayment of any Existing Mortgage not assumed by Purchaser. With respect to any Property encumbered by an Existing Mortgage which Purchaser desires to assume, Seller and Purchaser agree to cooperate with each other to effect the sale of such Property hereunder in a manner, if possible, which would not violate the applicable provisions of such Existing Mortgage regarding the sale or transfer of such Property. In the event that Purchaser elects to assume the Existing Mortgage with respect to any Property located in Marysville, Ohio, Plainfield, Indiana, Sycamore, Illinois, Macomb, Illinois, or Tupelo, Mississippi 3 but such assumption cannot be consummated prior to the Closing Date stipulated in Section 4.1, the Closing Date with respect to any such Property shall be adjourned for a period ending no later than June 30, 1999; provided, however that the Purchase Price will be reduced by an amount equal to Thirty-nine Thousand Eight Hundred Three and No/100 Dollars ($39,803.00) multiplied by the number of rooms for each such Property with respect to which the Closing Date has been so adjourned, and the sum of Fifteen Thousand and No/100 Dollars ($15,000.00) shall remain in escrow with the Escrow Agent for each Property with respect to which the Closing Date has been so adjourned. In the event that any such assumption ultimately is not allowed by the mortgagee under such Existing Mortgage, Purchaser or Seller may (i) elect to pay the prepayment penalty which would be due upon the repayment of the loan secured by such Existing Mortgage and consummate the transaction contemplated herein with respect to the Property encumbered by such Existing Mortgage, or (ii) reject such Property whereupon the Agreement shall terminate with respect to such Property and the escrow funds attributable to such Property shall be returned to Purchaser, and neither party hereto shall have any further claim against the other by reason of this Agreement with respect to such Property. Notwithstanding anything contained herein to the contrary, all due diligence rights of Purchaser with respect to any such Property are expressly reserved upon any such adjournment of the Closing Date with respect to any such Property. ARTICLE THREE SURVEY AND TITLE 3.1 Surveys. As soon as practical after the Effective Date, Seller shall deliver or cause to be delivered to Purchaser an as-built, ALTA survey (collectively, the "Surveys") of each Property. The Surveys shall be sufficient to permit the Title Insurance Company to delete the standard printed 4 survey exception in the title policy or otherwise obtain the ALTA survey endorsement. The Surveys shall indicate the location and dimensions of all of the Improvements. 3.2 Title Commitments. As soon as practical after the Effective Date, Purchaser shall obtain the title commitment (collectively, the "Title Commitments") for each property, together with copies of all documents (collectively, the "Title Documents") constituting exceptions to Seller's title as reflected in the Title Commitments. 3.3 Review Period. Purchaser shall have the Inspection Period (as hereinafter defined) in which to review the Title Commitments, Title Documents, UCC Searches (as hereinafter defined) and Phase I Audits (as hereinafter defined) and to deliver to Seller in writing such reasonable objections as Purchaser may have to anything contained or set forth in such documents. Each item to which Purchaser does not accept in writing within such period shall not be deemed to be a Permitted Exception. Seller shall have and be entitled to a reasonable period of time within which to clear such objection(s) and shall cure title or remove said exceptions or defect which may be removed by the payment of money at the expense of Seller of up to (a) $50,000.00 in the aggregate with respect to each property and (b) $500,000.00 as an aggregate for all of the Property. Notwithstanding anything to the contrary, Seller shall have no obligation to cure title or remove said objection(s) which may be removed by the payment of money at an expense to Seller in excess of (a) $50,000.00 with respect to each Property, and (b) $500,000.00 in the aggregate for all of the Property. If Seller (I) is unable or unwilling to remove any such objection and fails to cause the Title Insurance Company to remove the same from Purchaser's title insurance policies (collectively, the "Title Policies"), or affirmatively insure against the same, or (II) is unable to convey the Property as herein agreed to be conveyed, then Purchaser shall have the option of either (A) waiving such 5 objection(s) and proceeding with the Closing, accepting title subject to such objection(s) without any abatement or reduction of the Purchase Price; or (B) excluding each such Property from the transaction contemplated by this Agreement, subject to the terms and conditions and with a credit against the Purchase Price for each Property as set forth in Section 6.6 hereof. Without limiting the generality of the foregoing, Seller shall not be obligated to bring any action or proceeding to remove any title objection(s). 3.4 Liens or Encumbrances. Any lien or encumbrance, or apparent lien or encumbrance, appearing of record against the Property, which can be discharged by the payment of money, shall not be an objection to title, provided Seller allows the amount thereof to be credited to Purchaser as an adjustment to the Purchase Price at the time of the Closing. A lien or encumbrance dischargeable by satisfaction shall not be deemed an objection to title, if, at the time of the Closing, Seller shall cause to be delivered to the Title Insurance Company either (A) a duly executed and acknowledged satisfaction, along with the filing fee, or (B) a payoff letter and the appropriate funds to satisfy the lien or encumbrance. Seller shall apply the proceeds of the sale to the satisfaction of any or all liens or encumbrances. Notwithstanding anything to the contrary contained within this Article Three, no matter shall be an objection to title if the Title Insurance Company is willing to insure the Property without exception therefor or affirmatively insure against collection out of the Property by reason thereof. The provisions of this Section 3.4 are subject to the terms and conditions set forth in Section 2.3 above. 3.5 Title Policy. At the Closing, Seller shall cause the Title Insurance Company to modify (by interlineation or otherwise) the Title Commitments so as to then reflect a current commitment by a duly licensed title insurance company to issue to Purchaser the Title Policies, 6 insuring good and indefeasible title to the Land and the Improvements in Purchaser, subject only to the Permitted Exceptions and the standard printed exceptions, except that: (a) The exception relating to restrictions against the Property shall be deleted, except for such restrictions which are Permitted Exceptions; (b) the exception relating to ad valorem taxes and assessments shall except only standby fees, taxes and assessments owing for the current and subsequent years; and (c) Purchaser shall receive the ALTA survey endorsement. 3.6 Title Charges. The cost for the Title Policies shall be paid by Seller at the Closing, and the additional costs for endorsements, if any, selected by Purchaser (or its lenders) shall be paid by Purchaser. ARTICLE FOUR CLOSING DATE 4.1 Closing Date. The closing of title under this Agreement (the "Closing") shall take place on or about June 30, 1998 (the "Closing Date), at the offices of the Title Insurance Company, 18333 Preston Road, Suite 410, Dallas, Texas 75252, or at such other location as may be reasonably agreeable to the parties. ARTICLE FIVE SPECIAL CONDITIONS 5.1 Conditions Precedent. The obligation of Seller to sell the Property to Purchaser is subject to the satisfaction on or before the Closing of the following conditions: (a) Seller shall have received the prior written consent of Seller's Board of Directors to the sale of the Property to Purchaser upon the terms and 7 conditions set forth in this Agreement, which consent shall be in the form of a duly authorized resolution from each member of Seller's Board of Directors, and shall be provided to Purchaser within seven (7) days after the Effective Date. (b) Purchaser, Amerihost Properties, Inc. and AmeriHost Inns, Inc. shall enter into a master agreement (the "Master Agreement"), and Purchaser and AmeriHost Inns, Inc. shall enter into a lease for each Property (the "Property Leases"), on terms and conditions substantially as set forth on Exhibits "D" and "E", respectively, attached hereto and made part hereof. (c) Purchaser shall have complied with all of its obligations herein provided. (d) Purchaser shall cooperate with Seller in the consummation of tax-free exchanges with respect to the Property, including, without limitation, the assignment of this Agreement by Purchaser to a tax-free exchange trust in order to accomplish the foregoing, provided Purchaser shall receive customary indemnities from Seller and reimbursement of costs therefor. 5.2 Covenants. (a) From and after the Effective Date, up to the Closing Date, Seller may enter into agreements with respect to the Property which are necessary or desirable in connection with the operation of the Property in the ordinary course of business, so long as no such agreements relate to the sale of any portion of the Personal Property. (b) Any liquor licenses or permits utilized in the operation of the business at the 8 Property presently held by Seller or its affiliates shall continue without assignment or transfer in Seller's name or its affiliate's name through the Closing Date. (c) The repairs and improvements at the Plainfield and Marysville properties as referenced on Exhibit "F", attached hereto and made a part hereof, must be either completed or funds must be placed in escrow for such purpose prior to Closing. ARTICLE SIX PURCHASER'S INSPECTIONS AND APPROVALS 6.1 Submittal to Purchaser. Seller agrees that Purchaser shall be entitled to enter upon the Property and to conduct such inspections, audits and reviews of any and all information and materials it deems necessary to effect a complete analysis of the proposed purchase and sale. The Purchaser shall complete its due diligence before the expiration of the Inspection Period. The following items (the "Due Diligence Items") will be delivered to Purchaser prior to the Closing or will be delivered to Purchaser within the time period after the date hereof as prescribed in Article Three. The cost and expense of obtaining and delivering the Due Diligence Items to Purchaser shall be paid by Seller, unless otherwise stated below: (a) The Surveys; (b) Any appraisals of the Property in the possession of Seller or its agent or employees; (c) The architectural plans and specifications for the Property. (d) The Books and Records. Subject to the provisions of Section 17.10 hereof, 9 Seller specifically permits Purchaser to disclose information revealed in the Books and Records to its lenders, if any, and professional advisors, and in any document (and amendments and supplements thereto) which Purchaser may be obligated to file with the Securities and Exchange Commission. Upon reasonable advance notice, Seller shall make available to the accountants of Purchaser such financial information as Purchaser's accountants reasonably require for investigation of the financial history of the operations of the Property. Seller has also provided monthly statements of operations for fiscal year 1997 and 1998 through the month of the Closing (the statement of operations for the month of the Closing to be made available after the Closing); (e) A UCC secured transactions search (collectively, the "UCC Searches") from each of the applicable recording offices with respect to the Property, together with a litigation search related to Seller and the Property for the county in which the Property is located; (f) Phase I Audits for each Property. Seller, at its sole cost and expense, shall provide to Purchaser an update of the Phase I Audit for each Property listed on Exhibit "G" attached hereto and made a part hereof. (g) Policies of title insurance for the Property, if any, in the possession of Seller or its agents or employees, together with the Title Commitments and the Title Documents, which shall be delivered to Purchaser by the Title Insurance Company; 10 11 (h) A descriptive summary of all pending litigation, if any, affecting the Property, and of any written notice of violation of any of the Legal Requirements applicable to the Property; (i) Copies of all of Seller's insurance policies for the Property or certificates thereof; and (j) All other documents and information in the possession of Seller or its agents or employees, or reasonably available to Seller, relating to the Property, which Purchaser reasonably requests. 6.2 Authorization for Inspection. Upon reasonable request by Purchaser, Seller will grant authority to Purchaser and any of Purchaser's representatives to obtain information provided for or contemplated in Section 6.1 hereof from any third parties. Said authorization will be provided in writing if requested by Purchaser. All such information shall be subject to the provisions of Section 17.10. 6.3 Adverse Phase I Audit. If any Phase I Audit states that Hazardous Materials may be in or under the Land or within the Improvements, or otherwise evidences any adverse environmental matter at the Property, Purchaser shall have the right to reject such Property pursuant to Section 6.4 by giving written notice to Seller of its intention to do so prior to the end of the Inspection Period. If, notwithstanding such adverse Phase I Audit, Purchaser desires to proceed with the transaction contemplated hereby with respect to such Property, then Purchaser shall have the right to order promptly, at its expense, a Phase II Site Assessment of the Land and the Improvements directed and certified to Purchaser and its lender, including materials samplings on and adjacent to the Land, to determine the extent and nature of any contamination by Hazardous 11 Materials. If such Phase II Site Assessment reveals the necessity for material environmental clean-up of for the Property, then Purchaser may reject such Property pursuant to Section 6.4 by giving written notice to Seller of its intention to do so within five (5) business days after receipt by Purchaser of such Phase II Site Assessment. 6.4 Purchaser's Acceptance or Rejection; Cure or Waiver. If Purchaser disapproves of any matter relating to any Property arising from Purchaser's review of the Surveys, the Title Commitments, the UCC Searches or the Phase I Audits, it shall give Seller written notice of such disapproval not later than the expiration of the Inspection Period, or such later date as referenced in Section 6.3, Section 11.1 or Section 11.2. If any matter is disapproved upon the foregoing notice, then Purchaser may elect in such notice either to (a) request that Seller cure specific matters disapproved; or (b) reject such Property from the terms and conditions of this Agreement subject to Section 6.6. If Purchaser requests Seller to cure any such matter, Seller shall, within four (4) business days, indicate in writing to Purchaser whether it shall elect to cure any such matter disproved under clause (a) above. If Seller is unwilling to cure such matter prior to the Closing, then Purchaser may, in its sole discretion, within four (4) business days of written notice of Seller's refusal to cure, elect, by written notice to Seller of its intention to do so, to (i) waive all matters disapproved and not cured, accept all matters relating to the Property which have been cured, and proceed with the acquisition of the Property; or (ii) reject such Property from the terms and conditions of this Agreement subject to Section 6.6. 6.5 Effect of Termination. If this Agreement shall be terminated by Purchaser in the exercise of its rights of termination as provided hereunder, the Deposit, and all interest earned thereon, if any, shall be promptly returned to Purchaser by Escrow Agent, this Agreement shall be 12 null and void, and neither party shall have any further obligation or liability to the other party, except as expressly herein provided. 6.6 Partial Exclusion. Seller agrees to close the sale of the Property on the terms and conditions herein contemplated, provided that not more than six (6) motel/hotels shall have been rejected by Purchaser pursuant to the provisions of Section 6.4., other than any Property rejected as allowed pursuant to Section 11.1 and Section 11.2 hereof. Notwithstanding the foregoing, Seller may, at its sole discretion, elect to close the sale of the Property on the terms and conditions herein contemplated if more than six (6) motels/hotels have been rejected by Purchaser pursuant to the provisions of Section 6.4. In any event, however, the Purchase Price shall be reduced by an amount equal to Thirty-nine Thousand Eight Hundred Three and No/100 Dollars ($39,803.00) multiplied by the number of rooms for each such Property rejected. Upon rejection in accordance with the provisions of this Article Six, such Property shall be deemed deleted from the terms and conditions of this Agreement and this Agreement shall be deemed so modified and amended as to give effect to such rejection. ARTICLE SEVEN SELLER'S REPRESENTATIONS, WARRANTIES AND AGREEMENTS Seller represents, warrants and agrees that the following facts and conditions exist on the date of execution hereof by Seller and shall exist as of the Closing Date, subject to updating by Seller to the Closing Date and to limitations otherwise set forth in this Article Seven: 7.1 Title. Seller owns fee simple title to the Real Estate, including the Land described in Exhibit "A", which, as of the Closing, shall be free and clear of all mortgages, except those Existing Mortgages which are assumed by Purchaser, certain of which Existing Mortgages contain 13 the assumption fees as set forth on Exhibit "H" attached hereto and made a part hereof (those Properties being the only Properties whose mortgages or related promissory notes contain prepayment penalties upon prepayment of the respective notes), and all liens, encumbrances, subleases, tenancies, security interests, covenants, conditions, restrictions, rights-of-way, easements, judgments, and title defects, other than the Permitted Exceptions. To the Knowledge of Seller, there are no pending or deferred Impositions of Governmental Authorities affecting the Property, except for real property and personal property taxes for the year of the Closing. To the Knowledge of Seller, no easements materially burdening the Property interfere with the use, maintenance, repair, or operation of the Property, and all easements necessary for the lawful operation of the Property, including all access, ingress, support and mechanical easements necessary or incident thereto, are in full force and effect and are not subject to termination, cancellation or rescission. Seller will assist in obtaining lender estoppel letters in a form reasonably satisfactory to Purchaser. 7.2 Zoning and Land Use Matters. To the Knowledge of Seller, all permanent certificates of occupancy for the Real Estate have been issued, and all conditions thereof, if any, have been fully complied with and require no further action. Seller has received no written notice of any requirements for obtaining necessary licenses, permits, authorizations or approvals with respect to the Property which Seller does not now possess or maintain, and Seller has received no written notice of any unwillingness of Governmental Authorities to renew any Permits and Licenses. To the Knowledge of Seller, the Property, as constructed and operated, is substantially in compliance with the terms, conditions and requirements imposed upon the Property by the Permitted Exceptions. To the Knowledge of Seller, the acquisition of the Property by Purchaser will not cause a violation, default or breach of any such Permitted Exceptions and there is no event of default currently in 14 existence under any such instrument which constitutes, and there is no event which, but for the giving of notice or the passage of time, or both, will constitute, an event of default thereunder. 7.3 Health, Environmental and Fire Codes. To the Knowledge of Seller, there are no Hazardous Materials in, on or under the Property, except for Permitted Hazardous Materials, and Seller has received no written notice that the Property is not substantially in compliance with applicable fire codes, building codes, health codes or other Legal Requirements which presently apply to the Property or the operation of all businesses thereon which remain unresolved. 7.4 No Adverse Action. There are no pending (and Seller has received no written notice from Governmental Authorities threatening) condemnation or other similar proceedings affecting the Property or any portion thereof, or pending public improvements in, about or outside the Property, which will affect access or create additional cost to Seller. There is no claim, legal action, tax audit, or other proceeding of any type, including, without limitation, any action of a civil or criminal nature, or any action or proceeding before any arbitration board or tribunal, pending against or affecting the Property which will materially adversely affect Purchaser upon the consummation of this acquisition. To the Knowledge of Seller, there are no pending claims against Seller arising out of injury to persons or property occurring in or on the Property as a result of any accident or occurrence on the Property thereon during the period of ownership of the Property by Seller which will materially adversely affect Purchaser upon consummation of this acquisition or are not covered by insurance. There is no pending claim or legal action of any type related to any employment matter related to the operation of the Property which will materially adversely affect Purchaser upon consummation of this acquisition or is not covered by insurance. 15 7.5 Authorization. Seller has all requisite corporate power and authority to perform its obligations under this Agreement, and the execution, delivery and performance of this Agreement by Seller has been duly and validly authorized by all officers and directors whose approval is required under the corporate documentation of Seller. Each person executing and delivering this Agreement, and all documents to be executed and delivered in regard to the consummation of the transaction herein, has due and proper authority to execute and deliver those documents. This Agreement, and all documents executed and delivered by Seller in connection with the transaction herein, shall constitute valid and binding obligations of Seller, enforceable against Seller in accordance with their terms. 7.6 Organization. Each Seller is a duly organized and validly existing corporation under the laws of the state of its formation, authorized to transact business in each state where the Property owned by such Seller is situated, with full power to enter into and perform this Agreement and to convey, assign, transfer and lease the Property. 7.7 Legal Requirements. To the Knowledge of Seller, there are no outstanding citations or violations of Legal Requirements in connection with the operation of the Property or the sale or provision of food or beverages thereon. 7.8 Business Records. All documents, items and information, including, without limitation, the Books and Records, which have been or will be made available by Seller to Purchaser as Review Items in accordance with the terms of this Agreement, have been maintained in the ordinary course of business, fairly reflect the financial condition of the applicable Property in all material respects, and are true and accurate. 16 7.9 No Breach of Prohibition. The transactions contemplated by this Agreement are not restrained or prohibited by any injunction, order or judgment rendered by any court or other governmental agency of competent jurisdiction. To the Knowledge of Seller, no proceedings have been initiated or are pending in which any creditor of Seller or any other person seeks to restrain such transactions or otherwise attach the applicable Property. Neither the execution and delivery of this Agreement, nor the consummation of the transactions contemplated hereby, will (a) be in material violation of any agreements, or (b) conflict with or result in the material breach or violation of any law, regulation, writ, injunction, decree of any court or governmental body or agreement of any nature, applicable to Seller and the Property. 7.10 No Adverse Notices. Seller has received, within the past year, no notice from any insurance company which has issued a policy with respect to any portion of the Property, from any board of fire underwriters, or from any Governmental Authority, requesting or requiring the performance of any repairs, alterations, renovations or other physical work on the Property, which has not been substantially completed. 7.11 No Union Contracts; Other Employee Matters. Seller warrants that there are no union contracts in effect with respect to the Employees, and that Purchaser shall incur no liability to the Employees arising out of Purchaser's acquisition of the Property. 7.12 Easements. Seller will cooperate fully with Purchaser, but at no expense to Seller, in seeking any corrective documents reasonably deemed necessary by Purchaser to clarify the location and validity of any Appurtenant Easement benefiting the Property. 17 7.13 Tax Matters. Seller has duly filed all federal, state, county and municipal, excise, sales, hotel occupancy and other tax returns and reports, or timely extensions thereof, required to be filed up to the date hereof with respect to the Property. To the Knowledge of Seller, all such returns are true and correct in all material respects, and Seller has paid all taxes, interest and penalties shown on such returns or reports, or claimed to be due to any federal, state, county and municipal or other taxing authority. 7.14 Property Condition. Seller warrants that each Property not yet inspected by Purchaser is in substantially the same general condition, normal wear and tear excepted, as those motel/hotels previously inspected by Purchaser, and Seller will maintain each Property in such same general condition until the Closing. 7.15 Bulk Transfers. Seller will take all actions necessary to comply with any bulk transfer laws applicable to this transaction and Purchaser will cooperate with any such actions at no cost to Purchaser. 7.16 Representations and Warranties of Seller. All of the representations and warranties of Seller are true and correct in all material respects, to the Knowledge of Seller, and do not contain untrue statements of a material fact or omit any material fact that would make the representations and warranties misleading. All representations and warranties of Seller shall survive the Closing and continue in full force and effect for a period of two (2) years after the Closing. 18 ARTICLE EIGHT PURCHASER'S REPRESENTATIONS AND WARRANTIES 8.1 Purchaser's Duty of Review. Purchaser is entering into this Agreement in reliance on its own knowledge and familiarity with the motel/hotel industry and its inspection of the Property. Purchaser is not relying on any representation of Seller, or its officers, shareholders or agents, except as expressly set forth in this Agreement or the Exhibits attached to this Agreement. 8.2 Warranties and Representations. Purchaser represents, warrants and agrees that the following facts and conditions exist on the date of execution hereof and shall exist as of the Closing Date: (a) Organization. Purchaser is a Texas real estate investment trust duly organized and validly existing and in good standing under the laws of the State of Texas, and has power and authority to own its properties and to transact the business in which it is engaged. Purchaser has taken all necessary action to authorize the execution, delivery and performance of this Agreement and all of the documents executed and delivered by Purchaser in connection with the transaction described herein, all of which constitute valid and binding obligations of Purchaser enforceable against Purchaser in accordance with their terms. (b) Authority. Purchaser has the right, power, legal capacity and authority to enter into and perform its obligations under this Agreement, and no approvals or consents of any persons other than Purchaser are required in connection with this Agreement. The execution of this Agreement and the 19 consummation of the transactions contemplated hereby will not result in or continue any default or event that, with the giving of notice or lapse of time, or both, would be a default, breach or violation of the organizational instruments or laws governing Purchaser or any lease, license, promissory note, conditional sales contract, commitment, indenture, mortgage, deed of trust, or other agreement, instrument, or arrangement to which Purchaser is a party or by which Purchaser is bound. 8.3 Representations and Warranties of Purchaser. All of the representations and warranties of Purchaser are true and correct in all material respects and do not contain untrue statements of a material fact or omit any material fact that would make any of the representations and warranties misleading. The representations and warranties herein contained shall survive the Closing and shall continue in full force and effect for a period of two (2) years. ARTICLE NINE DEFAULTS; FAILURE TO PERFORM; LIQUIDATED DAMAGES 9.1 Default of Purchaser. IN THE EVENT (A) ALL OF THE CONDITIONS TO THIS AGREEMENT SHALL HAVE BEEN SATISFIED OR WAIVED; (B) SELLER SHALL HAVE FULLY PERFORMED OR TENDERED PERFORMANCE OF ITS OBLIGATIONS HEREUNDER: (C) PURCHASER SHALL FAIL TO PERFORM ITS OBLIGATION HEREUNDER; AND (D) THE CLOSING SHALL FAIL TO OCCUR SOLELY AS A RESULT OF PURCHASER'S DEFAULT HEREUNDER, THEN, AS SELLER'S SOLE AND EXCLUSIVE REMEDY FOR PURCHASER'S FAILURE TO CLOSE, THE ENTIRE AMOUNT OF THE DEPOSIT (PLUS ALL INTEREST ACCRUED THEREON, IF ANY) SHALL BE 20 IMMEDIATELY PAID TO SELLER. PURCHASER AND SELLER HEREBY ACKNOWLEDGE AND AGREE THAT SELLER'S DAMAGES WOULD BE DIFFICULT OR IMPOSSIBLE TO DETERMINE AND THE AMOUNT OF THE DEPOSIT (PLUS ALL INTEREST ACCRUED THEREON, IF ANY) IS THE PARTIES' BEST AND MOST ACCURATE ESTIMATE OF DAMAGES SELLER WOULD SUFFER IN THE EVENT THE TRANSACTION PROVIDED FOR IN THIS AGREEMENT FAILS TO CLOSE. PURCHASER AND SELLER AGREE THAT SELLER'S RIGHT TO RETAIN THE DEPOSIT (PLUS ALL INTEREST ACCRUED THEREON IF ANY) SHALL BE THE SOLE AND EXCLUSIVE REMEDY OF SELLER IN THE EVENT OF A BREACH OF THIS AGREEMENT BY PURCHASER AS PROVIDED ABOVE. 9.2 Default of Seller. If Seller defaults in its obligations hereunder after the expiration of any notice and cure periods, if applicable, Purchaser may, as its sole remedy, at its option, either: (A) terminate this Agreement and receive a refund of the Deposit, whereupon the obligations of the parties hereto, other than those expressly set forth to survive termination hereof, shall terminate, and neither shall have any further claim against the other by reason of this Agreement or (B) seek an action for specific performance under this Agreement. Purchaser agrees that it shall not record this Agreement or any memorandum hereof unless Seller has defaulted in its obligations hereunder. This Section 9.2 shall survive Closing or other termination of this Agreement. 9.3 Failed Funds. If a payment made on account of the Purchase Price, whether the Deposit or otherwise, is by check, and if said check fails due collection, Purchaser shall be deemed in default hereunder, and Seller, at its sole option, may declare this Agreement terminated pursuant to Section 9.1 hereof and may pursue its remedies against Purchaser upon said check and/or this Agreement or in any other manner permitted by law, such remedies being cumulative, but in no 21 event shall Seller have any obligations to Purchaser hereunder. ARTICLE TEN CLOSING DOCUMENTS 10.1 Closing Documents of Seller. At the Closing, Seller shall deliver or cause to be delivered to Purchaser the following: (a) A special, limited warranty deed, as customarily provided on a state-by-state basis, conveying good and indefeasible title in the Property (the "Deed") to Purchaser, duly executed and acknowledged by Seller subject only to the Permitted Exceptions. (b) A bill of sale, duly executed and acknowledged by Seller, conveying title to the Personal Property to Purchaser. (c) A certificate stating that Seller is not a "Foreign Person" within the meaning of IRC Section 1445(f)(3). (d) The Title Policies, issued at Seller's sole cost and expense, by the Title Insurance Company, insuring Purchaser as owner of the Property, subject only to the Permitted Exceptions. (e) An Indemnity Agreement, duly executed and acknowledged by Seller, pursuant to which Seller agrees to indemnify, defend and hold harmless Purchaser, and its shareholders, directors and officers, from any and all claims, losses, damages and expenses which shall have arisen from any violation of the Americans for Disabilities Act at the Property prior to the Closing. 22 (f) An Indemnity Agreement duly executed and acknowledged by Seller, pursuant to which Seller agrees to indemnify, defend and hold harmless Purchaser, and its shareholders, directors and officers, from any and all claims, losses, damages and expenses which shall have arisen from an "Environmental Problem" (as hereinafter defined) before the Closing. "Environmental Problem" shall mean the presence or release of any Hazardous Materials from, onto, on or under any portion of the Property, or the violation of any environmental law with respect to the Property or any part thereof, or the failure to abide by the terms of any permit or approval required under any environmental law with respect to the Property or any part thereof. (g) Such other instruments and documents as may be reasonably required to consummate the transaction herein contemplated, including but not limited to, the Property Lease, the Master Agreement and related guaranty of Amerihost Properties, Inc. 10.2 Closing Documents of Purchaser. At the Closing, Purchaser shall deliver or cause to be delivered to Seller the following: (a) The balance of the cash portion of the Purchase Price provided in Article One hereof, less any interest accrued on the Deposit. (b) The Property Leases, executed by Purchaser, as lessor, in each instance. (c) The Master Agreement, executed by Purchaser. (d) Evidence of Purchaser's power and authority to enter into the subject 23 transaction, and evidence of the signatories' authority to sign on behalf of Purchaser. (e) A letter addressed to Escrow Agent directing Escrow Agent to deliver the Deposit and any interest thereon, if any, to Seller, and releasing Escrow Agent from any and all liability in connection with the subject transaction. (f) An Indemnity Agreement duly executed and acknowledged by Purchaser, pursuant to which Purchaser agrees to indemnify, defend and hold harmless Seller, and its shareholders, directors and officers, from any and all claims, losses, damages and expenses which shall have arisen from an "Environmental Problem" (as hereinafter defined) after the Closing, where the Environmental Problem is caused by Purchaser. "Environmental Problem" shall mean the presence or release of any Hazardous Materials from, onto, on or under any portion of the Property, or the violation of any environmental law with respect to the Property or any part thereof, or the failure to abide by the terms of any permit or approval required under any environmental law with respect to the Property or any part thereof. (g) Such other instruments and documents as may be reasonably required to consummate the transaction herein contemplated. 24 ARTICLE ELEVEN RISK OF LOSS 11.1 Casualty Loss. The risk of loss or damage to the Property by fire or other casualty, until the Closing, is assumed by Seller, but without any liability or obligation of Seller to repair same, except Seller, at Seller's sole option, shall have the right to repair or replace such loss or damage to the Property. If Seller elects (such election to be made within twenty (20) days after Seller shall have actual knowledge of such damage) to make such repair or replacement, and such repair or replacement can be fully complete prior to the Closing, this Agreement shall continue in full force and effect. If Seller does not elect to repair or replace any such loss or damage or such repair or replacement damage cannot be completed prior to the Closing, the following shall control: If the Improvements on any motel/hotels comprising the Property shall be materially damaged or destroyed by fire, storm or other casualty before the Closing, Purchaser shall have the right to reject any such Property pursuant to Section 6.4 by giving written notice thereof to Seller within fourteen (14) days after receiving written notice of such material destruction and Purchaser shall receive a reduction in the Purchase Price as set forth in Section 6.6. If Purchaser shall not elect to reject such Property, or if said destruction is immaterial, this Agreement shall continue in full force and effect without any modification or abatement of the Purchase Price, and Purchaser shall be entitled to receive an absolute assignment (without representation or warranty by or recourse against Seller) from Seller of any interest Seller may have otherwise had in the proceeds of any insurance on the Property (including any rent loss or business interruption insurance proceeds allocable to the period from and after the Closing), except for any expense theretofore incurred by Seller for restoration or safety in connection therewith, which sum shall be reimbursed by Purchaser 25 to Seller at the Closing. 11.2 Eminent Domain. If notice of any action, suit or proceeding shall be given after the date hereof, but prior to the Closing, for the purpose of taking by eminent domain or condemning any material part of the Property, then Purchaser and Seller shall each have the right to reject any such Property pursuant to Section 6.4 by written notice to the other party given within fourteen (14) days after receiving notice of such condemnation or taking and Purchaser shall receive a reduction in the Purchase Price as set forth in Section 6.6. If neither Purchaser nor Seller elects to reject such Property as above provided, or if the taking or condemnation is of an immaterial part of the Property, or in the event of a change of legal grade, the award with respect to such condemnation, taking or change, except for any expense theretofore incurred by Seller for restoration or safety in connection therewith, which sum shall be reimbursed by Purchaser to Seller at the Closing, shall be assigned (without representation or warranty by or recourse against Seller) to Purchaser without further consideration, and this Agreement shall continue in full force and effect without any modification or abatement of the Purchase Price or any liability or obligation on the part of Seller by reason of such taking, and the definition of "Property" shall be accordingly amended. Any taking of any portion of an Improvement shall be considered "material" for purposes of this Section 11.2. ARTICLE TWELVE CONDITION "AS IS"; NO FURTHER REPRESENTATIONS 12.1 Condition of Property. Purchaser represents that it has inspected the Property and is thoroughly acquainted with its condition, and it is agreed and understood that neither Seller nor any person purporting to act for Seller has made or now makes any representations as to the physical condition (including, without limitation, the presence of any Hazardous Materials, or any condition 26 which would violate any laws regarding environmental matters), layout, leases, footage, rent, income, expense, operation or any other matter or thing affecting or relating to the Property or to this Agreement, except as specifically set forth in this Agreement, and that no party hereto is relying on any statement or representation made by any other which is not embodied in this Agreement. Purchaser hereby expressly acknowledges that no representation has been made which is not expressly set forth in this Agreement, and Purchaser further agrees to take and accept the Property "as is" and in its condition at the Closing. This Article shall survive the Closing and delivery of the Deed or other termination of this Agreement.. ARTICLE THIRTEEN FINANCIAL MATTERS; COSTS 13.1 Sales Tax. Although it is not anticipated that any sales tax shall be due and payable in connection with this transaction, Purchaser agrees that Purchaser shall indemnify, defend and hold Seller harmless from and against any and all liability for any sales tax regardless of jurisdiction which may now or hereafter be imposed upon Seller with respect to this transaction. This provision shall survive the Closing and delivery of the Deed. 13.2 Other Changes. Purchaser and Seller shall each pay one-half of all escrow charges. The parties shall be responsible for all transfer taxes or documentary taxes which are payable upon the delivery and/or recording of the Deed or of any document contemplated by this Agreement, and the charges incurred in connection with the recording of any instrument contemplated hereby on the basis of custom in the jurisdiction in which the Property is situated. Notwithstanding the foregoing, costs related to endorsements to the Title Policies or to Surveys shall be borne by Purchaser. 13.3 Closing Statements. The Title Insurance Company shall prepare customary 27 settlement or closing statements (the "Closing Statements") which shall include the items set forth in Section 13.2, at least two (2) days before the Closing Date, and each party shall cause its designated representatives to assist the Title Insurance Company in doing so. All ad valorem, personal property and hotel occupancy taxes, if applicable, shall be pro rated as of the Closing Date. ARTICLE FOURTEEN BROKERAGE 14.1 Broker. Seller and Purchaser represent and warrant to each other that they have not dealt with any broker in connection with this transaction. Seller agrees to indemnify and hold Purchaser harmless from all loss, damage, cost and expense (including reasonable attorney's fees and disbursements) that Purchaser may suffer as a result of any claim for a fee, commission or payment of any description brought by any person with whom Seller may have dealt in connection with this transaction. Purchaser agrees to indemnify and hold Seller harmless from all loss, damage, cost and expense (including reasonable attorneys' fees and disbursements) that Seller may suffer as a result of any claim for a fee, commission or payment of any description brought by any person with whom Purchaser may have dealt in connection with this transaction. The representations and covenants set forth in this Section 14.1 shall survive delivery of the Deed and the Closing or other termination of this Agreement. ARTICLE FIFTEEN THE DEPOSIT - ESCROW 15.1 Deposit. (a) The Deposit shall be delivered to the Title Insurance Company ("Escrow Agent"), and Escrow Agent shall hold the proceeds thereof in escrow and dispose of 28 such sums only in accordance with the provisions of this Agreement. (b) Escrow Agent shall place the Deposit in (I) certificates of deposit issued by a bank with a Texas office, (II) money market funds in a bank with a Texas office, or a company such as Dreyfus Liquid Assets, Inc., or as otherwise approved in writing by Purchaser and Seller, (III) U.S. Treasury bills or other similar securities, or (IV) a segregated, interest bearing bank account. Any interest earned thereon shall be paid to the party entitled to receive the Deposit simultaneously with disbursement of the Deposit. The party receiving such interest shall pay any income taxes thereon. At the Closing, the Deposit and the interest thereon, if any, shall be paid by Escrow Agent to Seller. If for any reason the Closing has not occurred, and either party makes a written demand upon Escrow Agent for payment of such amount stating the basis for such demand, Escrow Agent shall give written notice to the other party of such demand along with a copy thereof. If Escrow Agent does not receive a written objection from the other party to the proposed payment within 15 days after the giving of such notice by Escrow Agent, which objection states the basis therefor, Escrow Agent is hereby authorized to make such payment to the demanding party. If Escrow Agent does receive such written objection within such 15-day period, or, if for any other reason, Escrow Agent in good faith shall elect not to make such payment, Escrow Agent shall continue to hold such amount until otherwise directed by written instructions from the parties to this Agreement or a final judgment of a court, and shall disburse said funds accordingly. Escrow Agent shall send a copy of any objection to the original demanding party. However, Escrow Agent shall have 29 the right at any time to deposit the escrowed proceeds and interest thereon, if any, with the clerk of the court of the county in which any Property is located, or with the clerk of the court in which any litigation between Seller and Purchaser is pending, or in any other court which Escrow Agent may select in the Chicago metropolitan area, in an action for interpleader, all costs thereof to be borne by whichever of Seller or Purchaser is the losing party. Escrow Agent shall give written notice of such deposit to Seller and Purchaser. Upon such deposit or payment pursuant to this Agreement, Escrow Agent shall be relieved and discharged of all obligations and responsibilities hereunder. (c) The parties acknowledge that Escrow Agent is acting solely as a stakeholder at their request and for their convenience; that Escrow Agent shall not be deemed to be the agent of either of the parties; and that Escrow Agent shall not be liable to either party for any act or omission on its part unless taken or suffered in willful disregard of this Agreement. Escrow Agent may act upon any instrument or writing believed by Escrow Agent to be genuine and to be signed and presented by the proper party. Seller and Purchaser shall jointly and severally indemnify and hold Escrow Agent harmless from and against all costs, claims and expenses, including reasonable attorneys' fees (including the value of same if Escrow Agent represents itself), incurred in connection with the performance of Escrow Agent's duties hereunder. Escrow Agent shall have no duties or responsibilities except those expressly set forth in this Agreement. Escrow Agent shall not be bound by any modification of this Agreement, unless the Same is in writing, signed by Seller and 30 Purchaser and delivered to Escrow Agent, and if Escrow Agent's duties are affected thereby, unless Escrow Agent shall have given prior written consent thereto. If Escrow Agent shall be uncertain as to its duties or rights hereunder, or shall receive instructions from Purchaser or Seller, which, in Escrow Agent's opinion, are in conflict with any of the provisions hereof, Escrow Agent shall be hold or apply the Deposit pursuant to subparagraph (b) hereof and may decline to take any other action. ARTICLE SIXTEEN MERGER OF UNDERSTANDINGS 16.1 Merger. It is understood and agreed that all understandings and agreements heretofore had between the parties hereto are hereby merged into this Agreement, which alone fully and completely expresses their agreement, and that this Agreement is entered into after full investigation, neither party relying upon any statement or representation made by Seller or Purchaser or anyone else not embodied in this Agreement. This paragraph shall survive the Closing and delivery of the Deed or other termination of this Agreement. ARTICLE SEVENTEEN MISCELLANEOUS 17.1 Entire Agreement. This Agreement and the exhibits attached hereto embody the entire agreement between the parties in connection with this transaction, and there are no oral agreements existing between the parties relating to this transaction which are not expressly set forth herein. This Agreement may not be modified or, except as expressly provided to the contrary herein, canceled or terminated, except in a writing signed by all parties hereto. This Agreement may be 31 executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one and the same instrument. 17.2 Waiver. Failure of either party to object to any act or omission on the part of the other party, no matter how long the same may continue, shall not be deemed to be a waiver by such party of any of its rights hereunder, unless expressly provided to the contrary herein. No waiver by any party at any time, express or implied, of any breach of any provision of this Agreement, shall be deemed a waiver of a breach of any other provision of this Agreement or a consent to any subsequent breach of the same or any other provision. If any action by any party shall require the consent or approval of another party, such consent or approval of such action on any one occasion shall not be deemed a consent to or approval of said action on any subsequent occasion. 17.3 Assignment. Purchaser may not assign any of its right, title or interest in this Agreement, or its right to the Deposit and any interest thereon, without the prior written consent of Seller, which consent shall be at Seller's sole discretion. 17.4 Headings. The captions, section numbers and article numbers appearing in this Agreement are inserted only as a matter of convenience, and do not define, limit, construe or describe the scope or intent of such sections or articles of this Agreement. Furthermore, as used in this Agreement, any gender shall include any other gender, the singular shall include the plural, and the plural shall include the singular, wherever applicable. 17.5 Third Parties. No party other than Seller, Purchaser and their respective successors and permitted assigns, shall have any rights to enforce or rely upon this Agreement. This Agreement is binding upon and made solely for the benefit of Seller, Purchaser and their respective heirs, personal representatives, successors and permitted assigns. 32 17.6 Notices. (a) Except as expressly provided to the contrary in this Agreement, notices which must or may be given by any party hereto must be in writing and shall be deemed as given hereunder upon actual receipt, if by personal delivery to the addresses set forth below, or, if properly addressed, if sent by certified or registered mail, return receipt requested, four (4) days after depositing such notice with postage prepaid at the rates and with the status certified or registered in a United States mailbox, or one (1) day after depositing such notice, with proper payment or credit arrangement, in the custody of a nationally recognized overnight delivery service. Notice shall be deemed properly addressed if sent to the following addresses: If to Seller: Amerihost Properties, Inc. 2400 E. Devon Street Suite 280 Des Plaines, IL 60018 Attn: Michael P. Holtz, President and Chief Executive Officer With copies to: Helen R. Friedli, P.C. c/o McDermott Will & Emery 227 West Monroe Street Chicago, IL 60606-5096 Attn: Helen R. Friedli, Esq. If to Escrow Agent: Stewart Title Guaranty Corporation 18333 Preston Road, Suite 410 Dallas, TX 75252 Attn: Tom Irons, Esq. 33 If to Purchaser: PMC Commercial Trust 17290 Preston Road Dept. 101 3rd Floor Dallas, TX 75252 Attn: Jan F. Salit, Executive Vice President and Chief Investment Officer, and Andrew S. Rosemore, Executive Vice President With a copy to: PMC Commercial Trust 17290 Preston Road 3rd Floor Dallas, TX 75252 Attn: Cheryl T. Murray, Esq. General Counsel (b) Except as set forth to the contrary herein, any party may designate, by notice in writing as above provided, a new or other address to which such notice or demand shall thereafter be so given, made or mailed. (c) The respective attorneys for the parties are hereby authorized (i) to give any notice which the party is required to give or may give under this Agreement; and (ii) to agree to adjournments of the Closing. It is understood that Seller's attorney is McDermott, Will & Emery, and Purchaser's attorney is Cheryl T. Murray, Esq. 17.7 Governing Law. This Agreement shall be governed by the laws of the State of Illinois, without cognizance to conflicts of laws rules. 34 17.8 Survival. The provisions, representations, warranties, covenants and agreements of this Agreement shall survive the Closing of the transaction contemplated hereby, unless expressly provided herein to the contrary. 17.9 Enforcement of Agreement. The parties hereto agree that irreparable damage would occur in the event any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce specifically the terms and provisions hereof, this being in addition to any other remedy to which they are entitled at law or in equity. 17.10 Satisfaction. The acceptance of a Deed by Purchaser for each Property shall be deemed to be a full performance of and discharge of any and all agreements and obligations on the part of Seller to be performed pursuant to the provisions of this Agreement, except those, if any, which are herein specifically stated to survive delivery of such Deed. 17.11 Confidentiality. All of the information heretofore or hereafter supplied by Seller to Purchaser shall be deemed confidential and shall not be revealed by Purchaser other than to a bank or other financial institution or investment banker or rating agency which shall provide Purchaser with financing in connection with the purchase of the Property, provided that this provision shall not apply to disclosure or utilization necessary or appropriate under applicable securities laws. In the event that the transaction herein shall not close, all such information shall be returned to Seller, and copies thereof shall not be retained by Purchaser or any lending institution. This Section shall survive the Closing and delivery of the Deed or other termination of this Agreement. 35 17.12 Mutuality. This Agreement has been executed after negotiation and the opportunity by both parties to have this Agreement reviewed and revised by legal counsel of their choice. 17.13 Marketing. Seller agrees not to market the Property or solicit or accept any offer for the purchase and sale of the Property from the date hereof through the earlier to occur of (a) the Closing Date, and (b) the earlier termination of this Agreement. ARTICLE EIGHTEEN DEFINITIONS Wherever used in this Agreement, the following terms have the meanings set forth in this Article Eighteen: "Appurtenances" shall mean all of Seller's right, title and interest in all rights of way, drives, rights in adjoining streets, sidewalks, alleyways, passages, curbs, berms and similar rights and areas used in connection with the Property; all development rights for the Land or Improvements, whether vested or not; all planned unit development (PUD) plans and other development approvals for the Land and the Improvements; all appurtenant rights of lateral support and encroachment rights; and all leases of property situated off-site, but used in connection with the operation of the Improvements. "Appurtenant Easements" shall mean all easements and licenses on or over land or improvements, other than the Land and Improvements, which benefit the Land or Improvements, including, but not limited to, all easements providing access to the Land from public streets, roads and ways, all easements, licenses and agreements for location, maintenance and replacement of off- 36 premises signs of the business and utility service lines, and all easements for parking and storage on adjoining property. "Books and Records" shall mean all books of account and annual statements of operations for 1996 and 1997 with respect to the Property (including audited statements to the extent the same have been audited); the 1998 budgets and all books of account and preliminary statements of the operations for the current 1998 fiscal year for the Property to date, which are kept by Seller in the ordinary course of business of operating the Property, and monthly statements of operations of the Property for 1997 and 1998 through the month of the Closing (the statement of operations for the month of the Closing to be provided after the Closing). "Employees" shall mean all persons employed by Seller in connection with the management and operation or possession of the Property during the pendency of this Agreement. "Excepted Items" shall mean the following property which is excluded from the definition of "Personal Property" hereunder: (a) items owned by independent contractors and business entities and not used in the operation of the Property; (b) all items (prepaid or otherwise) stored, maintained, or operated at the Property and consumed in the ordinary course of business, (c) cash in bank accounts and petty cash maintained at the Property, checks and money orders; (d) room reservation deposits of any kind or nature, (e) receivables, if any, (f) utility deposits, if any, of every type and nature, including any interest accrued thereon, and (g) all accounts payable with respect to the Property, whether owing or accruing prior to, on or after the Closing Date. 37 "Governmental Authorities" shall mean all federal, state, county, municipal and local governments, administrative agencies and quasi-governmental authorities having jurisdiction over the Property. "Hazardous Materials" shall mean any and all substances which are or become defined as a "hazardous waste," "hazardous substance" pollutant or contaminant under any Legal Requirements, including, without limitation, the Comprehensive Environmental Response Compensation and Liability Act (42 U.S.C. Section 9601 et seq.), as amended, and/or the Resource Conservation and Recovery Act (42 U.S.C. Section 6901 et seq.), as amended, and/or the federal regulations implementing such Acts; "Hazardous Materials" shall include, but are not limited to, petroleum products and asbestos. "Impositions" shall mean all real estate, personal property and hotel occupancy taxes, general and special assessments imposed by Governmental Authorities, water and sewer charges, and fees and charges assessed or imposed by Governmental Authorities upon all or part of the Property and which are or may become a lien on the Property. "Improvements" shall mean all buildings and structures erected or located on the Land and Appurtenant Easements at the date of this Agreement, or at any time between the date of this Agreement and the Closing Date, including all machinery, equipment and fixtures owned by Seller and attached to such buildings and structures and used for operation or maintenance of the buildings and structures, all parking area and driveway surfaces, and curbs and drainage features, all landscaping, pool areas, all utility lines and appurtenances and all signs and structural supports for signs. 38 "Inspection Period" shall mean the period of time beginning on the date of receipt of the last Survey, Title Commitment (including Title Documents), UCC Search or Phase I Audit, and/or updates thereto, and ending thirty (30) days thereafter, however, in no event shall this Inspection Period extend beyond the Closing Date. "Knowledge of Seller" shall mean the actual knowledge of Seller. "Legal Requirements" shall mean all laws, codes, ordinances, rules, regulations, and requirements of all Governmental Authorities existing at the date of this Agreement or at any time between the date of this Agreement and the Closing Date applicable to all or part of the Property or the ownership, operation, management, maintenance, development, improvements, repair, renovation, lease, sale, encumbering, transfer, use or manner of use of all or part of the property (including, without limitation, any law, code, ordinance, rule, regulation or requirement relating to Hazardous Materials). "Permits and Licenses" shall mean all permits, licenses, certificates of occupancy, sales tax permits, and renewals thereof, which are material to the normal operation of the Property. "Permitted Exceptions" shall mean any defects, liens, encumbrances, covenants, restrictions, easements, reservations, agreements and other matters affecting title to the Property to which Purchaser does not object prior to the expiration of the Inspection Period. 39 "Permitted Hazardous Materials" shall mean Hazardous Materials in ordinary quantities which are customarily used in the operation, maintenance and repair of hotels and lodging facilities similar to the Property and which are stored and handled according to manufacturers' standards and guidelines and in compliance with all applicable Legal Requirements, and prepackaged office supplies, cleaning materials, personal grooming items and other similar items sold for consumer use. "Personal Property" excludes the Excepted Items and shall mean all fixtures, furnishings and equipment located at the Property and required for the operation of the Improvements as a motel/hotel, including, without limitation, office furnishings and equipment (exclusive of all of the vehicles used in the operation of the Improvements); fittings, machinery, heating and cooling systems, tools, maintenance equipment, appliances, wires and installed telephones, televisions, pictures, rugs, kitchen equipment, and all other fixtures and personal property of every kind and nature, other than the Excepted Items, which are located on, attached to, appurtenant to or used in the operation, maintenance, management or security of the Property or any portion of the Property, and which are owned by Seller, including Personal Property (other than Excepted Items) acquired by Seller between the date of this Agreement and the Closing Date, and all replacements, substitutions and additions of and to all of the foregoing. Personal Property does not include assignable trade names and goodwill. Seller does not lease any Personal Property, but rather, owns all Personal Property used in operation of the Property. 40 "Phase I Audit" shall mean a Phase I environmental site assessment of the Property with respect to Hazardous Materials from a qualified environmental audit firm experienced in Phase I environmental site assessments, as selected by Purchaser, to be made within the Inspection Contingency Period and pursuant to the ASTM Standard Practice for Environmental Site Assessments. "Phase II Site Assessment" shall mean a phase II environmental site assessment of the Property with respect to Hazardous Materials from a qualified environmental audit firm experienced with Phase II environmental site assessments, as selected by Purchaser, to be made pursuant to ASTM Standard Practice for Environmental Site Assessments. "Title Insurance Company" shall mean Stewart Title Guaranty Corporation. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. 41 SELLER: [AMERIHOST PROPERTIES SUBSIDIARIES to be listed as signatories] By: /s/ Michael P. Holtz ------------------------------------- Michael P. Holtz President and Chief Executive Officer PURCHASER: PMC COMMERCIAL TRUST, a Texas Real Estate Investment Trust By: /s/ Lance B. Rosemore ------------------------------------- Name: Lance B. Rosemore Title: President The undersigned, Amerihost Properties, Inc., a Delaware corporation, and the sole shareholder of Seller, hereby joins this Agreement solely for the purpose of performing its duties and obligations as set forth in Section 5.1 (b) and Section 6.6, if applicable. AMERIHOST PROPERTIES, INC. By: /s/ Michael P. Holtz ------------------------------------- Michael P. Holtz, President The undersigned, AmeriHost Inns, Inc., a Delaware corporation, hereby joins this Agreement solely for the purpose of performing its duties and obligations as set forth in Section 5.1 (b). AMERIHOST INNS, INC. By: /s/ Michael P. Holtz ------------------------------------- Michael P. Holtz, President 42 SCHEDULE OF EXHIBITS A . . . . . . . . . . . . . . . . . . . . . Property-Owning Subsidiaries B . . . . . . . . . . . . . . . . . . . . . Street Addresses B-1 to B-30 . . . . . . . . . . . . . . . . Land C . . . . . . . . . . . . . . . . . . . . . Price Allocation per Property D . . . . . . . . . . . . . . . . . . . . . Form of Master Agreement E . . . . . . . . . . . . . . . . . . . . . Form of Property Lease F . . . . . . . . . . . . . . . . . . . . . Repairs for Marysville, Ohio and Plainfield, Indiana G . . . . . . . . . . . . . . . . . . . . . Phase I Audit Update Property H . . . . . . . . . . . . . . . . . . . . . Assumption Fees 43 EXHIBIT A MASTER AGREEMENT THIS MASTER AGREEMENT (this "AGREEMENT") is made and entered into as of this 30th day of June, 1998, by and among PMC COMMERCIAL TRUST (the "LESSOR"), and AMERIHOST PROPERTIES, INC. ("AMERIHOST") AND AMERIHOST INNS, INC. (the "LESSEE"). RECITALS WHEREAS, the Lessor has acquired those certain twenty-six (26) hotels (the "INITIAL HOTELS") listed on Exhibit A attached hereto; WHEREAS, simultaneously with the execution of this Agreement, the Lessor has leased the Initial Hotels to the Lessee; WHEREAS, Amerihost is a guarantor of the Lessee's obligation to pay rent under the Property Leases (as hereinafter defined), on the terms and conditions set forth therein, and WHEREAS, the parties hereto desire to enter into this Agreement to set forth certain agreements relating to the matters set forth herein. AGREEMENTS NOW, THEREFORE, in consideration of the foregoing premises, the representations, warranties and covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto 1 agree as follows: ARTICLE I DEFINITIONS Unless the context otherwise requires, (a) all capitalized terms not otherwise defined herein shall have the meanings set forth in the Property Leases, (b) references to the singular shall include the plural and vice versa, (c) references to designated "Articles," "Sections" or other subdivisions are references to the designated Articles, Sections or other subdivisions of this Agreement, (d) all accounting terms not otherwise defined herein shall have the meanings assigned to them in accordance with GAAP and (e) the words "herein," "hereof," and "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular Article, Section or other subdivision. ARTICLE II LEASING OF HOTELS 2.1 Initial Hotels. Simultaneously with entering into this Agreement, the Lessor and the Lessee have entered into an individual lease in the form attached hereto as Exhibit "B" (the "PROPERTY LEASE") for each of the Initial Hotels at the rents specified on Exhibit "C" attached hereto. 2.2 Additional Hotels. Lessor and Lessee may also from time to time agree to the lease of Additional Hotels (herein so called) to Lessee. The lease of Additional Hotels shall 2 be by mutual agreement of Lessor and Lessee and upon such terms and conditions as are contained in form of the Property Lease attached hereto as Exhibit B and such Additional Hotels shall become subject to the terms and conditions of this Agreement as amended to reference such Additional Hotels and the Amerihost Guaranty (as hereinafter defined). ARTICLE III RENT So long as this Agreement remains in effect, Lessee promises to pay to Lessor, in lawful money of the United States of America, in immediately available funds, rents in the amount specified below: 3.1 The annual amount of rent (the "Base Rent"), payable in equal monthly installments as set forth on Schedule I attached hereto, shall initially be $6,220,000.00 until adjusted as provided in the Property Leases or as adjusted with the addition of Additional Hotels. The Base Rent shall be paid monthly in advance in the manner as set forth in Section 3.1 of the Property Leases. ARTICLE IV RESERVES 4.1 Reserves. (a) Lessee shall deposit monthly during the Lease Term (on or before the 15th day of the subsequent month) into the Capital Expenditure Reserve Account an amount which is equal to two percent (2%) of Room Revenues for all Initial Hotels and Additional Hotels, as the case may be, for the prior month. 3 (b) Lessee shall also deposit monthly during the Lease Term (on or before the 15th day of the subsequent month) into the FF&E Reserve Account an amount equal to two percent (2%) of the Room Revenues for all Initial Hotels and Additional Hotels, as the case may be, for the prior month. ARTICLE V ESCROW Section 5.1 Escrow. The Lessee has deposited in escrow (the "ESCROW") with Lessor, and Lessor hereby acknowledges receipt of, the sum of $1,036,666.67 (the "ESCROW FUNDS"), representing a sum equivalent to two months' Base Rent under all Property Leases. The Escrow Funds shall be invested in "Qualified Investments." The Lessor shall cause earnings thereon to be remitted annually to the Lessee not later than the first day of February of each year in which the Escrow is maintained, provided that an Event of Default has not occurred and is continuing under the Property Lease. Notwithstanding the foregoing provision, the Lessee shall have the option from time to time, as a substitute for cash, upon reasonable notice to the Lessor, to provide a letter of credit (the "LETTER OF CREDIT") in favor of the Lessor in the amount of the Escrow Funds, in form and substance, and issued by an issuer, reasonably acceptable to the Lessor. Section 5.2 Coverage Ratio. The Escrow hereby created shall continue until such date that the ratio of Net Operating Income in the aggregate on all of the Initial Hotels to the aggregate Base Rent of all Initial Hotels shall equal or exceed a ratio of 1.25 to 1.0 (such rent 4 coverage ratio hereinafter called the "RCR"), as of the first day of each quarter during the term of the Escrow, on a trailing 12-month basis commencing on December 31, 1999. In the event Additional Hotels are added under this Agreement, an Escrow pursuant to Section 5.1 shall be established with respect to such Additional Hotels and shall continue pursuant to the terms and conditions set forth in this Section 5.2. Lessor shall have the right to draw on the Escrow Funds upon the occurrence of an Event of Default by the Lessee in the payment of Base Rent to the extent necessary to cure the shortfall in payment of Base Rent and Lessee must replenish the Escrow within two (2) business days after written notice from Lessor. Section 5.3 Financial Reports. During the term of this Agreement, the Lessee shall provide detailed monthly statements to the Lessor within forty-five (45) days of each fiscal period outlining financial results for the Property during the accounting period and year-to-date, compared to the previous fiscal year and budget. Annual financial consolidating statements shall be sent to the Lessor not later than one hundred twenty (120) days after the end of the Lessee's fiscal year. The Lessee agrees timely to provide financial data and to cooperate fully with the Lessor in connection with prompt quarterly and annual reconciliations of the monthly payments of Base Rent with the Net Operating Income for equivalent periods. Section 5.4 Termination of Escrow. Within ten (10) days after the submission of evidence reasonably satisfactory to the Lessor that the RCR has been achieved, the Lessor shall remit the Escrow Funds, together with earnings thereon, if any, or return the Letter of Credit, as the case may be, to the Lessee and the appropriate Escrow created hereunder shall be closed and of no further force and effect. 5 ARTICLE VI AMERIHOST GUARANTY Amerihost hereby executes this Agreement to acknowledge and confirm Amerihost's agreement to guarantee to the Lessor the prompt and complete payment of the Base Rent and Additional Rent under the Property Leases in the form of guaranty attached hereto as Exhibit D (the "Amerihost Guaranty"); it being expressly understood and agreed that this is a continuing guaranty and an instrument for the payment of money only, and that the obligation of Amerihost is and shall be absolute under any and all circumstances. ARTICLE VII NON-COMPETITION During the term of this Agreement, Lessor, Lessee and Amerihost shall not (and shall take reasonable actions to assure that any Related Party of Lessor, Lessee or Amerihost shall not) within fifteen (15) miles of the Project develop a property by constructing a new motel/hotel project without the written approval of the Lessor or Lessee, as the case may be. ARTICLE VIII DEFAULT Section 8.1 Event of Default. An Event of Default (herein so called) shall exist under this Agreement if any of the following occur: (a) Base Rent Payment. Lessee breaches any of its obligations to pay Base Rent as provided in Section 3.1 hereof and in Sections 3.1 and 3.2 of any of the 6 Property Leases subject to any notice and cure period contained in the Property Leases. (b) Capital Expenditure Reserve Account. A breach by Lessee of its obligation to fund the Capital Expenditure Reserve Account as provided in Section 4.1(a) hereof and Section 3.7(d) of the Property Leases subject to any notice and cure period contained in the Property Leases. (c) FF&E Reserve Account. A breach by Lessee of its obligation to create and fund the FF&E Reserve Account as provided in Section 4.1(b) hereof and Section 3.7(f) of the Property Leases subject to any notice and cure period contained in the Property Lease. (d) Failure of Lessee to replenish the Escrow within two (2) business days after written notice from Lessor. (e) Failure of Amerihost to honor the terms of the Amerihost Guaranty. 8.2 Remedies. Upon the occurrence of an Event of Default, Lessor shall have the right to terminate this Agreement upon ten (10) days written notice to Lessee; in which event Lessor shall have all the rights and remedies as set forth in Section 12.2 of the Property Leases and this Agreement. 7 ARTICLE IX MISCELLANEOUS Section 9.1 Modification, Amendments and Waivers. No modification, amendment or waiver of any provision of this Agreement shall be effective unless the same is in a writing signed by all parties to this Agreement. Section 9.2 Notices. All notices and other communications pursuant to this Agreement shall be in writing and personally served or mailed as provided in the Property Lease. Section 9.3 Successors and Assigns. The provisions of this Agreement shall be binding upon the parties hereto and all of their successors and assigns and inure to the benefit of the parties hereto and their permitted successors and assigns. Section 9.4 Termination. This Agreement shall terminate at such time as all of the Property Leases have terminated, except that the Escrow created under Article V and the Amerihost Guaranty created under Article VI shall terminate on the terms and conditions therein provided. Section 9.5 Governing Law. This Agreement shall be governed by the laws of the State of Texas, without giving effect to the principles of conflicts of law thereof. Section 9.6 Counterparts. This Agreement may be signed in one or more counterparts, each of which shall be an original, with the same force and effect as if the signatures thereto and hereto were upon the same instrument. 8 Section 9.7 Waiver. Each party waives, to the extent permitted by applicable law, any right to a trial by jury in any proceedings brought by either party to enforce the provisions of this Agreement. Section 9.8 Time of the Essence. Time is of the essence of this Agreement. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. LESSOR PMC COMMERCIAL TRUST By: /s/ Lance B. Rosemore ----------------------------------- Name: Lance B. Rosemore ------------------------------ Title: President ----------------------------- LESSEE AMERIHOST INNS, INC. By: /s/ Michael P. Holtz ----------------------------------- Name: Michael P. Holtz ------------------------------ Title: President ----------------------------- GUARANTOR AMERIHOST PROPERTIES, INC. By: /s/ Michael P. Holtz ----------------------------------- Name: Michael P. Holtz ------------------------------ Title: President ----------------------------- 9 EXHIBIT B LEASE AGREEMENT BY AND BETWEEN PMC COMMERCIAL TRUST, AS LANDLORD AND AMERIHOST INNS, INC., AS TENANT TABLE OF CONTENTS Page ---- RECITALS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1 ARTICLE I DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . .. 2 ARTICLE II DEMISE; TERM; LEASE YEAR 2.1 Demise . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.2 Term . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2.3 Lease Year . . . . . . . . . . . . . . . . . . . . . . . 7 2.4 Renewal Options . . . . . . . . . . . . . . . . . . . . 8 ARTICLE III RENT AND OTHER CHARGES . . . . . . . . . . . . . . . . . . . 3.1 Base Rent . . . . . . . . . . . . . . . . . . . . . . . 8 3.2 Consumer Price Index Adjustments to Base Rent . . . . . 8 3.3 Payment of Impositions . . . . . . . . . . . . . . . . . 9 3.4 Utilities and Operating Expenses . . . . . . . . . . . 12 3.5 Location of Payments . . . . . . . . . . . . . . . . . 12 3.6 No Setoff . . . . . . . . . . . . . . . . . . . . . . 12 3.7 Capital Expenditure Reserve Account . . . . . . . . . 13 3.8 Specified FF&E and Operating Equipment . . . . . . . . 16 ARTICLE IV ALTERATIONS AND ADDITIONS . . . . . . . . . . . . . . . . . 16 4.1 Alterations . . . . . . . . . . . . . . . . . . . . . 16 4.2 Construction Liens . . . . . . . . . . . . . . . . . . 17 4.3 Removal of Improvements . . . . . . . . . . . . . . . 17 ARTICLE V REPAIRS AND MAINTENANCE . . . . . . . . . . . . . . . . . . 18 5.1 Tenant's Obligations . . . . . . . . . . . . . . . . . 18 5.2 Termination for Decline in Quality . . . . . . . . . . 19 5.3 Surrender . . . . . . . . . . . . . . . . . . . . . . 19 5.4 Right of Entry . . . . . . . . . . . . . . . . . . . . 19 ARTICLE VI HAZARDOUS SUBSTANCES . . . . . . . . . . . . . . . . . . . 20 6.1 No Hazardous Substances . . . . . . . . . . . . . . . 20 6.2 Indemnity . . . . . . . . . . . . . . . . . . . . . . 20 6.3 Survival . . . . . . . . . . . . . . . . . . . . . . . 20 i TABLE OF CONTENTS Page ---- ARTICLE VII COVENANTS OF TENANT . . . . . . . . . . . . . . . . . . 21 7.1 Use of Project . . . . . . . . . . . . . . . . . . . 21 7.2 Continuing Covenants . . . . . . . . . . . . . . . . 21 7.3 Operating Supplies . . . . . . . . . . . . . . . . . 22 7.4 Legal Requirements . . . . . . . . . . . . . . . . . 22 7.5 FF&E and Operating Equipment . . . . . . . . . . . . 22 7.6 Permits and Licenses . . . . . . . . . . . . . . . . 22 7.7 Tenant's Obligation to Manage . . . . . . . . . . . 23 7.8 Permitted Contests . . . . . . . . . . . . . . . . . 23 ARTICLE VIII RESERVED . . . . . . . . . . . . . . . . . . . . . . . . 24 ARTICLE IX INSURANCE AND INDEMNITIES . . . . . . . . . . . . . . . . 24 9.1 Insurance Coverages . . . . . . . . . . . . . . . . 24 9.2 Insurance Policies . . . . . . . . . . . . . . . . . 26 9.3 Exemption of Landlord from Liability . . . . . . . . 26 9.4 Indemnification . . . . . . . . . . . . . . . . . . 27 9.5 Mutual Waiver of Subrogation . . . . . . . . . . . . 27 9.6 Insurance Premium Escrow . . . . . . . . . . . . . . 27 ARTICLE X DAMAGE OR DESTRUCTION . . . . . . . . . . . . . . . . . . 28 10.1 Reports on Insurance Claims . . . . . . . . . . . . 28 10.2 Insurance Proceeds . . . . . . . . . . . . . . . . . 28 10.3 Reconstruction in the Event of Damage or Destruction 29 10.4 Abatement of Rent . . . . . . . . . . . . . . . . . 30 ARTICLE XI CONDEMNATION . . . . . . . . . . . . . . . . . . . . . . 30 11.1 Taking of Whole . . . . . . . . . . . . . . . . . . 30 11.2 Partial Taking . . . . . . . . . . . . . . . . . . . 30 11.3 Tenant's Award . . . . . . . . . . . . . . . . . . . 31 ARTICLE XII DEFAULTS; REMEDIES . . . . . . . . . . . . . . . . . . . 31 12.1 Defaults . . . . . . . . . . . . . . . . . . . . . . 31 12.2 Landlord's Remedies . . . . . . . . . . . . . . . . 32 ii TABLE OF CONTENTS Page ---- 12.3 Landlord May Perform . . . . . . . . . . . . . . . 34 ARTICLE XIII ASSIGNMENT AND SUBLETTING . . . . . . . . . . . . . . 34 13.1 Assignment by Tenant . . . . . . . . . . . . . . . 34 13.2 Tenant Ownership . . . . . . . . . . . . . . . . . 37 13.3 Assignment Due to Bankruptcy . . . . . . . . . . . 38 13.4 Transfer of Landlord's Rights . . . . . . . . . . 40 13.5 Licenses and Leasehold Mortgages . . . . . . . . . 41 ARTICLE XIV RIGHT OF FIRST REFUSAL . . . . . . . . . . . . . . . . 43 14.1 Right of First Refusal . . . . . . . . . . . . . . 43 14.2 Conditions of Offer . . . . . . . . . . . . . . . 44 14.3 Restraining Order . . . . . . . . . . . . . . . . 44 14.4 Exclusion from Right of First Refusal . . . . . . 44 ARTICLE XV GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . 45 15.1 Estoppel Certificate . . . . . . . . . . . . . . . 45 15.2 Landlord's Liability . . . . . . . . . . . . . . . 45 15.3 Severability . . . . . . . . . . . . . . . . . . . 45 15.4 Captions . . . . . . . . . . . . . . . . . . . . . 46 15.5 Complete Agreement . . . . . . . . . . . . . . . . 46 15.6 Tenant's Remedies . . . . . . . . . . . . . . . . 46 15.7 Franchise Obligations . . . . . . . . . . . . . . 46 15.8 Notices . . . . . . . . . . . . . . . . . . . . . 46 15.9 Waivers . . . . . . . . . . . . . . . . . . . . . 47 15.10 Recording . . . . . . . . . . . . . . . . . . . . 47 15.11 Holding Over . . . . . . . . . . . . . . . . . . . 48 15.12 Covenants and Conditions . . . . . . . . . . . . . 48 15.13 Binding Effect . . . . . . . . . . . . . . . . . . 48 15.14 Subordination and Attornment. . . . . . . . . . . 48 15.15 No Joint Venture . . . . . . . . . . . . . . . . . 49 15.16 Quiet Enjoyment . . . . . . . . . . . . . . . . . 49 15.17 Expansion of Project . . . . . . . . . . . . . . . 49 iii TABLE OF CONTENTS Page ---- 15.18 Counterparts . . . . . . . . . . . . . . . . . . . 49 15.19 Brokers . . . . . . . . . . . . . . . . . . . . . 49 15.20 Tenant's Right to Cure . . . . . . . . . . . . . . 49 15.21 Breach by Landlord . . . . . . . . . . . . . . . . 49 15.22 Landlord to Grant Easements, etc. . . . . . . . . 50 15.23 Governing Law; Submission to Jurisdiction . . . . 50 15.24 REIT Compliance . . . . . . . . . . . . . . . . . 51 15.25 Financings . . . . . . . . . . . . . . . . . . . . 51 15.26 Landlord's Right to Inspect . . . . . . . . . . . 51 15.27 "As Is" Lease . . . . . . . . . . . . . . . . . . 51 15.28 Third Party Beneficiary . . . . . . . . . . . . . 52 15.29 No Merger of Title . . . . . . . . . . . . . . . . 52 iv LEASE AGREEMENT THIS LEASE AGREEMENT (the "Lease") is made and entered into as of the ___ day of June, 1998 by and between PMC COMMERCIAL TRUST, a Texas real estate investment trust ("Landlord"), and AMERIHOST INNS, INC., a Delaware corporation ("Tenant"). REFERENCE PAGE In addition to the other terms elsewhere defined in this Lease, the following terms, wherever used in this Lease, shall have the meaning set forth in this Reference Page. 1. PREMISES: The motel property located at_____________. 2. NAME: AmeriHost Inn. 3. COMMENCEMENT DATE: June ___, 1998 4. EXPIRATION DATE: June ___, 2008 5. LEASE TERM: Ten (10) years, as the term may be extended upon Tenant's exercise of either one or both of Tenant's two (2) options to extend the Lease Term for five (5) years each. 6. BASE RENT: The rent set forth in Schedule I annexed hereto and made a part hereof. 7. PROJECT: The Land, Improvements, FF&E, and Operating Equipment, which comprise a two (2) story motel, containing ____ rooms, located at the Premises. The Reference Page information is incorporated into and made a part of this Lease. In the event of any conflict between any Reference Page information and the Lease, the Lease shall control. RECITALS: A. Landlord is the owner of the Project. B. Tenant has represented to Landlord that it has substantial experience in the operation, management and maintenance of facilities similar to the Project and recognizes Landlord's expectation that Tenant will use such experience to operate the Project. C. Tenant desires to lease from Landlord and Landlord desires to lease to Tenant the Project for the operation by Tenant of a motel and Tenant desires to lease and operate the Project subject to and in accordance with the terms and conditions set forth herein. AGREEMENTS: NOW, THEREFORE, for good, fair and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, and, intending to be legally bound hereby, Landlord and Tenant hereby covenant and agree as follows: ARTICLE I DEFINITIONS The following words and terms shall have the following meanings ascribed to them: 1.1 "ADDITIONAL RENT" shall mean all costs, expenses, charges and other amounts owed by Tenant to Landlord hereunder, other than Base Rent. Additional Rent shall include any cost incurred by Landlord in fulfilling Tenant's obligations hereunder. Additional Rent shall be due and payable two (2) business days following written demand, unless specifically provided to the contrary in this Lease; and shall bear interest at the Default Rate from the date paid by Landlord until the date paid by Tenant to Landlord, if applicable. 1.2 "AWARD" shall have the meaning ascribed to such term in Section 11.1 hereof. 1.3 "BANKRUPTCY CODE" shall mean the United States Bankruptcy Code, as amended. 1.4 "CAPITAL EVENT" shall mean any of the following events: (a) any sale, assignment, transfer or refinancing of the Lessee's interest in the Project; (b) the receipt of any insurance payments or damage recoveries paid to the Lessee in respect of the Project; and (c) any condemnation or eminent domain proceedings relating to all or part of any leasehold interest in the Project. 1.5 "CAPITAL EXPENDITURE RESERVE ACCOUNT" shall have the meaning ascribed to such term in Section 3.7 hereof. 2 1.6 "CONSUMER PRICE INDEX" shall mean The "U.S. City Average, All Items" Consumer Price Index for All Urban Consumers published by the Bureau of Labor Statistics of the United States Department of Labor (Base: 1982-1984=100), or any successor index thereto. 1.7 "DEFAULT" shall mean an event which but for the giving of notice or passing of time, or both, would constitute an Event of Default hereunder. 1.8 "DEFAULT RATE" shall mean the annual rate of interest of two percent (2%) over the Prime Rate as published in The Wall Street Journal, Southwest Edition, or such lesser amount as may be the maximum amount permitted by applicable law. 1.9 "ENVIRONMENTAL REGULATION(S)" means any law, rule, regulation, permit or agreement relating to the environment, human health or safety now existing or hereafter enacted. 1.10 "EVENT OF DEFAULT" shall have the meaning ascribed to such term in Section 12.1 hereof. 1.11 "FF&E" shall mean all furniture, furnishings and equipment owned by Landlord and located at the Project as of the date of this Lease and required for the operation of the Improvements as a motel, including, without limitation, (a) office furnishings and equipment, (b) specialized motel equipment necessary for the operation of any portion of the Improvements as a motel, including equipment for kitchens, laundries, dry cleaning facilities, bars, restaurants, public rooms, commercial and parking spaces, and recreational facilities and (c) all other furnishings and equipment as necessary or desirable in the operation of the Project in accordance with the terms and conditions set forth in this Lease. 1.12 "FF&E RESERVE ACCOUNT" shall mean funds available for the repair, replacement or refurbishment of FF&E, which funds shall be provided by, and under the control of, Tenant through monthly payment into an account established on the Commencement Date by Tenant and maintained by Tenant during the Lease Term. 1.13 "FIXTURES" shall mean all equipment, machinery, fixtures and other items of property, including all components thereof now and hereafter, permanently affixed to or incorporated into the Improvements, including, without limitation, all furnaces, boilers, heaters, electrical equipment, heating, plumbing, lighting, ventilating, refrigerating, incineration, air and water pollution control, waste disposal, air-cooling and air-conditioning systems and apparatus, sprinkler systems and fire and theft protection equipment, all of which to the greatest extent permitted by law are hereby deemed by the parties hereto to constitute real estate, together with all replacements, modifications, alterations and additions thereof. 3 1.14 "FRANCHISOR" A Related Party of Tenant or any other national or regional hotel/motel franchisor reasonably acceptable to Landlord. 1.15 "FRANCHISE AGREEMENT" Any agreement that may be entered into by and between a Franchisor and Tenant, regarding the operation of the Project as a franchised motel of Franchisor, on terms reasonably acceptable to Landlord. 1.16 "GAAP" means generally accepted accounting principles. 1.17 "GOVERNMENTAL AUTHORITY" means any federal, state, or local governmental body including elected bodies, departments, agencies, commissions, boards or instrumentalities having or purporting to have jurisdiction over Landlord, Tenant, the Project, or the business conducted or to be conducted from the Project. 1.18 "HAZARDOUS SUBSTANCES" means any substance, pollutant or contaminant, as those terms are now or hereafter defined in any Environmental Regulation, and specifically includes, but is not limited to, asbestos, asbestos-containing materials, petroleum, or petroleum-based products, formaldehyde, and polychlorinated biphenyls. 1.19 "IMPOSITIONS" shall have the meaning ascribed to such term in Section 3.3(a) hereof. 1.20 "IMPROVEMENTS" shall mean all buildings, structures and improvements now located or hereafter constructed on the Land and all Fixtures and equipment attached to, forming a part of and necessary for the operation of such buildings, structures and improvements as a motel, and such (a) restaurants, bars, banquet, meeting and other public areas, (b) commercial space, including concessions and shops, (c) parking space, (d) storage and services areas, (e) recreational facilities and areas, (f) public grounds and gardens, (g) permanently affixed signage and (h) other facilities and appurtenances, as necessary or desirable for the operation of the Improvements as a motel in accordance with the terms and conditions of this Lease. 1.21 "INSURED CASUALTY" shall have the meaning ascribed to such term in Article 10 hereof. 1.22 "LAND" shall mean that certain real property consisting of the Premises described in the Reference Page and legally described on Exhibit A attached hereto, together with all easements and rights benefitting or appurtenant to such real property. 1.23 "LANDLORD" shall mean PMC Commercial Trust, a Texas real estate investment trust, and its successors and assigns. 4 1.24 "LEASE YEAR" shall mean a full calendar year, provided that the first and last Lease Years shall be determined in accordance with Section 2.3 hereof. 1.25 "LEGAL REQUIREMENTS" shall have the meaning ascribed to such term in Section 7.4 hereof. 1.26 "MASTER AGREEMENT" shall mean the agreement made and entered into as of June ___, 1998 by and among PMC Commercial Trust, Amerihost Properties, Inc. and AmeriHost Inns, Inc. 1.27 "NET OPERATING INCOME" shall mean Room Revenues and Sundry Revenues, less Operating Expenses, but specifically excludes any and all income derived by reason of the occurrence of a Capital Event. 1.28 "NET WORTH" shall mean Landlord's net worth which shall be equal to the excess of Landlord's assets over its liabilities as determined in accordance with GAAP. 1.29 "OPERATING EQUIPMENT" shall mean (a) all operating equipment required for the operation of a motel, including chinaware, glassware, linens, silverware, utensils, uniforms, smallwares, telephone equipment, computers and all other similar items, and (b) all replacements, substitutions and additions of and to all of the foregoing. 1.30 "OPERATING EXPENSES" shall mean, for any applicable period, all expenses incurred by the Tenant in connection with the operation of the Project in aggregate during such period determined in accordance with GAAP, which operating expenses shall be deemed to include a reserve of four percent (4%) of Room Revenues for fixtures, furnishings and equipment and capital expenditures, and a management fee of four percent (4%) of Room Revenues, provided, however that "Operating Expenses" shall exclude capital expenditures, depreciation, amortization expenses and interest expense but shall include administrative and general expenses, management fees, marketing expenses, maintenance expenses, energy costs, real and personal property taxes and insurance premiums, as such terms are described and accounted for by Tenant in the ordinary course of its business and in accordance with the financial statements periodically provided by Tenant to Landlord in accordance with the provisions hereof. 1.31 "OPERATING SUPPLIES" shall mean all food, beverages and other consumable items used in the operation of a motel, such as fuel, soap, cleaning materials, matches, stationery, brochures, folios and all other similar items, together with all substitutions and replacements thereto. 5 1.32 "PERMITS" shall have the meaning ascribed to such term in Section 7.6 hereof. 1.33 "PERMITTED USE" shall mean the use of the Project as a motel in compliance with all Legal Requirements and the terms and conditions of this Lease. 1.34 "PROHIBITED CASUALTY" shall have the meaning ascribed to such term in Article 10 hereof. 1.35 "PROHIBITED TAKING" shall have the meaning ascribed to such term in Section 11.1 hereof. 1.36 "QUALIFIED INVESTMENTS" shall mean any one or more of the following obligations or securities: (i) direct obligations of, and obligations fully guaranteed by, the United States of America or any agency or instrumentality of the United States of America the obligations of which are backed by the full faith and credit of the United States of America, excluding any principal-only or interest-only stripped mortgage pass-throughs and provided that any obligations of any such agency or instrumentality must be guaranteed as to timely payment of principal and interest; (ii) demand and time deposits in, certificates of deposits of, or bankers' acceptances issued by, any depository institution or trust company incorporated under the laws of the United States of America or any state thereof and subject to supervision and examination by federal or state banking authorities, so long as at the time of such investment or contractual commitment providing for such investment the commercial paper or other short-term debt obligations of such depository institution or trust company (or, in the case of a depository institution which is the principal subsidiary of a holding company, the commercial paper or other short-term debt obligations of such holding company) have a credit rating not lower than the second hightest rating category from a nationally recognized rating agency; (iii) commercial paper (including both non-interest-bearing discount obligations and interest-bearing obligations payable on demand or on a specified date not more than 270 days after the date of issuance thereof) having the highest commercial paper rating from a nationally recognized rating agency; (iv) money market funds registered under the Investment Company Act of 1940, as amended, having a credit rating, at the time of such investment, not lower than the highest rating category from a nationally recognized rating agency. 6 1.37 "RELATED PARTY" shall mean a person or entity who controls, is controlled by or is under common control with another person or entity. 1.38 "RENT" shall mean Base Rent and Additional Rent. 1.39 "ROOM REVENUES" shall mean all revenues, receipts, and income of any kind derived directly or indirectly by Tenant from or in connection with the rental of guest rooms or suites, whether to individuals, groups or transients, at the Project, whether on a cash basis or credit, paid or collected, determined in accordance with generally accepted accounting principles, excluding the following: (a) The amount of all credits, rebates or refunds to customers, guests or patrons, and all service charges, finance charges, interest and discounts attributable to charge accounts and credit cards, to the extent the same are paid to Tenant by its customers, guests or patrons, or to the extent the same are paid for by the Tenant to, or charged to Tenant by, credit card companies; (b) All sales taxes or any other taxes imposed on the rental of such guest rooms or suites; (c) Gratuities or service charges actually paid to employees; (d) Proceeds of business interruption and other insurance; and (e) Revenues from the sale of food and beverage or Sundry Revenues. 1.40 "STATE" shall mean the state in which the Project is located. 1.41 "SUNDRY REVENUES" shall mean all revenues, receipts, and income derived from the Project's meeting rooms, telephones, TV and movie rentals, check room, washroom, laundry, valet, vending machines, and other motel related operation sources not specified herein as Room Revenues or food and beverage revenues. 1.42 "TAX CODE" shall mean the Internal Revenue Code of 1986, as amended. 1.43 "TENANT" shall mean AmeriHost Inns, Inc., a Delaware corporation, and its successors and permitted assigns. 7 ARTICLE II DEMISE; TERM; LEASE YEAR 2.1 DEMISE. (a) Subject to the terms and conditions of this Lease, Landlord leases to Tenant and Tenant hereby leases from Landlord, the Land, Improvements, FF&E and Operating Equipment. (b) It is the intent of Landlord and Tenant that Tenant have uninterrupted control in the operation of and business conducted at the Project so long as no Event of Default has occurred and is continuing. Without limiting any of Landlord's or Tenant's rights hereunder, Tenant shall have absolute discretion in the determination of room rates and rates and charges to guests of the Project for other motel related services available at the Project and in determination of the terms of guest admittance to the Project, use of rooms for commercial purposes, policies relating to entertainment, labor and food and beverage service and all phases of advertising, publicity and promotion and other matters incidental to the operation of Tenant's business at the Project. 2.2 TERM. The term of this Lease shall be for the Lease Term, unless terminated sooner pursuant to any of the provisions hereof or extended as provided in Section 2.4 hereof. The Lease Term shall commence on the date of this Lease. Tenant's obligation to pay Rent shall commence on the Commencement Date. 2.3 LEASE YEAR. The first Lease Year shall begin on the Commencement Date and shall end on December 31st of the calendar year following the calendar year in which the Commencement Date occurs. The second Lease Year shall begin on the next succeeding January 1st and each Lease Year thereafter during the Lease Term shall consist of a full calendar year, provided that if the Lease Term expires on a date other than December 31, the period of time from January 1 of that calendar year until such expiration date shall be construed as a Lease Year. 2.4 RENEWAL OPTIONS. (a) Provided no Event of Default has occurred or is continuing, the Term of this Lease shall be automatically extended for an additional five (5) years to commence on the day next succeeding the Expiration Date (the "First Renewal Term") and to expire on the day (hereinafter referred to as the "Renewal Term Expiration Date") which shall be the fifth (5th) anniversary of the Expiration Date, unless Tenant delivers notice to Landlord on or before the day which is six (6) months prior to the Expiration Date of its election not to extend the Term of this Lease for the First Renewal Term. If this Lease shall be renewed for the First Renewal Term, it shall be upon all of the terms and conditions of this Lease. 8 (b) Provided no Event of Default has occurred and is continuing, the Term of this Lease shall be automatically extended for an additional five (5) years to commence on the day next succeeding the Renewal Term Expiration Date (the "Second Renewal Term") and to expire on the day which shall be the fifth anniversary of the Renewal Term Expiration Date, unless Tenant delivers notice to Landlord on or before the day which is six (6) months prior to the Renewal Term Expiration Date of its election not to extend the Term of this Lease for the Second Renewal Term. If this Lease shall be renewed for the Second Renewal Term, it shall be upon all of the terms and conditions of this Lease except that Tenant shall not have any further right to renew the Term of this Lease. ARTICLE III RENT AND OTHER CHARGES 3.1 BASE RENT. Tenant shall pay Base Rent commencing on the Commencement Date. Base Rent shall be payable in advance in monthly installments as set forth on Schedule I on or before the first day of each calendar month. Base Rent for any period during the Lease Term which is less than one (1) month shall be a pro-rata portion of the applicable monthly installment. If the Base Rent is not paid within two (2) business days after written notice from Landlord, a late fee equal to two percent (2%) of one-twelfth (1/12) of the amount of the annual Base Rent shall also be due and payable. 3.2 CONSUMER PRICE INDEX ADJUSTMENTS TO BASE RENT. Effective as of the first day of the first month of the fourth Lease Year and the first day of the first month of each Lease Year thereafter, there shall be made a cost of living adjustment of the annual Base Rent payable under Section 3.1 hereof. (a) Effective as of the first day of the first month of the fourth Lease Year and the first day of first month of each Lease Year thereafter, annual Base Rent as adjusted shall be increased by two percent (2%) and shall be payable monthly until such time as the actual change in the Consumer Price Index can be determined and calculated pursuant to Section 3.2(b) hereof. In the event that the change in the Consumer Price Index calculated pursuant to Section 3.2(b) is less than two percent (2%), Landlord shall, within two (2) business days of such determination, refund the difference to Tenant. (b) For the Fourth (4th) Lease Year and each Lease Year thereafter, in the event the Consumer Price Index for the first month of the Fourth Lease Year and each Lease Year thereafter reflects an increase over the Consumer Price Index for the first month of the immediately prior Lease Year, then the Base Rent herein provided to be paid as of the first day of the first month of such Lease Year and each month thereafter shall be adjusted by multiplying the Base Rent, as previously adjusted for any Consumer Price Index increases, 9 by the lesser of (i) the percentage difference between the Consumer Price Index for the first month of the current Lease Year and the Consumer Price Index for the first month of the prior Lease Year, and (ii) two percent (2%), and the resulting amount shall be added to the Base Rent, which adjusted Base Rent shall be effective as of the first day of the first month of the current Lease Year. Said adjusted Base Rent shall thereafter be payable as set forth on Schedule I until adjusted as of the first month of the next Lease Year. (c) If (i) a significant change is made in the number or nature (or both) of items used in determining the Consumer Price Index, or (ii) the Consumer Price Index shall be discontinued for any reason, the Bureau of Labor Statistics shall be requested to furnish a new index comparable to the Consumer Price Index, together with information which will make possible a conversion to the new index in computing the adjusted Base Rent hereunder. If for any reason the Bureau of Labor Statistics does not furnish such an index and such information, the parties will instead mutually select, accept and use such other index or comparable statistics on the cost of living that is computed and published by an agency of the United States or a responsible financial periodical of recognized authority. 3.3 PAYMENT OF IMPOSITIONS. (a) Tenant shall pay and discharge when due all taxes of every kind and nature (including, without limitation, all real and personal property, franchise, withholding, sales, hotel occupancy, profits and gross receipts taxes), all charges for any easement or agreement maintained for the benefit of any portion of the Project, all general and special assessments, levies, permits, inspection and license fees, all water and sewer rents and charges and all other public charges, levies or taxes, whether of a like or different nature, even if unforeseen or extraordinary, imposed upon or assessed of or against Landlord with respect to the Project, Tenant or any portion of the Project or interest therein, together with any penalties or interest on any of the foregoing (all of the foregoing are hereinafter collectively referred to as the "Impositions"). It is expressly understood and agreed that the Lease is a triple net lease and all taxes expressly including, but not limited to, the Michigan Single Business Tax, but not including any fees required to be paid by Landlord in order for Landlord to maintain its organizational existence or qualification to do business in certain states as required, the net income and employee unemployment and withholding taxes of Landlord, shall be paid by Tenant. Tenant will provide Landlord with copies of all bills and other demands evidencing Impositions promptly following Tenant's receipt of the same and Tenant shall deliver to Landlord (i) copies of receipted bills and cancelled checks evidencing payment of such Imposition if it is a real estate tax or other public charge, and (ii) evidence acceptable to Landlord showing the payment of any other such Imposition. (b) Tenant shall have the right, at Tenant's sole cost and expense, to contest or object to an Imposition in good faith, but such right shall not be deemed or construed in any 10 way as relieving, modifying or extending Tenant's covenant to pay any such Imposition at the time and in the manner provided in this Section 3.3, unless (i) Tenant has given prior written notice to Landlord of Tenant's intent so to contest or object to an Imposition, (ii) Tenant shall diligently and in good faith contest the same by appropriate legal proceedings which shall operate to prevent the enforcement or collection of the same and the sale of the Project or any part thereof; (iii) Tenant shall have furnished to Landlord a cash deposit, or an indemnity bond satisfactory to Landlord with a surety satisfactory to Landlord, in the amount of the Imposition, plus a reasonable additional sum to pay all costs, interest and penalties that may be imposed or incurred in connection therewith, to assure payment of the matters under contest and to prevent any sale or forfeiture of the Project or any part thereof; (iv) Tenant shall promptly pay upon final determination thereof the amount of any such Imposition so determined, together with all costs, interests and penalties which may be payable in connection therewith; (v) notwithstanding the foregoing, Tenant shall immediately upon the request of Landlord pay (and if Tenant shall fail to do so, Landlord may, but shall not be required to, pay or cause to be discharged or bonded against) any such Imposition under protest notwithstanding such contest, if in the reasonable opinion of Landlord, the Project shall be in jeopardy or in danger of being forfeited or foreclosed; and (vi) no Event of Default has occurred and is continuing. Landlord may pay over any such cash deposit or part thereof to the claimant entitled thereto at any time when, in the judgment of Landlord, the entitlement of such claimant is established after Landlord has first requested in writing that Tenant pay such amount and Tenant does not provide evidence of payment within five (5) business days thereafter. Tenant shall indemnify, defend and save Landlord harmless against any loss, cost, expense or damage arising from such contest and shall, if necessary to prevent a sale or other loss or damage to Landlord, pay such tax, assessment or charge under protest and take such other steps as may be necessary in Landlord's determination to prevent any sale or loss of the Project. Subject to the foregoing, and if Landlord shall so request, within twenty (20) days after the date when an Imposition is due and payable Tenant shall deliver to Landlord evidence acceptable to Landlord showing the payment of such Imposition. (c) Landlord shall have the right, on notice to or demand upon Tenant, to pay any Imposition not paid by Tenant after the date such Imposition shall have become due (subject to Tenant's right to contest such Imposition as provided in Section 3.3(b) hereof), and nothing herein contained shall affect such right and such remedy. Any sums paid by Landlord in discharge of any Impositions shall be treated as Additional Rent. (d) Upon the occurrence of an Event of Default under this Lease, Tenant, upon Landlord's request, shall deposit with Landlord monthly (as a deposit and not a payment) an amount equal to one-twelfth of the annual Impositions reasonably estimated by Landlord so that Landlord shall have sufficient funds to pay the Impositions on the first day of the month preceding the month in which they become due. In such event Tenant further agrees to cause all bills, statements or other documents relating to Impositions to be sent or mailed directly to Landlord. Upon receipt of such bills, statements or other documents, and 11 provided Tenant has deposited sufficient funds pursuant to this Section 3.3(d), Landlord shall pay such amounts as may be due thereunder, in a manner so as to take advantage of the maximum discount available, out of the funds so deposited. If at any time and for any reason the funds deposited with Landlord are or will be insufficient to pay such amounts as may then or subsequently be due, Landlord shall notify Tenant and Tenant shall immediately deposit an amount equal to such deficiency with Landlord. Notwithstanding the foregoing, nothing contained herein shall cause Landlord to be obligated to pay any amounts in excess of the amount of funds deposited pursuant to this Section 3.3(d). Landlord shall keep such deposits in a segregated account and shall not commingle said funds with Landlord's own funds. In the event Landlord's Net Worth decreases below $90,000,000, then Tenant shall deposit such funds with a bank or financial institution or other escrow agent selected by Landlord and Tenant, with the consent of Landlord's lender, if such funds have not already been deposited by Landlord with a bank, financial institution or other escrow agent (the "Reserve Agent") to administer the deposit account in accordance with the terms of this Section 3.3(d). All such deposits shall be invested in Qualified Investments. Any earnings on deposits shall remain in the account. If amounts collected by Landlord under this Section 3.3(d) together with earnings thereon exceed amounts necessary in order to pay Impositions, the excess amounts shall be retained in the account and Tenant shall receive a credit for such excess amount toward the next payments due for such Impositions. Except as a result of their gross negligence or willful misconduct, neither Landlord nor any of its officers, directors, shareholders or employees shall be liable for any action taken or omitted to be taken by it hereunder or in connection herewith. Landlord may rely on all certificates, documents and other proofs delivered to it as to the facts therein disclosed and the statements therein made, with respect to such investments, and any such certificate, document or other proof shall be evidence of such facts to protect Landlord in any action that it may or may not take, or in respect of anything it may or may not do, by reason of the supposed existence of such fact. Should Tenant fail to deposit with Landlord sums sufficient to pay such Impositions in full at least thirty (30) days before delinquency thereof after notice from Landlord as hereinabove provided, such failure shall constitute an Event of Default hereunder and Landlord may, at Landlord's election, but without any obligation so to do, advance any amounts required to make up the deficiency, which advances, if any, shall be treated as Additional Rent. Upon expiration or any earlier termination of the Lease Term, and except in case of termination due to an Event of Default, the sums held by Landlord under this Section 3.3(d) shall be allocated between Landlord and Tenant as of such expiration or termination date based upon the periods with respect to which such sums are due and payable, and Landlord shall be entitled to retain such portion as represents amounts due and payable up to such termination or expiration date, and the balance shall be returned to Tenant. (e) In compliance with Landlord's Net Worth requirement, on the Commencement Date and within 120 days after the end of each fiscal year beginning with the fiscal year ending December 31, 1998, the Landlord shall deliver to the Tenant a copy of its annual audited financial statements which have been audited by a nationally 12 recognized firm of independent public accountants. Such financial statements shall include a balance sheet, income statement, statement of retained earnings, statement of stockholder's equity and statement of cash flows and shall be in comparative form. 3.4 UTILITIES AND OPERATING EXPENSES. Tenant shall pay or cause to be paid when due, all charges, fees, assessments and related costs for public utility services (including, without limitation, gas, water, sewer, electricity, light, power, telephone, cable and other communication services and refuse and garbage collection) used, rendered or supplied in connection with the Project throughout the Lease Term. Tenant shall also pay or cause to be paid when due all other costs and expenses in connection with operating the Project in accordance with the terms and conditions hereof including, but not limited to, costs and expenses for personnel, Operating Supplies, Operating Equipment, insurance and compliance with Legal Requirements (subject to the provisions of Section 7.4 hereof). 3.5 LOCATION OF PAYMENTS. Tenant shall for the entire Lease Term pay Rent to Landlord as herein provided at the address set forth in Section 15.8 hereof or at such place as Landlord may from time to time in writing designate. 3.6 NO SETOFF. It is the intention of the parties hereto that the obligations of Tenant hereunder shall be separate and independent covenants and agreements, and that Base Rent, Additional Rent and all other sums payable by Tenant hereunder shall continue to be payable in all events, including any default by Landlord hereunder, and that the obligations of Tenant hereunder shall continue unaffected, unless the requirement to pay or perform the same shall have been terminated pursuant to an express provision of this Lease. This is a net lease and Base Rent, Additional Rent and all other sums payable hereunder by Tenant shall be paid without notice or demand, and without setoff, counterclaim, recoupment, abatement, suspension, deferment, diminution, deduction, reduction or defense, except as otherwise specifically set forth herein. This Lease shall not terminate and Tenant shall not have any right to terminate this Lease, during the Lease Term (except as otherwise expressly provided herein). Tenant agrees that, except as otherwise expressly provided herein, it shall not take any action to terminate, rescind or avoid this Lease notwithstanding (i) the bankruptcy, insolvency, reorganization, composition, readjustment, liquidation, dissolution, winding-up or other proceeding affecting Landlord, (ii) the exercise of any remedy, including foreclosure, under any mortgage, (iii) any action with respect to this Lease (including the disaffirmance hereof) which may be taken by Landlord under the Federal Bankruptcy Code or by any trustee, receiver or liquidator of Landlord or by any court under the Federal Bankruptcy Code or otherwise, (iv) the taking of the Project or any portion thereof (except as specifically provided in this Lease below), (v) the prohibition or restriction of Tenant's use of the Project under any legal requirement or otherwise, (vi) the destruction of the Project or any portion thereof, (vii) the eviction of Tenant from possession of the Project, by paramount title or otherwise, or (viii) default by Landlord under any other agreement between Landlord and Tenant. Tenant waives all rights which are not expressly stated herein but which may now or hereafter otherwise be conferred by 13 law to quit, terminate or surrender this Lease or any of the Project; to any setoff, counterclaim, recoupment, abatement, suspension, deferment, diminution, deduction, reduction or defense of or to Base Rent, Additional Rent or any other sums payable under this Lease, and for any statutory lien or offset right against Landlord or its property, each except as otherwise expressly provided herein. Landlord and Tenant agree that this Lease is a true lease and does not represent a financing arrangement. Each party shall reflect the transaction represented hereby in all applicable books, records and reports (including income tax filings) in a manner consistent with "true lease" treatment rather than "financing" treatment. 3.7 CAPITAL EXPENDITURE RESERVE ACCOUNT AND FF&E RESERVE ACCOUNT (a) Landlord shall establish an account (the "Capital Expenditure Reserve Account") and all amounts deposited therein shall be held by Landlord in accordance with the terms and conditions of this Section 3.7. In the event Landlord's "Net Worth" decreases below $90,000,000, then Landlord and Tenant shall establish and maintain the Capital Expenditure Reserve Account with the Reserve Agent to administer the account in accordance with the terms of this Section 3.7. Tenant shall have no right of withdrawal from the Capital Expenditure Reserve Account except pursuant to the provisions of this Section, and the Capital Expenditure Reserve Account shall be under the exclusive dominion and control of Landlord or its assigns as the case may be. (b) Not later than thirty (30) days prior to the commencement of each Lease Year, including the first Lease Year, Tenant shall submit for approval a proposed annual operating budget (the "Operating Budget") and a capital budget (the "Capital Budget") to Landlord. Landlord shall have twenty (20) days from the date of receipt of the Capital Budget to review and make reasonable comment on the Capital Budget and Landlord and Tenant shall negotiate in good faith the terms of the Capital Budget. If Landlord fails to object or otherwise respond to the proposed Capital Budget within such 20-day period, Landlord shall be deemed to have accepted the Capital Budget as so proposed. The Operating Budget and Capital Budget shall contain the following as applicable: (1) Tenant's reasonable estimate of Room Revenues and Sundry Revenues (including average room rates), operating expenses, and operating profits for the forthcoming Lease Year on a monthly basis, as same may be revised or updated from time to time by Tenant. (2) An estimate of the amounts to be dedicated to the capitalizable repair, replacement or refurbishment of the Improvements from the Capital Expenditure Reserve Account. 14 (3) An estimate of the amount to be dedicated to the repair, replacement or refurbishment of FF&E from the FF&E Reserve Account. (4) A cash flow projection. (5) A marketing plan. (6) Any amount required to be budgeted for matters required by the Franchise Agreement except where the Franchisor is a Related Party of Tenant. (c) Provided there is no existing Event of Default, Tenant is authorized to seek reimbursement from the Capital Expenditure Reserve Account for all items and matters contained in the Capital Budget with respect to capital expenditures for the Improvements submitted by Tenant and reasonably approved by Landlord pursuant to Section 3.7(b). In addition, Tenant is authorized to seek reimbursement from the Capital Expenditure Reserve Account in emergency situations at the Project when necessary, in the Tenant's opinion, to maintain the Project and to provide for its continued operation and for the safety and welfare of the Project guests. Tenant is further authorized to spend up to Five Thousand Dollars ($5,000.00) per year for replacement and improvements on a routine basis, without prior approval. In the event that Tenant desires to make expenditures not contained in the Capital Budget previously approved or such expenditures are above Tenant's authorized per year limit, Tenant shall provide an explanation of the circumstances and need for any requested non-budgeted expenditures from the Capital Expenditure Reserve Account and prior to purchasing must receive Landlord's consent for such expenditures. Nothing contained herein to the contrary shall obligate Landlord to spend or reimburse Tenant for any expenditures in excess of the amount in the Capital Expenditure Reserve Account. Tenant shall, except in emergency situations, obtain the approval of Landlord for all expenditures for the Improvements in any Lease Year which exceed the amount in the Capital Expenditure Reserve Account for that Lease Year. Any amount of the Capital Expenditure Reserve Account not actually expended in any Lease Year shall accumulate in the Capital Expenditure Reserve Account for use in succeeding Lease Years. Subject to Landlord's rights under Section 12.2(e), an amount equal to all cash, instruments, securities and funds, if any, remaining in the Capital Expenditure Reserve Account shall be paid or delivered to Tenant, on the expiration of the Lease Term, provided no Event of Default exists, by Landlord. (d) Tenant shall deposit monthly during the Lease Term (on or before the 15th day of the subsequent month) into the Capital Expenditure Reserve Account an amount which is equal to two percent (2%) of Room Revenues for the prior month. If the required monthly deposit into the Capital Expenditure Reserve Account is not paid within two (2) days after written notice from Landlord, a late fee equal to two percent (2%) of the amount of such deposit shall also be due and payable. 15 (e) Funds in the Capital Expenditure Reserve Account held by Landlord shall be deposited in segregated accounts and may not be commingled with any other funds of Landlord. Cash on deposit in the Capital Expenditure Reserve Account shall be invested in Qualified Investments. All dividends, interest and other income earned from any such investment shall be added to and become a part of the Capital Expenditure Reserve Account, and any losses from such investment shall operate to reduce the Capital Expenditure Reserve Account by the amount of such loss. Except as a result of their gross negligence or willful misconduct, neither Landlord nor any of its officers, directors, shareholders or employees shall be liable for any action taken or omitted to be taken by it hereunder or in connection herewith. Landlord may rely on all certificates, documents and other proofs delivered to it as to the facts therein disclosed and the statements therein made, with respect to Qualified Investments, and any such certificate, document or other proof shall be evidence of such facts to protect Landlord in any action that it may or may not take, or in respect of anything it may or may not do, by reason of the supposed existence of such fact. (f) Tenant shall also deposit monthly into the FF&E Reserve Account an amount equal to two percent (2%) of the Room Revenues for the prior month which payment shall be due and payable on the same terms and conditions as set forth in Section 3.7(d) for payments into the Capital Expenditure Reserve Account. Tenant shall also provide Landlord written evidence of such payment and the receipt thereof by the depository of such account within ten (10) days following each such payment. Tenant shall at all times be deemed to be the owner of the FF&E Reserve Account and, upon the expiration or earlier termination of this Lease, shall have the right to retain all amounts in the FF&E Reserve Account unless an Event of Default has occurred and Landlord is entitled to utilize such account pursuant to Section 12.2(e). (g) If at any time Tenant receives any proceeds from the sale or disposition of any FF&E, all such proceeds shall be deposited in the FF&E Reserve Account. (h) In the event any of the standards of Section 5.1 hereof have not been satisfied and Landlord determines that the FF&E requires repair, replacement or refurbishment, or capital expenditures or major repairs to the Improvements are required, Landlord agrees to make available to Tenant funds in the Capital Expenditure Reserve Account therefor, and, if Tenant shall fail to accomplish such repair, replacement or refurbishment of the FF&E or capital expenditures or major repairs to the Improvements, within thirty (30) days of Landlord's written notice to Tenant requiring the same (or within such longer period of time, as may be reasonable and reasonably necessary to accomplish such work where Tenant is diligently pursuing the work), Landlord shall draw funds from the Capital Expenditure Reserve Account only in the event there are no funds remaining in the FF&E Reserve Account as may be needed to make the required repair, replacement or refurbishment to the FF&E or capital expenditures or major repairs to the Improvements. 16 3.8 SPECIFIED FF&E AND OPERATING EQUIPMENT. Notwithstanding any other provision in this Lease to the contrary, and without affecting any other provision of this Lease, Landlord and Tenant agree solely for purposes of this Section 3.8, that FF&E and Operating Equipment consists of items with economic useful lives of substantially less than the length of the Lease Term and Tenant shall be replacing such items during the Lease Term. From and after the date of the Lease, Landlord shall have no obligation whatsoever to repair, replace, add to, renew or substitute for, any item constituting FF&E or Operating Equipment. All such repairs, replacements, additions, renewals and substitutions and the provision of FF&E or Operating Equipment that is either necessary or desirable in the operation of the Project shall be at the sole cost and expense of Tenant. Tenant at its sole cost and expense shall from time to time replace with other operational equipment or parts any of FF&E, Operating Equipment or the mechanical systems or other equipment included within the term "Improvements" as defined in this Lease which shall have become worn out, obsolete or unusable for the purpose for which it is intended, been taken by condemnation, or been lost, stolen, damaged or destroyed. Tenant shall be deemed to be the owner of all FF&E and Operating Equipment replaced by Tenant during the Lease Term (all such FF&E and Operating Equipment being referred to herein as the "Specified FF&E and Operating Equipment"). Landlord and Tenant further agree that during the Lease Term Tenant shall be deemed to be the owner of such Specified FF&E and Operating Equipment for all purposes of the Tax Code and that Tenant and not Landlord shall be entitled to depreciation or cost recovery deductions with respect thereto; provided, however, that upon the expiration of the Lease Term or earlier termination of this Lease in accordance with the provisions hereof, title to the FF&E and Operating Equipment automatically shall vest in Landlord. Notwithstanding such automatic vesting of title, Tenant agrees to execute and deliver such documents as Landlord may request in order to effectuate or memorialize such transfer. Landlord and Tenant agree to prepare their respective tax returns in a manner consistent with the provisions of this Section 3.8. Nothing in this Section 3.8 should increase the liability of Tenant or limit the rights of Landlord otherwise provided for in this Lease. ARTICLE IV ALTERATIONS AND ADDITIONS 4.1 ALTERATIONS. (a) Tenant will not make or allow to be made any alterations, additions or deletions in or to the Project which are not contained in the Capital Budget and approved by Landlord, without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed, except as set forth in Sections 3.7(c), 4.1 (b) or 7.5 hereof, or except in the case where the failure to make such changes would enable the Franchisor to terminate the Franchise Agreement, except where the Franchisor is a Related Party of Tenant. Subject to the provisions of Section 3.8 hereof, such alterations, physical 17 additions, or improvements shall become part of the Project and the property of the Landlord. (b) Tenant may, at its sole cost and expense, make alterations or additions to the Improvements without Landlord's prior consent, provided (i) such alterations or additions do not affect the structural integrity of the Improvements or adversely affect any of the mechanical or electrical systems of the Improvements; (ii) such alterations or additions are performed by duly licensed and qualified contractors in accordance with all Legal Requirements and in a good and workmanlike manner; (iii) such alterations or additions are completed prior to the expiration of the Lease Term; (iv) such alterations or additions do not reduce the value of the Project; and (v) no Default or Event of Default has occurred and is continuing. 4.2 CONSTRUCTION LIENS. Tenant shall pay when due, and indemnify, defend and hold Landlord harmless from, all claims for labor or materials furnished or alleged to have been furnished to Tenant for use in the Project, which claims are or may be secured by any lien against the Project or any interest therein in accordance with applicable law. Tenant shall not permit any liens to be filed against the Project or any interest therein and shall immediately obtain a release from any lien so filed or remove or discharge the same by bond in form and content reasonably satisfactory to Landlord. In the event that any lien does so attach, and is not released or bonded against as heretofore required, Landlord, in its sole discretion, may pay and discharge the same and relieve the Project therefrom after first requesting in writing Tenant to do so and Tenant does not provide evidence of payment within five (5) business days thereafter, and Tenant agrees to repay and reimburse Landlord upon demand for the amount so paid by Landlord together with interest at the Default Rate from the date such amount is paid until the date such amount is repaid. Nothing in the Lease shall be construed in any way as constituting the consent or request of Landlord to any contractor, subcontractor, laborer, or materialman for the performance of any labor or the furnishing of any materials for any alteration, addition, improvement or repair to the Project, nor as giving Tenant any right, power or authority to contract for or permit the rendering of services or the furnishing of materials that would give rise to the filing of a lien against the Project. 4.3 REMOVAL OF IMPROVEMENTS. All alterations, additions and other improvements by Tenant shall become the property of Landlord and shall not be removed from the Project, unless request is made by Landlord to Tenant to remove those alterations, additions and other improvements which were made without Landlord's approval where such approval was required under this Lease. All (i) moveable trade fixtures and signs installed in the Project by Tenant and paid for by Tenant, other than those items comprising FF&E or Operating Equipment which are replacements, substitutions or additions thereof or thereto made by Tenant and FF&E and Operating Equipment present in the Project as of the date hereof, and (ii) signs, logos and other property, including Operating Equipment and Supplies, bearing the logo of any Franchisor which is not continuing as the Franchisor 18 following the expiration of the Term of this Lease shall remain the property of Tenant or Franchisor, as the case may be, and may be removed upon the expiration of the Lease Term; provided that any of such items as are affixed to the Project and require severance may be removed only if Tenant repairs any damage caused by such removal and that Tenant shall have fully performed all of the terms, conditions and covenants to be performed by Tenant under this Lease. If Tenant fails to remove such items from the Project by the expiration of the Lease Term or earlier termination of this Lease, all such trade fixtures, furniture, furnishings and signs shall become the property of Landlord, unless Landlord elects to require their removal, in which case Tenant shall, at its sole cost and expense, promptly remove the same and restore the Project to its condition on the date of this Lease. The covenants contained in this Section shall survive the expiration or earlier termination of this Lease. ARTICLE V REPAIRS AND MAINTENANCE 5.1 TENANT'S OBLIGATIONS. Tenant is solely responsible for causing the Project to be kept in good condition and state of repair. Landlord shall not be required to make any repair, whether foreseen or unforeseen, or to maintain any of the Project in any way, and Tenant hereby expressly waives the right to make repairs at the expense of the Landlord, which right may otherwise be provided for in any law now or hereafter in effect. Nothing in the preceding sentence shall be deemed to preclude Tenant from being entitled to insurance proceeds or condemnation awards for restoration pursuant to the terms of this Lease. Tenant shall, in all events, make all repairs promptly, and all repairs shall be in good, proper and workmanlike manner. In this regard and by way of example, Tenant shall keep the exterior of the Project and the foundations, roof, and structural portions of the walls and roofs of the Improvements in good condition and repair; Tenant shall also keep the Project and every part thereof and any fixtures, facilities or equipment contained therein (including FF&E and Operating Equipment), in good condition and repair, including, but not limited to, exterior doors, window frames and all portions of the facade area(s), columns, nonstructural walls and partitions, the heating, air-conditioning, ventilating, electrical, lighting, plumbing and sewer systems, and shall make all replacements thereof and of all broken and cracked glass which may become necessary during the Lease Term. Tenant shall provide for all scheduled servicing of the Project and maintain necessary maintenance contracts to assure proper maintenance of the Project. As used in this Section, the term "repairs" shall include replacements and other improvements as are necessary to maintain the Project in as good order and condition. If Landlord is required to make repairs by reason of Tenant's acts or omissions or those of Tenant's employees, agents, invitees, licensees or contractors, and provided that Landlord has first given Tenant thirty (30) days notice of the need for such repairs and Tenant has failed to commence such repairs within said thirty (30) days or has failed thereafter to diligently pursue such repairs and complete all work within a reasonable period of time but immediately upon notice in the event of an 19 emergency (that is, imminent danger of injury to persons or property), Landlord shall have the right, but shall not be obligated, after prior written notice to Tenant to make such repairs or replacements on behalf of and for the account of Tenant and Tenant does not make such repairs or replacements within five (5) business days thereafter. In such event, such work shall be paid for in full by Tenant as Additional Rent. 5.2 TERMINATION FOR DECLINE IN QUALITY. In the event the Landlord determines in the exercise of its reasonable business judgment that there has occurred a material deterioration of the physical condition of a Project, the Landlord shall have the right to obtain an independent quality assessment (the "Quality Assessment") of such Project, conducted by a third party of national reputation in the hotel/motel industry, funded from the Capital Expenditure Reserve Account. The Landlord shall promptly provide to the Tenant a complete copy of the Quality Assessment upon receipt by the Landlord. In the event the rating for the Project from such Quality Assessment is less than a "B" level as compared to a nationally recognized franchise of the same class of motel as the subject Project, the Tenant shall have the right to remedy the reported defects within ninety (90) days of its receipt of the Quality Assessment, provided that in the event such remedy is not susceptible of cure within such 90 day period, the Tenant shall be permitted such time as shall be needed to remedy the defect, with the further provision that the Tenant shall timely commence to cure and shall prosecute such cure to completion. If required by the Landlord, a re-inspection of the subject Project thereafter shall be promptly conducted by the same or comparable inspector. If the initial defective rating of less than "B" is sustained by the re-inspection, the Landlord shall have the right to terminate the Lease upon thirty (30) days' written notice to Tenant, pursuant to and in accordance with Section 12.2 hereof. 5.3 SURRENDER. On the last day of the Lease Term, or on any sooner termination of this Lease, Tenant shall surrender the Project in the same condition as the Project existed on the Commencement Date, ordinary wear and tear and damage by casualty or the elements excepted, with such additions, replacements, betterments, alterations and improvements thereto as permitted hereunder, broom clean, and shall surrender all keys to Landlord. 5.4 RIGHT OF ENTRY. Landlord and its authorized representatives shall have the right to enter the Project (a) upon prior notice to Tenant at all reasonable times to inspect the Land, Improvements, FF&E, Operating Equipment and Operating Supplies or to show the Project to prospective purchasers or tenants, provided any such entry is done in a manner such as to avoid interference with the operation of the Project and, (b) in the event of the existence of an Event of Default hereunder, to make repairs, alterations, improvements or additions as Landlord may reasonably deem necessary, including those to be performed by Tenant, without the same constituting an eviction of Tenant in whole or in part, and Rent shall not abate as a result of such entry. Nothing herein shall imply any duty upon the part of Landlord to do any work which the Tenant may be required to perform under 20 this Lease, and the performance thereof by Landlord shall not constitute a waiver of Tenant's default in failing to perform it. If Tenant is not present to permit entry into the Project, Landlord may, in case of emergency, enter by master key, or may forcibly enter, without rendering Landlord liable therefor, except to the extent of Landlord's gross negligence or willful misconduct. ARTICLE VI HAZARDOUS SUBSTANCES 6.1 NO HAZARDOUS SUBSTANCES. Tenant shall not bring into or permit the existence of any Hazardous Substance on the Project. If Tenant discovers the presence of any Hazardous Substance on or in the Project which is in violation of any Environmental Regulation, Tenant shall promptly give Landlord notice thereof. If during Tenant's occupancy or at any time throughout the Lease Term the existence of a Hazardous Substance is caused or permitted to occur by Tenant or any of Tenant's agents, employees, contractors or invitees, (a) Tenant shall remove such Hazardous Substance and dispose of it as required by any and all applicable Environmental Regulations, or (b) Landlord, if it is advised to remove such Hazardous Substance itself to protect or minimize against any liability to Landlord as a result of the presence of any Hazardous Substance by no less than ten (10) days' notice to Tenant, may elect to remove any Hazardous Substance and dispose of it as required by any Environmental Regulation, in which case Tenant shall pay the entire cost of such disposal within ten (10) days after receipt of a statement for such cost by Landlord, such amount to be treated as Additional Rent. If any Governmental Authority shall require any remedial action or other response with respect to the Project as the result of any Hazardous Substance brought into or permitted by Tenant on or in the Project during the Lease Term, Tenant shall notify Landlord of such action or response and shall Tenant shall be responsible for satisfying the requirements of the applicable Governmental Authority. 6.2 INDEMNITY. Tenant agrees to indemnify, defend, protect and hold Landlord harmless from any and all claims, causes of action, damages, penalties, costs and expenses (including reasonable attorneys' fees, consultant fees and related expenses) which may be asserted against or incurred by Landlord resulting from the presence, release or threatened release of any Hazardous Substance on, in or from the Project during the Lease Term and not caused by Landlord or resulting from or due to any violation or alleged violation during the Lease Term of any Environmental Regulation by Tenant or any of Tenant's agents, employees, contractors or invitees. Tenant's duty to indemnify and hold harmless includes, but is not limited to, proceedings or actions commenced by any Governmental Authority. 6.3 SURVIVAL. The foregoing covenants and indemnifications shall be deemed continuing covenants and indemnifications for the benefit of Landlord and its successors and assigns and shall survive the expiration of the Lease Term or earlier termination of this 21 Lease and shall be in addition to any other obligations or liabilities Tenant may have to Landlord at common law under all statutes and ordinances or otherwise. ARTICLE VII COVENANTS OF TENANT 7.1 USE OF PROJECT. Tenant covenants and agrees that from and after the Commencement Date, and except for reasonable periods of time caused by unforeseeable events beyond Tenant's control or required for remodeling or restoration otherwise permitted hereunder, it shall continuously and without interruption use and occupy the entire Project (and not less than one hundred percent (100%) of the Project except for subleases, licenses and concessions in the ordinary course of business which are permitted and meet the requirements hereunder) solely for the purpose of the Permitted Use and for no other purpose. Tenant will not use or permit the use of the Project in any manner which would result or would with the passage of time result in the creation of any easement or prescriptive right. Tenant shall not use or occupy the Project, or knowingly permit them to be used or occupied, contrary to any statute, rule, order, ordinance, requirement, regulation or certificate of occupancy affecting the same, or which would make void or voidable any insurance then in force with respect thereto or which would make it impossible to obtain fire or other insurance thereon required to be furnished hereunder at Tenant's expense, or which would cause structural injury to the Improvements or cause the value of usefulness of the Project, or any portion thereof, to diminish (reasonable wear and tear excepted), or which would constitute a public or private nuisance or waste, and Tenant agrees that it will promptly, upon discovery of any such use, take all necessary steps to compel the discontinuance of such use. 7.2 CONTINUING COVENANTS. Tenant covenants and agrees with Landlord to: 1. not abandon the Project; 2. maintain the Project and the abutting grounds, sidewalks, roads, parking and landscaped areas in good condition and state of repair; 3. promptly make all necessary repairs, renewals, replacements and additions, to the Project; 4. not commit or suffer waste with respect to the Project; 5. not remove, demolish or in any material respect alter any of the Improvements, FF&E or Operating Equipment, provided that Tenant may (i) remove any FF&E and Operating 22 Equipment in accordance with the provisions of Section 7.5 hereof and (ii) make alterations in accordance with Section 4.1 hereof; 6. subject to any Legal Requirement, not make, install or permit to be made or installed, any alterations or additions to the Project if doing so will violate the terms and conditions of this Lease unless approved in advance by Landlord in writing; 7. not make, suffer or permit any nuisance to exist on the Project; 8. conduct its business in a manner consistent with the purpose and character of the Project and in accordance with the standards for operating the type of business currently operated in the Project; 9. keep the Land and Improvements clean and attractive in appearance; 7.3 OPERATING SUPPLIES. On the Commencement Date and thereafter during the Lease Term, Tenant, at its sole cost and expense, shall furnish and maintain at the Project all Operating Supplies necessary or desirable for the operation of the Project in accordance with the provisions of this Lease. Tenant, at its sole cost and expense, shall maintain and replace the Operating Supplies so that the same quantities of such items that existed on the Commencement Date shall be left for the use of Landlord on the date of the expiration of the Lease Term. 7.4 LEGAL REQUIREMENTS. Subject to the provisions of Section 7.9 hereof, Tenant shall comply with, or cause to be complied with, and conform to all present and future laws, statutes, codes, ordinances, orders, judgments, decrees, injunctions, rules, regulations and requirements pertaining to the Project including any applicable insurance, environmental, zoning or building, use and land use laws, ordinances, rules or regulations and all covenants, restrictions and conditions now or hereafter of record which may be applicable to it or to any of the Project, or to the use, manner of use, occupancy, possession, operation, maintenance, alteration, construction, repair or reconstruction of any of the Project (collectively, the "Legal Requirements"). 7.5 FF&E AND OPERATING EQUIPMENT. Any additions to furniture, fixtures and equipment located at the Project shall become part of the FF&E and Operating Equipment. Upon the termination of this Lease, by expiration of the Lease Term or otherwise, Tenant shall, at its sole cost and expense, cause all of the items of FF&E and Operating Equipment 23 to be in proper working order and in good condition (ordinary wear and tear and damage by casualty and the elements excepted). Any such item which requires replacement prior to termination of this Lease shall be replaced with an item of the same utility and quality by Tenant, at its sole cost and expense, and Tenant shall notify Landlord in writing of such replacement promptly upon the occurrence of the same. 7.6 PERMITS AND LICENSES. From and after the Commencement Date, Tenant, at its sole cost and expense and in its name, shall obtain and maintain all licenses and permits necessary or desirable for the operation of the Project in accordance with the provisions of this Lease required by any Governmental Authority (collectively, the "Permits"). If Tenant, for any reason whatsoever, is denied any necessary Permit or if any necessary Permit shall, at any time be revoked as a result of the acts or inaction of Tenant and is not reinstated within a reasonable period of time, the same shall constitute an Event of Default. 7.7 TENANT'S OBLIGATION TO MANAGE. At all times during the term hereof, Tenant or a Related Party or a manager reasonably acceptable to Landlord shall manage and operate the Project. 7.8 PERMITTED CONTESTS. Tenant shall have the right to contest the amount or validity of any Legal Requirement or insurance requirement or any lien, attachment, levy, encumbrance, charge or claim ("Claims") by appropriate legal proceedings in good faith and with due diligence (but this shall not be deemed or construed in any way to relieve, modify or extend Tenant's covenants to pay or its covenants to cause to be paid any such charges at the time and in the manner as in this Section provided), on condition, however, that such legal proceedings shall not operate to relieve Tenant from its obligations hereunder and shall not cause the sale or risk the loss of any portion of the Project, or cause Landlord or Tenant to be in default under any mortgage, deed of trust, security deed or other agreement encumbering the Project or any interest therein. Upon the request of Landlord, Tenant shall either (a) provide a bond or other monetary assurance reasonably satisfactory to Landlord that all Claims which may be assessed against the Project together with interest and penalties, if any, thereon will be paid, or (b) deposit within the time otherwise required for payment with a bank or trust company as trustee upon terms reasonably satisfactory to Landlord, as security for the payment of such claims, money in an amount sufficient to pay the same, together with interest and penalties in connection therewith, as to all Claims which may be assessed against or become a Claim on the Project or any part thereof, in said legal proceedings. Tenant shall furnish Landlord and any lender of Landlord with reasonable evidence of such deposit within five (5) days of the same. Landlord agrees to join in any such proceedings if the same be required legally to prosecute such contest of the validity of such Claims; provided, however, that Landlord shall not thereby be subjected to any liability for the payment of any costs or expenses in connection with any proceedings brought by Tenant; and Tenant covenants to indemnify, defend and save harmless Landlord from any such costs or expenses. Tenant shall be entitled to any refund of any Claims and such charges and penalties or interest thereon which have been 24 paid by Tenant or paid by Landlord and for which Landlord has been fully reimbursed. In the event that Tenant fails to pay any Claims when due or to provide the security therefor as provided in this Section and diligently to prosecute any contest of the same, Landlord may, upon ten days advance notice to Tenant, pay such charges together with any interest and penalties and the same shall be repayable by Tenant as Additional Rent provided, however, that should Landlord reasonably determine that the giving of such notice would risk loss to the Project then Landlord shall give such notice as is practical under the circumstances. Landlord reserves the right to contest any of the Claims at its expense not pursued by Tenant. Landlord and Tenant agree to cooperate in coordinating the contest of any Claims. ARTICLE VIII RESERVED ARTICLE IX INSURANCE AND INDEMNITIES 9.1 INSURANCE COVERAGES. Tenant shall obtain, at its sole cost and expense, beginning on the Commencement Date and shall maintain through the Lease Term, the following insurance coverages: (a) A policy of commercial general liability insurance (including Insurance Service Office (ISO) forms and endorsements or their equivalent) naming Landlord, Tenant and any other party designated by Landlord as an additional insured, to insure against injury to property, person or loss of life arising out of the ownership, use, occupancy or maintenance of the Project with limits of general liability not less than $10,000,000 for death and/or bodily injury, personal injury, advertising injury and property damage. The policy shall contain supplemental endorsements covering contractual liability as provided in an ISO liability policy under the definition of insured contract. (b) A policy providing commercial property insurance containing the insuring agreement "Cause of Loss-Special Form" or its equivalent, together with such endorsements as may be deemed advisable by Landlord to insure the Improvements, Tenant's leasehold improvements, merchandise, trade fixtures, furnishings, equipment and personal property, and naming Landlord and any other party designated by Landlord in connection with a securitization or financing of the Project as an additional insured. Such 25 policy shall provide coverage in an amount not less than the full replacement cost of the Project. An "Agreed Amount Clause" waiving the coinsurance clause must be included, as well as, if commercially reasonable and obtainable, flood and earthquake coverage at limits equal to the maximum foreseeable loss at the location of the Project. Such coverage must include the expense of tearing down any Improvements, including the cost of removing its debris and increased cost of construction coverage. (c) A policy of workers' compensation insurance must be provided that insures the benefits required by the State law and includes coverage B Employer's Liability. The Employer's liability limits must be at least: Bodily Injury By Accident $1,000,000 Each Accident Bodily Injury By Disease $1,000,000 Policy Limit Bodily Injury By Disease $1,000,000 Each Employee Landlord does not, by requiring such insurance or by any other act or event, assume or undertake liability for any work-related injuries or death to Tenant or Tenant's employees. (d) If Tenant commits or permits any activity or the placing or operation of any equipment on or about the Project creating unusual hazards, Tenant shall promptly upon notice or demand from Landlord, procure and maintain in force, during such activity or operation, insurance sufficient to cover the risks created thereby. Landlord's demand for unusual hazard insurance shall not constitute a waiver of any right Landlord may have to demand the removal or cessation of such activity or operation. (e) In the event Tenant is in the business of manufacturing, distributing, selling, servicing or furnishing alcoholic beverages, a policy of alcoholic beverage and liquor liability insurance naming Landlord and any other party designated by Landlord in connection with the securitization or financing of the Project as an additional insured with limits of not less than $10,000,000 per occurrence. The limits may be obtained through a primary and an excess policy. (f) A policy of business interruption insurance with an "Extra Expense" insuring agreement naming Landlord and any other party designated by Landlord as an additional insured providing coverage of not less than twelve (12) months of Rent and other business income. (g) All other insurance, if any, customarily maintained by businesses of like type, or required by any Legal Requirement to be carried or maintained by Tenant, or as otherwise may be reasonably required by Landlord, including but not limited to, boiler and 26 machinery coverage, innkeepers liability coverage, automobile and garagekeepers liability coverage, service interruption coverage, food spoilage coverage and coverage for employee dishonesty and loss of money and securities. Tenant may comply with the provisions of this Article by providing the foregoing insurance coverage under a blanket policy covering other Projects and properties of Tenant as well as the Project, provided that the amount of insurance thereunder allocated to the Project is not less than that required herein, and the blanket policy otherwise complies as to endorsements and coverage with the provisions of this Article. Evidence of insurance in compliance with this Section 9.1 shall be provided to Landlord fifteen (15) days prior to the Commencement Date and, with respect to any renewal policy, thirty (30) days prior to the expiration of the existing policy. A copy of such insurance policies will be provided by Tenant to Landlord upon Tenant's receipt from its insurance company. 9.2 INSURANCE POLICIES. Insurance required under Section 9.1 shall be written by companies duly qualified to do business in the state where the Project is located and shall be reasonably satisfactory in all respects to Landlord, and, if required, the holder of any mortgage or deed of trust against the Project. The companies providing such insurance shall deliver to Tenant and Landlord copies of such policies or certificates evidencing the existence and amount of such insurance. No such policy shall be cancelable or subject to reduction of coverage or modification except after twenty (20) days prior written notice to Landlord and such other persons designated by Landlord. At least ten (10) days prior to the expiration of such policies, Landlord may on notice to Tenant order such insurance and charge the cost to Tenant as Additional Rent. Tenant shall not do, or permit anything to be done which will invalidate the insurance policies furnished pursuant to Section 9.1 or by Landlord and shall comply with all requirements imposed by Landlord's insurers, unless such compliance is expressly waived in writing by Landlord. Landlord may from time to time require that the policy limits of any or all such insurance be increased to reflect the effects of inflation and changes in normal commercial insurance practices. Each insurance policy referred to above shall, to the extent applicable, contain standard non-contributory mortgagee clauses in favor of any mortgagee of Landlord. Each policy required to be carried by Tenant shall also provide that any loss otherwise payable thereunder shall be payable notwithstanding (i) any act or omission of Landlord or Tenant which might, absent such provision, result in a forfeiture of all or a part of such insurance payment, (ii) the occupation or use of any of the Project for purposes more hazardous than permitted by the provisions of such policy, (iii) any foreclosure or other action or proceeding taken by any mortgagee of Landlord pursuant to any provision of the mortgage held by such mortgagee upon the happening of an event of default therein, or (iv) any change in title or ownership of any of the Project. Tenant shall pay as they become due all premiums for the insurance required by this Lease and shall renew or replace each policy. In the event of Tenant's failure to comply with any of the foregoing requirements of this Section 9.2 within the earlier of five (5) days 27 after receipt of notice of impending cancellation or five (5) days of written notice from Landlord, Landlord shall be entitled to procure such insurance. Any sums expended by Landlord in procuring such insurance shall be repaid by Tenant, together with interest thereon at the Default Rate, from the time of payment by Landlord until fully paid by Tenant immediately upon written demand therefor by Landlord. 9.3 EXEMPTION OF LANDLORD FROM LIABILITY. Tenant hereby agrees that Landlord shall not be liable and Tenant hereby waives all claims against Landlord for injury to Tenant's business or any loss of income or other consequential damages or for damage to the inventory, fixtures, furnishings, improvements or other property of Tenant, Tenant's employees, invitees, customers, sublessees, agents, occupants, contractors, or injury to the person of Tenant, Tenant's employees, agents, contractors, occupants, invitees, customers, sublessees, or any other person in or about the Project, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, sprinklers, wires, appliances, plumbing, air-conditioning or lighting fixtures, or from any other cause whatsoever, whether said damage or injury results from conditions arising upon the Project, or from other sources or places, and regardless of whether the cause of such damage or injury or the means of repairing the same is inaccessible to Tenant. Landlord shall not be liable for any damages arising from any act or neglect of any other tenant of the Project. 9.4 INDEMNIFICATION. Tenant shall indemnify, defend, protect and hold harmless Landlord from and against any and all claims arising from Tenant's use of the Project, or from the conduct of Tenant's business or from any activity, work or things done, permitted or suffered by Tenant in or about the Project or elsewhere, except to the extent such claim arises in whole or in part out of any gross negligence or intentional misconduct of Landlord (and then only to the extent such claim is attributable to the gross negligence or intentional misconduct of Landlord), and shall further indemnify, defend and hold harmless Landlord from and against any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any negligence of the Tenant, or any of Tenant's sublessees, agents, customers, invitees, contractors, occupants, or employees, and from and against all costs, attorneys' fees, expenses and liabilities incurred in the defense of any such claim or any action or proceeding brought thereon. In case any action or proceeding be brought against Landlord by reason of any such claim, Tenant, upon notice from Landlord, shall defend the same at Tenant's expense by counsel reasonably satisfactory to Landlord (but such approval shall not constitute a waiver of Landlord's right to object to any dual or conflicting representation by such counsel that is otherwise objectionable under any applicable code of professional conduct or ethics). Landlord hereby approves of any counsel engaged by Tenant's insurance carrier. The provisions of this Section shall survive expiration of the Lease Term or the earlier termination thereof. 28 9.5 MUTUAL WAIVER OF SUBROGATION. Nothing in this Lease shall be construed so as to authorize or permit any insurer of Landlord or Tenant to be subrogated to any right of Landlord or Tenant against the other party arising under this Lease. Landlord and Tenant each hereby release the other to the extent of any loss required to be insured against by either of the parties under the terms of this Lease, whether or not such insurance has actually been secured, and to the extent of their respective insurance coverage actually received for any loss or damage caused by any such casualty, even if such incidents shall be brought about by the fault or negligence of either party or persons for whose acts or negligence the other party is responsible. Landlord and Tenant shall, to the extent permitted by their respective insurers, each obtain appropriate waivers of subrogation from their respective insurance carriers giving effect to this Section. 9.6 INSURANCE PREMIUM ESCROW. In the case of a Default or an Event of Default hereunder, Tenant, upon Landlord's request, shall deposit with Landlord, as a deposit and not a payment, an amount equal to one-twelfth of the estimated aggregate annual insurance premiums on all policies of insurance required by this Lease on the first day of each month. Upon Landlord's request, Tenant shall cause all bills, statements or other documents relating to the foregoing insurance premiums to be sent or mailed directly to Landlord. Upon receipt of such bills, statements or other documents, and providing Tenant has deposited sufficient funds pursuant to this Section, Landlord shall pay such amounts as may be due thereunder out of the funds so deposited. If at any time and for any reason the funds deposited with Landlord are or will be insufficient to pay such amounts as may then or subsequently be due, Landlord shall notify Tenant and Tenant shall immediately deposit an amount equal to such deficiency with Landlord. Notwithstanding the foregoing, nothing contained herein shall cause Landlord to be obligated to pay any amounts in excess of the amount of funds deposited with Landlord pursuant to this Section. Landlord shall maintain all deposits in a segregated account and shall not commingle said funds with its own funds. All deposits shall be invested in Qualified Investments. In the event Landlord's Net Worth decreases below $90,000,000 then Tenant shall deposit funds with the Reserve Agent to administer the deposit account in accordance with the terms of this Section 9.6. Any earnings on deposits shall remain in the account to be applied against future premiums. Landlord may impound or reserve for future payment of insurance premiums such portion of such payments or earnings thereon as Landlord in its reasonable discretion may deem proper. Should Tenant fail to deposit sums sufficient to pay in full such insurance premiums at least thirty (30) days before delinquency thereof, Landlord may, at Landlord's election, but without any obligation so to do, advance any amounts required to make up the deficiency, which advances, if any, shall be treated as Additional Rent. Subject to Section 12.2(e), upon expiration of the Lease Term and payment of all sums due Landlord under this Lease, all remaining sums held under this Section 9.6 if any, shall be remitted to Tenant. 29 ARTICLE X DAMAGE OR DESTRUCTION 10.1 REPORTS ON INSURANCE CLAIMS. Tenant shall promptly investigate and make a complete and timely written report to the appropriate insurance company as to all accidents, claims for damage relating to the ownership, operation and maintenance of the Project, any damage or destruction to the Project and the estimated cost of repair thereof and shall prepare any and all reports required by any insurance company in connection therewith. Tenant shall provide Landlord notice of any such accident, claim, damage, or destruction promptly after the occurrence thereof and at least on a quarterly basis. All such reports shall be timely filed with the insurance company as required under the terms of the insurance policy involved, and a final copy of such report shall be furnished to Landlord. If no Event of Default has occurred and is continuing, Tenant shall be authorized to adjust, settle or compromise any insurance loss, or to execute proofs of such loss, in the aggregate amount of $25,000 or less, with respect to any single casualty or other event, however, any single casualty loss or other event over $25,000 shall require Landlord's consent and approval. 10.2 INSURANCE PROCEEDS. All insurance proceeds payable by reason of any loss or damage to the Project, or any portion thereof, and insured under any policy of insurance required by Article 9 of this Lease shall be paid to Landlord and held in trust by Landlord in an interest-bearing account, shall be made available, if applicable, for reconstruction or repair, as the case may be, of any damage to or destruction of the Project, or any portion thereof, and, if applicable, shall be paid out by Landlord from time to time for the reasonable costs of such reconstruction or repair upon satisfaction of reasonable terms and conditions specified by Landlord or its construction consultants. If neither Landlord nor Tenant is required or elects to repair and restore, and the Lease is terminated as described in Section 10.3, all such insurance proceeds shall be retained by Landlord and salvage resulting from any risk covered by insurance shall belong to Landlord. 10.3 RECONSTRUCTION IN THE EVENT OF DAMAGE OR DESTRUCTION. (a) If during the Term the Project is totally or partially destroyed by a risk covered by the insurance described in Article IX and the Project thereby is rendered unsuitable for its primary intended use as a motel facility and no Event of Default has occurred and is continuing Tenant, at its sole option shall either (i) restore the Project to its original specifications utilizing materials of similar or superior quality so that it is no longer unsuitable for its primary intended use as a motel facility and all obligations of Tenant hereunder shall remain unabated during such restorations or (ii) terminate this Lease as of the date of the casualty and neither Landlord or Tenant shall have any further liability hereunder, except for any liabilities which have arisen prior to or which survive such 30 termination, and Landlord shall be entitled to retain all insurance proceeds. Notwithstanding the above, if the ratio of the average Net Operating Income to Base Rent for the Project for the prior three (3) years of this Lease does not equal or exceed 1.1 to 1.0, then Tenant must obtain Landlord's consent to Tenant's election to either restore the Project or terminate the Lease. (b) If during the Term the Project is partially destroyed by a risk covered by the insurance described in Article IX, but the motel is not thereby rendered unsuitable for its primary intended use as a motel facility Tenant shall restore the Project to substantially the same condition as existed immediately before the damage or destruction and otherwise in accordance with this terms of the Lease. Such damage or destruction shall not terminate this Lease; provided, however, that if Tenant cannot within a reasonable time obtain all necessary government approvals, including building permits, licenses and conditional use permits, after diligent efforts to do so, to perform all required repair and restoration work and to operate the Project for its primary intended use as a motel facility in substantially the same manner as that existing immediately prior to such damage or destruction and otherwise in accordance with the terms of the Lease either Landlord or Tenant may terminate this Lease upon notice to the other. (c) Upon Landlord's final approval of the reconstruction or repair of the Project, any excess proceeds of insurance and salvage value resulting from any risk covered by insurance remaining after the completion of the restoration or reconstruction of the Project, as hereinafter set forth, shall be paid to Tenant. (d) In the event that any damage or destruction shall occur at such time as Tenant shall not have maintained third-party insurance in accordance with this Lease, Tenant shall pay to the Landlord the amount of the proceeds that would have been payable had such insurance program been in effect. 10.4 ABATEMENT OF RENT. Any damage or destruction due to casualty notwithstanding, this Lease shall remain in full force and effect and Tenant's obligation to pay Rent required by this Lease shall remain unabated by any damage or destruction. ARTICLE XI CONDEMNATION 11.1 TAKING OF WHOLE. In the event (a) the whole of the Project shall be taken or condemned for a public or quasi-public use or purpose by a competent authority or sold by Landlord in lieu thereof, (b) such a portion of the Project or access thereto shall be taken, condemned or sold in lieu thereof so that the balance cannot be used for the same purpose and with substantially the same utility to Tenant as immediately prior to such 31 taking, or (c) the Project or any portion thereof or access thereto shall be taken or condemned for a public or quasi-public use or purpose by a competent authority or sold by Landlord in lieu thereof and Tenant is unable to repair, rebuild or restore the balance of the Project under the terms of any agreement to which it is a party, or under any Legal Requirement or other governmental order to which Landlord or the Project is subject or to such condition that the Project can be operated for the same purpose and substantially the same utility to Tenant as immediately prior to such taking (a "Prohibited Taking"), this Lease shall terminate upon notice from Landlord on Tenant, effective upon delivery of possession to the condemning authority or its assignee. The award, compensation or damage (the "Award") for the value of the fee interest in the Landlord in the Improvements shall be paid to and be the sole property of Landlord. The Award as compensation for diminution of the value of the leasehold estate shall be paid to and be the sole property of Tenant. Tenant shall have no claim against Landlord by reason of such taking or termination. Tenant shall continue to pay Rent and other charges hereunder until the Lease is terminated. 11.2 PARTIAL TAKING. In the event (a) only a part of the Project is taken or condemned but the Project or the part remaining can still be used for the same purpose and with substantially the same utility to Tenant as immediately prior to such taking, or (b) a Prohibited Taking has not occurred, this Lease shall not terminate and Tenant shall repair and restore the remaining Improvements provided the cost and expense of such repair and restoration does not exceed the amount of the Award made available to Tenant and Base Rent shall be adjusted in proportion to the lost value of the Project to Tenant for Tenant's purposes. If the cost of such repair or restoration exceeds the amount of the Award made available, Tenant may terminate this Lease by giving Landlord written notice of termination. 11.3 TENANT'S AWARD. Tenant may claim and seek to recover from the condemning authority such compensation as may otherwise be separately awarded to Tenant for any damage to Tenant's business by reason of such condemnation and for any cost or loss incurred by Tenant in removing or relocating Tenant's fixtures, furnishings, Operating Equipment and Operating Supplies. Except with respect to an award or payment to which Tenant is entitled pursuant to the foregoing provisions of this Section, no agreement with any condemnor in settlement of or under threat of any condemnation shall be made by either Landlord or Tenant without the written consent of the other, and of Landlord's mortgagee, if the Project is then subject to a mortgage, which consent shall not be unreasonably withheld or delayed provided such award or payment is applied in accordance with this Lease. No award made to Tenant may have the effect of diminishing any award otherwise available to Landlord. 32 ARTICLE XII DEFAULTS; REMEDIES 12.1 DEFAULTS. The occurrence of any one or more of the following events shall constitute a default and breach of this Lease by Tenant and each such event shall be referred to herein as an "Event of Default": (a) The vacation or abandonment of the Project (not operating for business in the Project for fourteen (14) consecutive days), except to the extent caused by casualty or condemnation or during a renovation or acts of God or third parties not reasonably foreseeable and not within the control of Tenant. (b) The failure of Tenant to make any payment of Rent or any other payment required to be made by Tenant under this Lease, within ten (10) days after written notice from Landlord. (c) The failure by Tenant to observe or perform any of the terms, covenants or conditions of this Lease to be observed or performed by Tenant (other than those described in Sections 12.1(a), (b), (d), (e) or (f) hereof) where such failure shall continue for a period of thirty (30) days after written notice thereof from Landlord to Tenant (or without notice in case of emergency or a hazardous condition or in case any fine, penalty, interest or cost may otherwise be imposed or incurred). Notwithstanding the foregoing, Tenant shall have such longer period of time in excess of thirty (30) days after written notice as may be reasonably necessary, in which to cure such failure in the event such failure is reasonably susceptible to cure, Tenant commences such cure within thirty (30) days of said notice and at all times diligently pursues such cure. (d) (i) The making by Tenant or any entity holding a controlling interest in Tenant of any general assignment, or general arrangement for the benefit of creditors; (ii) the filing by or against Tenant or any entity holding a controlling interest in Tenant of a petition to have Tenant or such controlling entity adjudged a bankrupt or a petition for reorganization or arrangement under any law relating to bankruptcy (unless, in the case of a petition filed against Tenant or such controlling entity, the same is dismissed within one-hundred and twenty (120) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Tenant's assets located at the Project or of Tenant's interest in this Lease, where possession is not restored to Tenant within one-hundred and twenty (120) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Tenant's assets located at the Project or of Tenant's interest in this Lease or in the Project, where such seizure is not discharged within one-hundred and twenty (120) days. 33 (e) The existence of any default (a "Franchise Default") by Tenant under the Franchise Agreement, provided, however, such Franchise Default shall not constitute an Event of Default under this Lease if (i) the Franchisor has not elected to exercise any remedy under the Franchise Agreement unless the Franchisor is a Related Party of Tenant, (ii) the Franchise Default is reasonably susceptible to cure, (iii) Tenant commences such cure within thirty (30) days, (iv) Tenant diligently pursues such cure and (v) the Franchise Default is cured within a reasonable time and (vi) the Tenant enters into a new Franchise Agreement with a Franchisor. (f) The Franchise Agreement shall be materially amended or cease to be in full force and effect for any reason, except by reason of the expiration of the term thereof, without Landlord's prior written approval. (g) An assignment shall occur in violation of Article 13 hereof. (h) The occurrence of an Event of Default by Tenant under the Master Agreement. 12.2 LANDLORD'S REMEDIES. Upon the occurrence of an Event of Default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law or equity, or elsewhere in this Lease, to which Landlord may resort cumulatively or in the alternative: (a) Landlord may, at Landlord's election, terminate this Lease upon the delivery of written notice of such termination to Tenant. On the delivery of such notice, all Tenant's rights in the Project, in all improvements located at the Project, to revenues thereafter arising from the Project, and to amounts which may otherwise be due from Landlord to Tenant under this Lease, shall terminate. Promptly after notice of termination, Tenant shall surrender and vacate the Project in a broom clean condition, and Landlord may reenter and take possession of the Land, Improvements, FF&E, Operating Equipment and Operating Supplies and eject all parties in possession or eject some and not others or eject none. Termination under this Subsection shall not relieve Tenant from the payment of any sum then due to Landlord or from any claim for damages previously accrued or then accruing against Tenant. Upon such termination Landlord shall also be entitled to recover from Tenant unpaid Rent and such other amounts which have been earned or are payable at the time of termination. (b) Landlord may, at Landlord's election, terminate Tenant's right to possession only, without terminating the Lease. Upon termination of Tenant's right to possession without termination of the Lease, Tenant shall surrender possession and vacate the Project immediately and deliver possession of the Land, Improvements, FF&E, Operating Equipment and Operating Supplies to Landlord, and Tenant hereby grants to Landlord the immediate right to enter into the Project, remove Tenant's signs and other evidences of 34 tenancy, and take and hold possession of the Land, Improvements, FF&E, Operating Equipment and Operating Supplies with or without process of law, and to dispossess the others who may be occupying or within the Project, without being deemed in any manner guilty of trespass, eviction, or forcible entry or detainer, without incurring any liability for any damage resulting therefrom, without such entry and possession terminating the Lease or releasing Tenant from Tenant's obligation to pay Rent and to fulfill all other of Tenant's obligations under this Lease for the full Lease Term. Landlord shall be entitled to recover from Tenant (i) unpaid Rent or such other amounts which have been earned or are payable at the time of termination, and (ii) such amounts as are payable pursuant to the last sentence of Section 12.2(d) below. Notwithstanding any remedial action taken hereunder by Landlord short of termination, including reletting the Project to a substitute tenant, Landlord may at any time thereafter elect to terminate this Lease for any previous Event of Default. (c) Landlord may, at Landlord's election, store Tenant's personal property, if any, for the account and at the cost of Tenant. (d) Whether or not Landlord elects to terminate the Lease, Landlord may, but shall be under no obligation to, relet all or any part of the Project for such rent and upon such terms as shall be satisfactory to Landlord (including the right to relet the Project as a part of a larger area, the right to change the character or use of the Project and the right to restrict prospective tenants to those whose merchandise and business is compatible with the nature and character of the Project or such larger area, if any). For the purpose of such reletting, Landlord may decorate or may make any repairs, changes, alterations or additions in or to the Project that may be necessary or convenient. If the Lease is not terminated and if the Project is not relet, or if it is relet and a sufficient sum shall not be realized from such reletting after paying all of the expenses of any such decorations, repairs, changes, alterations and additions, the expenses of such reletting and the collection of the rent accruing therefrom (including, but not limited to, reasonable attorneys' fees and brokers' commissions), to satisfy the Rent and other charges herein provided to be paid for remainder of the term of this Lease, Tenant shall pay to Landlord promptly any deficiency, and Tenant agrees that Landlord may file suit to recover and recover any sum falling due under the terms of this Subsection from time to time. (e) Landlord may, at Landlord's election, withdraw any or all amounts on deposit pursuant to Sections 3.3(d), 3.7 and 9.6 hereof and apply such amounts to Tenant's obligations hereunder. (f) The term "Rent" as used in this Section 12.2 shall be deemed to be and to mean Base Rent, Additional Rent and such other sums, if any, required to be paid by Tenant pursuant to the terms of this Lease. 35 (g) Notwithstanding anything in this Article XII to the contrary, Tenant shall not be liable to Landlord for consequential, punitive or exemplary damages 12.3 LANDLORD MAY PERFORM. Landlord shall have the right at any time, after ten (10) days notice to Tenant (or without notice with respect to matters described in Article 9, and in case of emergency or a hazardous condition or in case any fine, penalty, interest or cost may otherwise be imposed or incurred), to make any payment or perform any act required of Tenant under any provision in this Lease which Tenant has failed to make or to perform beyond the expiration of any notice or cure period, and in exercising such right, to incur necessary and incidental costs and expenses, including reasonable attorneys' fees. Nothing herein shall obligate Landlord to make any payment or perform any act required of Tenant, and this exercise of the right to so do shall not constitute a release of any obligation or a waiver of any Default. All payments made and all costs and expenses incurred in connection with any exercise of such right shall be reimbursed to Landlord by Tenant as Additional Rent. ARTICLE XIII ASSIGNMENT AND SUBLETTING 13.1 ASSIGNMENT BY TENANT AND SUBLEASES. (a) Provided that Tenant shall remain liable under all of the terms and conditions of this Lease for the full remainder of the Lease Term, and provided further that any sublessee shall consent to use the Project for Permitted Uses only and said sublessee's use does not increase the risk of Hazardous Substances being used, generated, manufactured, stored, treated, released or disposed of on, under or about the Project or transported to or from the Project, Tenant shall have the absolute right to sublet the Project, in whole or in part, without the consent of Landlord. Except as expressly permitted below, Tenant shall not assign its interest in this Lease without the prior written consent of Landlord, which consent shall not be unreasonably withheld or delayed. Assignment of this Lease by Tenant to a Related Party of Tenant, who remains a Related Party of Tenant, shall not require the consent of Landlord. A change of ownership of 51% or more of Tenant shall be deemed an assignment of this Lease for purposes of this paragraph. (b) No assignment or subletting shall serve to release Tenant of any obligations hereunder or alter the primary liability of Tenant for the payment of Base Rent, Additional Rent and other sums due Landlord hereunder or for the performance of or compliance with each and every term, covenant, condition and obligation to be performed or observed by Tenant under this Lease unless Landlord, in its reasonable discretion, elects to release Tenant of its obligations or liability hereunder. 36 (c) Landlord may accept any rent or performance of Tenant's obligations from any person other than Tenant and such acceptance of any rent or performance shall not constitute a waiver or estoppel of Landlord's rights to exercise its remedies for the default or breach by Tenant of any of the terms, covenants or conditions of this Lease. (d) In the event of any default or breach of Tenant's obligations under this Lease, Landlord may proceed directly against Tenant, or any one else responsible for the performance of Tenant's obligations under this Lease, including the sublessee, without first exhausting Landlord's remedies against any other person or entity responsible thereof, or any security held by Landlord or Tenant. (e) Any assignee of, or sublessee under, this Lease shall, by reason of accepting such assignment or entering into such sublease, be deemed for the benefit of Landlord, to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Tenant during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of the assignment or sublease. (f) Each sublease of the Project or any part thereof shall be subject and subordinate to the provisions of this Lease. Tenant agrees that in the case of an assignment, Tenant shall, within fifteen (15) days after the execution and delivery of any such assignment, deliver to Landlord (i) a duplicate original of such assignment in recordable form and (ii) an agreement executed and acknowledged by the assignee in recordable form wherein the assignee shall agree to assume and agree to observe and perform all of the terms and provisions of this Lease on the part of the Tenant to be observed and performed from and after the date of such assignment, and, in the case of a sublease, Tenant shall, within fifteen (15) days after the execution and delivery of such sublease, deliver to Landlord a duplicate original of such sublease. (g) The following terms and conditions shall apply to any subletting by Tenant of all or any part of the Project and shall be deemed included in all subleases, under this Lease whether or not expressly incorporated therein: Tenant hereby assigns and transfers to Landlord all of Tenant's interest in all rents and income arising from any sublease of all or a portion of the Project heretofore or hereafter made by Tenant, and Landlord may collect such rent and income and apply same toward Tenant's obligation under this Lease; provided however, that except during any period in which a breach has occurred in the performance of Tenant's obligations under this Lease, and remains uncured Tenant may, except as otherwise provided in this Lease, receive, collect and enjoy the rents accruing under such sublease. Landlord shall not, by reason of this assignment of rents or any other assignment of sublease to Landlord, nor by reason of the collection of the rents from a sublessee, be deemed liable to the sublessee for any failure of Tenant to perform and comply with any of Tenant's obligations to such sublessee under such sublease. Tenant 37 hereby irrevocably authorizes and directs any such sublessee, upon the receipt of a written notice from Landlord stating that a default exists in the performance of Tenant's obligation under this Lease, to pay to Landlord the rents and other charges due and to become due under the sublease. Sublessee shall rely upon any such statement and request from Landlord and shall pay such rents and other charges to Landlord without any obligation or right to inquire as to whether such default exists and notwithstanding any notice from or claim from Tenant to the contrary, Tenant shall have no right or claim against said sublessee, or, until the default has been cured, against Landlord, for any such rents and other charges so paid by sublessee to Landlord. (h) In the event of a breach by Tenant in the performance of its obligations under this Lease, and a resulting termination of Lease by Landlord, Landlord, at its option and without any obligation to do so, may require any sublessee to attorn (i.e., agree to become tenant to a new owner or landlord of the same property) to Landlord, in which event Landlord shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Landlord shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior defaults or breaches of such sublessor under such sublease. (i) Any matter or thing requiring the consent of the sublessor under a sublease shall also require the consent of Landlord herein, if Landlord's consent is required under this Lease. (j) Each sublease shall provide that (i) it is subject and subordinate to this Lease and any mortgage covering the Project; (ii) Landlord may enforce the provisions of the sublease, including collection of rent; (iii) if this Lease is terminated for any reason, Landlord may, at its option, either (A) terminate the sublease, or (B) takeover all of the rights and interest of Tenant, as sublessor, under such sublease, in which case such sublessee shall attorn to Landlord. If Landlord elects to takeover the rights and interest of Tenant, Landlord shall not (i) be liable for any previous act or omission of Tenant under the sublease, (ii) be subject to any defense or offset in favor of the sublessee against Tenant, or (iii) be bound by any modification to the sublease made without Landlord's written consent or by any prepayment by sublease of more than one month's rent. (k) Landlord agrees for itself, its successors and assigns, promptly upon Tenant's request, to enter into a nondisturbance and attornment agreement with any Qualified Subtenant, as defined below, of the Project upon the terms described below, pursuant to which Landlord shall agree, for so long as such Qualified Subtenant is not in default under its Qualified Sublease, as defined below, that the Qualified Sublease shall not be terminated as a result of any termination of this Lease and such Qualified Subtenant's use and occupancy of the premises demised pursuant to the Qualified Sublease shall not be 38 disturbed by Landlord, and pursuant to which such Qualified Subtenant shall agree to attorn to Landlord or its successor as landlord under the Qualified Sublease upon any termination of this Lease. Said agreement shall further provide that nothing therein contained shall impose any obligation on the Landlord, the then owner or any mortgagee of Landlord or their respective successors to (i) return or apply any security deposit under such sublease, such security shall be transferred and turned over to the Landlord, such then owner or any mortgagee of Landlord, (ii) expend any sums to make any installations or alterations provided to be made by the sublessor under said sublease or reimburse the subtenant under said sublease for any installations or alterations made by it, (iii) be liable for any act or omission of any prior sublessor, (iv) be subject to any offsets or defense which such subtenant might have against any prior sublessor, (v) be bound by any rent or additional rent which such subtenant might have paid for more than the current rent to any prior landlord, or (vi) be bound by any amendment or modification of the sublease made without the prior written consent of Landlord, the terms of which amendment or modification if included in the original sublease would have prevented such sublease from meeting the criteria for a Qualified Sublease. Any subtenant under a Qualified Sublease is a "Qualified Subtenant." A "Qualified Sublease" shall be any absolute net sublease (that is, a subleases that requires the uninterrupted payment of rent without offset or diminution, that confers all rights to condemnation awards [other than a separate award for moving expenses and subtenant's fixtures] upon the sublessor, and that places no obligations upon the sublessor thereunder other than those of the type placed upon Landlord hereunder) of the entire Project with a subtenant whose creditworthiness is reasonably acceptable to Landlord and pursuant to which the subtenant thereunder is required to fulfill all of the obligations of Tenant hereunder, including, without limitation, payment of rent which shall at all times be equal to or greater than the rent which Tenant is required to pay hereunder. (l) Upon the occurrence of an Event of Default under this Lease, Landlord shall have the right to collect and enjoy all rents and other sums of money payable under any sublease of any of the Project, and Tenant hereby irrevocably and unconditionally assigns such rents and money to Landlord, which assignment may be exercised upon and after (but not before) the occurrence of an Event of Default. 13.2 TENANT OWNERSHIP. For the purposes of this Article XIII, an assignment shall be deemed to include any of the following transactions: (i) the issuance or sale by Tenant or the sale by any stockholder of Tenant of a controlling interest in Tenant to persons or entities other than Amerihost Properties, Inc. and any Related Party; (ii) the sale, conveyance or other transfer of all or substantially all of the assets of Tenant (whether by operation of law or otherwise); (iii) any transaction pursuant to which Tenant is merged with or consolidated into another entity where Tenant or a Related Party of Amerihost Properties, Inc. is not the surviving entity; and (iv) any other transaction or series of transactions, which results in Amerihost Properties Inc. or a Related Party of Amerihost Properties, Inc., no longer having control of Tenant. 39 13.3 ASSIGNMENT DUE TO BANKRUPTCY. (a) In the event a petition is filed by or against Tenant under the Bankruptcy Code, Tenant, as debtor and debtor in possession, and any trustee who may be appointed, agree to adequately protect Landlord as follows: 1. to pay monthly in advance on the first day of each month as reason-able compensation for use and occupancy of the Project an amount equal to all Rent due pursuant to this Lease; and 2. to perform each and every obligation of Tenant under this Lease until such time as this Lease is either rejected or assumed by order of a court of competent jurisdiction; and 3. to determine within sixty (60) days after the filing of such petition whether to assume or reject this Lease; and 4. to give Landlord at least thirty (30) days prior written notice, unless a shorter notice period is agreed to in writing by the parties, of any proceeding relating to any assumption of this Lease; and 5. to do all other things of benefit to Landlord otherwise required under the Bankruptcy Code. Tenant shall be deemed to have rejected this Lease in the event of the failure to comply with any of the above. (b) If Tenant or a trustee elects to assume this Lease subsequent to the filing of a petition under the Bankruptcy Code, Tenant, as debtor and as debtor in possession, and any trustee who may be appointed agree as follows: 1. to cure each and every existing breach by Tenant within not more than thirty (30) days of assumption of this Lease; and 2. to compensate Landlord for any actual pecuniary loss resulting from any existing breach, including without limitation, Landlord's reasonable costs, expenses and attorney's fees incurred as a result of the breach, as 40 determined by a court of competent jurisdiction, within thirty (30) days of assumption of this Lease; and 3. in the event of an existing breach, to provide adequate assurance of Tenant's future performance, including without limitation: (i) the production to Landlord of written documentation establishing that Tenant has sufficient present and anticipated financial ability to perform each and every obligation of Tenant under this Lease; and (ii) assurances, in form acceptable to Landlord, as may be required under any applicable provision of the Bankruptcy Code; and 4. the assumption will not breach any provision of this Lease; and 5. the assumption will be subject to all of the provisions of this Lease unless the prior written consent of Landlord is obtained; and 6. the prior written consent to the assumption of any mortgagee to which this Lease has been assigned as collateral security is obtained. (c) If Tenant assumes this Lease and proposes to assign the same pursuant to the provisions of the Bankruptcy Code to any person or entity who shall have made a bona fide offer to accept any assignment of this Lease on terms acceptable to Tenant, then notice of such proposed assignment shall be furnished by Tenant to Landlord, setting forth: 1. the name and address of such person; and 2. all the terms and conditions of such offer; and 3. the adequate assurance to be provided Landlord to assure such person's future performance under the Lease, including without limitation, the assurances referred to in any applicable provision of the Bankruptcy Code, shall be given to Landlord by Tenant no later than twenty (20) days after receipt by 41 Tenant, but in any event no later than ten (10) days prior to the date that Tenant shall make application to a court of competent jurisdiction for authority and approval to enter into such assignment and assumption, and Landlord shall thereupon have the prior right and option, to be exercised by notice to Tenant given at any time prior to the effective date of such proposed assignment, to accept (or to cause its designee to accept) an assignment of this Lease upon the same terms and conditions and for the same consideration, if any, as the bona fide offer made by such person, less any brokerage commissions which may be payable out of the consideration to be paid by such person for the assignment of this Lease. The adequate assurance to be provided Landlord to assure the assignee's future performance under the Lease shall include without limitation: (i) a written demonstration that the assignee meets all reasonable financial and other criteria of Landlord as did Tenant and its business at the time of execution of this Lease, including the production of the most recent audited financial statement of the assignee prepared by a certified public accountant; and (ii) the assignee's use of the Project will be a Permitted Use; and (iii) assurances, in form acceptable to Landlord, as to all matters identified in any applicable provision of the Bankruptcy Code. 13.4 TRANSFER OF LANDLORD'S RIGHTS. Subject to Landlord's compliance with Article XIV hereof, Landlord shall have the right to transfer and assign, in whole or in part, all and every feature of its rights and obligations hereunder and in the Project. Such transfers or assignments, howsoever made, are to be fully binding upon and recognized by Tenant provided the transferee assumes all of Landlord's obligations hereunder and Landlord delivers to Tenant notice of such transfer within ten (10) days following its effective date. Upon such transfer or assignment and the assumption of Landlord's obligations by the transferee, and subject to the provisions of Section 15.2 hereof, Landlord shall be relieved of all obligations under the Lease accruing subsequent to the date of transfer. 42 13.5 LICENSES AND LEASEHOLD MORTGAGES. (a) Tenant shall have the right during the Lease Term to grant licenses of portions of the Project, provided that no such license shall be for the use and operation of the entire Project without compliance by Tenant with the provisions of Section 13.1 nor be valid for a period of more than thirty (30) days. In the event the term of any license shall extend beyond the fixed date for the expiration of the Lease Term, such license shall be subject to the consent of Landlord, which consent shall not be unreasonably withheld or delayed. In the event of the termination or expiration of the Lease Term, any existing license shall remain in effect notwithstanding the termination of this Lease. Tenant shall assign such license agreement to Landlord by an instrument mutually satisfactory to Landlord and Tenant, and any such licensee's use, occupancy and enjoyment of its premises shall not be disturbed, subject however to the terms and conditions of any such license agreement. (b) Tenant may grant a mortgage, deed of trust or other financing instrument that constitutes or creates a lien on Tenant's interest in this Lease or the leasehold estate created hereby (such mortgage, deed of trust or other financing instrument hereinafter a "Leasehold Mortgage"). Landlord will promptly provide to the holder of the Leasehold Mortgage ("Leasehold Lender") copies of any material notice or other material correspondence, including, without limitation, any notice of default or breach under this Lease that Landlord gives to Tenant, but Landlord's failure to give any such notice shall not constitute a default by Landlord on this Lease or constitute a waiver of any such default or breach of Tenant or grant Tenant any additional time to cure any such default or breach. Landlord hereby grants Leasehold Lender the right to cure any default or breach under this Lease, the exercise of which shall be at the sole option of Leasehold Lender. Leasehold Lender shall have the right to enter upon the Project at any time to cure any such default. (c) Notwithstanding any contrary provisions of this Lease, Landlord agrees not to terminate this Lease or Tenant's right of possession of the Project or to exercise any of Landlord's other remedies under this Lease or to interfere with Tenant's occupancy, use or enjoyment of the Project for any default under this Lease unless (x) Landlord has given to Leasehold Lender notice of such default, which notice shall be set forth in reasonable detail the nature of such default and (y) if such default constitutes a default under Section 12.1 (b) of this Lease, the same is not cured within two (2) days after notice of such default to Leasehold Lender, or if such default constitutes a default under any other subsection of Section 12.1 of this Lease, which default is curable by Leasehold Lender, and such default shall not have been cured by Tenant or Leasehold Lender within the greater of the cure period provided therefor under the terms of this Lease or a period of ten (10) days following Leasehold Lender's receipt of such notice. If any non-monetary default that is curable by Leasehold Lender is of such nature that it cannot be cured within ten (10) days, Leasehold Lender shall be entitled to such additional period of time as may be reasonably necessary to cure such default if Leasehold Lender proceeds promptly to remedy the same. In the event 43 of the bankruptcy of Tenant, or a general assignment by Tenant for the benefit of its creditors, Landlord will not terminate this Lease or exercise its other remedies under this Lease so long as Leasehold Lender continues to pay all rent and other sums and performs or causes to be performed all other obligations of Tenant under this Lease reasonably susceptible of performance by Leasehold Lender. If any default cannot be cured by Leasehold Lender because such cure requires possession of the Project, Landlord agrees that it will not exercise its rights and remedies under this Lease as a result thereof, so long as Leasehold Lender cures all other curable defaults, including payment of past due Base Rent and Additional Rent within the cure periods provided in this paragraph. It is expressly understood and agreed by Landlord that Leasehold Lender has right to cure Tenant's defaults under this Lease, but shall not have the obligation to do so. Upon compliance with the foregoing provisions, any notice of breach or default given by Landlord or any action of Landlord to terminate or exercise any remedies under this Lease or to otherwise interfere with the occupancy, use or enjoyment of the Project by reason thereof, shall be deemed rescinded without any further action by Landlord, Tenant or Leasehold Lender. (d) Upon written notice from Leasehold Lender, Landlord, in its reasonable discretion, agrees to recognize Leasehold Lender or any assignee or designee of Leasehold Lender approved by Landlord as tenant under this Lease, provided (i) Leasehold Lender or such assignee or designee assumes this Lease and all of Tenant's obligations hereunder, (ii) such assignee or designee is a financially responsible party (which shall be determined by Landlord, such determination not to be unreasonably withheld or delayed), and (iii) all Base Rent and Additional Rent payments are then current. In such event, Leasehold Lender or any assignee or designee of Leasehold Lender shall thereafter be entitled to all the rights and privileges of the Tenant under this Lease. Landlord will not unreasonably interfere with the enforcement by Leasehold Lender of its liens and security interests on Tenant's assets. Leasehold Lender is permitted to act through its employees or agents. (e) If Leasehold Lender or its assignee or designee succeeds to the interest of Tenant under this Lease, upon Landlord's consent, Landlord agrees to recognize Leasehold Lender or its assignee or designee as the tenant under this Lease, and if Leasehold Lender so requests, Landlord agrees to enter into a new lease with Leasehold Lender or its assignee or designee for the remainder of the Lease Term at the rents and upon the same covenants, agreements, terms and provisions contained in this Lease, including, without limitation, any options to renew and rights of first refusal contained herein. If Leasehold Lender or its assignee or designee succeeds to the interest of Tenant under this Lease or enters into a new lease with Landlord, Leasehold Lender or its assignee or designee shall have the right, with Landlord's consent, to sublease the Project or assign this Lease or new lease to an entity designated by Leasehold Lender, provided that in the case of an assignment such entity assumes in writing all of Tenant's obligations under this Lease or new lease from and after the effective date of such assignment and such entity is a financially responsible party (which shall be determined by Landlord, such determination not to be unreasonably withheld or delayed), and all Base Rent and Additional Rent payments are then current. 44 ARTICLE XIV RIGHT OF FIRST REFUSAL 14.1 RIGHT OF FIRST REFUSAL. During the Lease Term when no Default or Event of Default exists and for a period of thirty (30) days following the expiration of the Lease Term, Landlord may not sell, transfer, assign, convey, pledge, or otherwise dispose of all or any portion of the Project or Landlord's interest in this Lease, other than a sale, assignment or conveyance in connection with a securitization or structured financing of the Project, without having first complied with the provisions of this Article XIV and the following terms and conditions: (a) Prior to any transfer or to entering into any contract to sell, transfer, assign, or convey all or any portion of the Project or Landlord's interest in this Lease to a third party, or prior to accepting any bona fide offer to purchase, buy, or acquire all or any portion of the Project or Landlord's interest in this Lease from a third party, Landlord shall give written notice of all the terms, provisions, and conditions with respect to such offer, including a copy of the proposed offer, to Tenant and Landlord shall offer to sell or to transfer to the Tenant the Project or Landlord's interest in the Lease which is the subject of such offer on the same terms, provisions, and conditions as are set forth in such third party offer. (b) Tenant shall have a period of ten (10) days from the date of its receipt of the written notice from Landlord to accept such offer on the same terms, provisions, and conditions stated in such written notice, which acceptance must be in writing and be received by Landlord prior to the expiration of such ten (10) day period. Any purported acceptance made orally shall be ineffective, and any purported acceptance which varies the terms of such offer shall be deemed a rejection thereof for all purposes. The closing of the purchase by Tenant shall be held at the time and place specified in the written notice from Landlord, or such earlier date as is specified by Tenant, but in no event later than the day the original offer would have been closed. (c) In the event Tenant delivers written notice of rejection to Landlord, or in the event Tenant fails to accept the offer in the manner required by Section 14.1(b) hereof, the offer made by Landlord shall be deemed to have been rejected by Tenant, and Landlord shall be free to sell, transfer, assign, or convey such interest to the third party on the terms, provisions, and conditions set forth in the written notice to Tenant. (d) In the event that such transaction is not consummated as provided in Section 14.1(c) hereof on or before thirty (30) days after the closing date specified in the notice from Landlord to Tenant, or in the event any material terms and provisions of such transaction are changed following a rejection by Tenant, no sale, transfer, assignment, or 45 conveyance of such interest in the Project or the Lease may be made unless the provisions of this Article XIV are again complied with. 14.2 CONDITIONS OF OFFER. Landlord shall not be entitled to exercise its rights under Section 14.1(a) hereof with respect to any offer to purchase or offer to sell any interest in the Project or the Lease unless such offer complies with all of the following requirements: (a) the proposed purchase price (which shall be net of any debts or liabilities which the proposed purchaser will assume) is payable in its entirety in cash; (b) the offer contains provisions whereby the proposed purchaser is obligated to comply with the provisions of Section 14.2(e) prior to or at closing; (c) it is an offer by or to a principal, identified in the offer, and not an agent acting on behalf of an undisclosed principal; and such principal shall not be a person or entity with respect to which Landlord has any direct or indirect ownership or control or from whom Landlord shall receive any form of undisclosed rebate, commission or other consideration in connection with the transaction; (d) the sale is subject to the rights of Tenant under this Lease; and (e) The prospective purchaser shall provide to Tenant a statement signed by such prospective purchaser to the effect that (i) such purchaser is a principal acting on its own behalf and not an agent acting on behalf of an undisclosed principal, (ii) such principal is not a person or entity with respect to which Landlord has any direct or indirect ownership or control, and (iii) that such purchaser is not paying any rebate, commission or other consideration not disclosed in the offer. Notwithstanding any term or provision of Sections 14.1 or 14.2 to the contrary, Landlord, subject to rights of Tenant under the Lease, may (i) sell, assign or convey the Project in connection with a securitization or structured financing of the Project (ii) assign or pledge the Project and its interest in and to this Lease as security for any loan secured by a mortgage or deed of trust on the Project, and (iii) sell, assign and convey the Project and its interest in the Lease to any Related Party of Landlord or any party into which Landlord merges whether or not Landlord is the surviving entity. 14.3 RESTRAINING ORDER. In the event that Landlord shall at any time transfer or attempt to transfer the Project or any portion thereof or its interest in the Lease in violation of the provisions of this Article XIV, then Tenant shall, in addition to all rights and remedies hereunder and at law and in equity, be entitled to a decree or order restraining and enjoining such transfer and Landlord shall not plead in defense thereto that there would be an adequate remedy at law; it being hereby expressly acknowledged and agreed that 46 damages at law will be an inadequate remedy for a breach or a threatened breach or violation of the provisions concerning transfers set forth in this Article XIV. 14.4 EXCLUSION FROM RIGHT OF FIRST REFUSAL. Notwithstanding any other provision of this Article XIV to the contrary, unless the use or operation of the Project for its intended purpose would be materially adversely affected, based upon a reasonable determination of such affect, the Landlord may sell, transfer, assign, lease, convey, pledge or otherwise dispose of all or any portion of the Land on which none of the Improvements or requisite parking are located without complying with any of the other terms and provisions of this Article XIV. ARTICLE XV GENERAL PROVISIONS 15.1 ESTOPPEL CERTIFICATE. Either party hereto (the "Certifying Party") shall at any time, upon not less than ten (10) days after the giving of written notice by the other party (the "Requesting Party"), execute, acknowledge and deliver to the Requesting Party or to such person designated by the Requesting Party, a statement in writing (i) certifying that this Lease is unmodified and in full force and effect (or if modified, stating the nature of such modification and certifying that this Lease, as so modified, is in full force and effect) and the date to which the rent and other charges are paid in advance, if any, (ii) acknowledging that there are not, to the Certifying Party's knowledge, any uncured defaults on the part of the Requesting Party hereunder, or specify such defaults if they are claimed, (iii) acknowledging that there are no offsets, counterclaims or defenses to the obligations of the Certifying Party under the Lease, and (iv) certifying as to any other matters as may be reasonably requested by the Requesting Party. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer or Tenant of any portion of the Project. If the Certifying Party does not execute, acknowledge and deliver the statement referred to in this Section within time set forth above, the information set forth therein shall be deemed true and correct. 15.2 LANDLORD'S LIABILITY. The term "Landlord," as used in this Lease, shall mean only the owner or owners at the time in question of the Improvements, FF&E and the fee title to the Land. In the event of any transfer of such title or interest, Landlord shall be released from all liability as respects Landlord's obligations thereafter to be performed, provided that: (a) Landlord's obligations are assumed by Landlord's transferee; and (b) any funds held by Landlord at the time of such transfer in which Tenant has an interest, shall be delivered to such transferee. Specifically, Landlord's delivery of the Capital Expenditure Reserve Account, and the deposits contemplated in Sections 3.3 and 9.6 hereof to any purchaser of Landlord's interest in the Project, and the acknowledgment by such purchaser of the receipt of such funds, shall discharge Landlord from any liability 47 to Tenant for the Capital Expenditure Reserve Account, and the deposits contemplated in Sections 3.3 and 9.6 hereof. 15.3 SEVERABILITY. The invalidity of any provision of this Lease, or of its application to any person or circumstance as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof and each term, covenant, condition and provision of this Lease shall be valid and be enforced to the fullest extent permitted by law. 15.4 CAPTIONS. Article and Section captions are not a part of this Lease. 15.5 COMPLETE AGREEMENT. This Lease and the attached exhibits set forth all the agreements, terms, covenants and conditions between Landlord and Tenant concerning the Project and there are no agreements, terms, covenants or conditions, oral or written, between them other than those herein contained. No amendment, change or addition to this Lease shall be binding upon Landlord or Tenant unless it is in writing and signed by each party. 15.6 TENANT'S REMEDIES. If Landlord shall fail to perform any covenant, term or condition of this Lease required to be performed by Landlord, if any, and if as a consequence of such default, Tenant shall recover a money judgment against Landlord, such judgment shall be satisfied only out of the proceeds of sale, and condemnation or insurance proceeds, received upon execution of such judgment and levied thereon against the right, title and interest of Landlord in the Project and out of Rents receivable by Landlord, or out of the consideration received by Landlord from the sale or other disposition of all or any part of Landlord's right, title and interest in the Project or this Lease, and neither Landlord nor its officers, directors, shareholders and lenders, nor their respective successors and assigns, shall be personally liable for any deficiency, provided that in the event a deficiency exists after application of the foregoing assets relating to the Project, Landlord shall be personally liable for such deficiency to the extent of the amount of all undisbursed sums in the Capital Expenditure Reserve Account, and the accounts provided for in Sections 3.3 and 9.6 provided to and held by Landlord hereunder and required to be returned to Landlord. 15.7 FRANCHISE OBLIGATIONS. Initially the Project will be operated by Tenant or a Related Party under the Name. Thereafter Tenant may elect to enter into a Franchise Agreement with a Related Party of AmeriHost Inns, Inc., and continue to operate under the Name or with another Franchisor, however, it is expressly agreed that at all times during the term of this Lease the Project will be operated under the Name or terms of a Franchise Agreement and all costs of maintaining, renewing, assigning or obtaining any Franchise Agreement shall be borne by Tenant. So long as the Franchise Agreement with a Related Party of AmeriHost Inns, Inc. or with any other Franchisor contains industry standard terms, including standard franchisee rights upon transfer of the Project and 48 termination, Landlord's consent to such Franchise Agreement shall not be unreasonably withheld or delayed. 15.8 NOTICES. All notices and demands hereunder shall be in writing, and shall be deemed to have been properly given or served as of (a) the date of personal delivery with acknowledgment of receipt; (b) three (3) business days after the same is deposited in the United States mail, prepaid, for delivery by registered or certified mail, return receipt requested; or (c) the first business day after the date delivered to a reputable overnight courier service providing proof of delivery. The initial addresses of Landlord and Tenant are set forth below: If to Landlord: PMC Commercial Trust Attention: Dept. 101 17290 Preston Road, Third Floor Dallas, Texas 75252 With a copy to: Lance B. Rosemore, Chief Executive Officer If to Tenant: c/o Amerihost Properties, Inc. 2400 East Devon Avenue Suite 280 Des Plaines, Illinois 60018 Attention: Mike Holtz, President With a copy to: McDermott Will & Emery 227 West Monroe Street Suite 4400 Chicago, IL 60606-5096 Attention: Helen R. Friedli, Esq. Tele: (312)984-7563 Fax: (312)984-3669 Such addresses may be changed at any time or from time to time or additional notice parties added, by notice as above provided. If any mortgagee of Landlord shall have advised Tenant by notice in the manner aforesaid that it is the holder of a mortgage against the Project and stating in said notice its address for the receipt of notices, then simultaneously with the giving of any notice by Tenant to Landlord, Tenant shall serve one or more copies of such notice upon such mortgagee in the manner aforesaid. 49 15.9 WAIVERS. No waiver by Landlord of any provision of this Lease shall be deemed a waiver of any other provision hereof or of any subsequent breach by Tenant of the same or any other provision. Landlord's consent to or approval of any act shall not be deemed to render unnecessary the obtaining of Landlord's consent to or approval of any subsequent act by Tenant. No payment by Tenant or receipt by Landlord of a lesser amount than the amount then due shall be deemed to be other than on account of the earliest rent due, nor shall any endorsement or statement on any check or any letter accompanying any check or payment as payment be deemed an accord and satisfaction, and Landlord shall accept such check or payment without prejudice to Landlord's right to recover the balance of such payment or pursue any other remedy in this Lease provided. 15.10 RECORDING. Landlord agrees, upon Tenant's request, to execute a short form of this Lease, entitled Memorandum of Lease, a copy of which is annexed hereto as EXHIBIT B, and Tenant may record the Memorandum of Lease at its expense following the date on which Landlord acquires fee simple title to the Land. The provisions of this Lease shall control, however, in regard to any omissions from the Memorandum of Lease, or with respect to any provisions hereof which may be in conflict with the Memorandum of Lease. 15.11 HOLDING OVER. Tenant shall surrender the Project upon the expiration of the Lease Term or earlier termination of the Lease. Any holdover not consented to by Landlord in writing shall not result in a new tenancy or interest and, in such case, Landlord may treat Tenant as a trespasser. If Tenant remains in possession of the Project or any part thereof after the expiration of the Lease Term or the earlier termination hereof without the express written consent of Landlord, Tenant shall pay rent (for such holdover period) equal to the amount of 150% of the amount of Base Rent payable by Tenant under Article 3 during the last month of the Term. 15.12 COVENANTS AND CONDITIONS. Each provision of this Lease performable by Tenant and Landlord shall be deemed both a covenant and a condition. 15.13 BINDING EFFECT. This Lease shall bind and inure to the benefit of Landlord and Tenant and their respective permitted successors and assigns. 15.14 SUBORDINATION AND ATTORNMENT. (a) This Lease, at the option of Landlord or any of its lenders, shall be subordinate to any ground lease, mortgage or any other hypothecation for security and any renewals, future advances, modifications, consolidations, replacements and extensions thereof, provided Tenant's rights hereunder continue to be recognized and Tenant's possession of the Project is not disturbed so long as no Event of Default has occurred and is continuing. Landlord agrees for itself, its successors and assigns, promptly upon Tenant's request, to enter into or cause to be entered into by its lender a nondisturbance agreement in 50 such regard for the benefit of Tenant on terms reasonably satisfactory to Tenant and Landlord. (b) Provided Tenant's rights hereunder continue to be recognized and its right of possession is not disturbed so long as no Event of Default has occurred and is continuing, Tenant shall execute any documents required to effectuate such subordination or to make this Lease prior to the lien of any mortgage, ground lease or other security device, as the case may be, and failing to do so within twenty (20) days after written demand, does hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney-in-fact and in Tenant's name, place and stead, to do so and any out-of-pocket expenses incurred by Tenant in connection therewith shall be paid by Landlord upon Tenant's request. (c) In the event of (a) a sale, assignment, ground lease, mortgage or other transfer of Landlord's interest in the Project or any portion thereof or in this Lease; or (b) any proceedings brought for the foreclosure of, the granting of a deed in lieu of foreclosure of or the exercise of the power of sale under any mortgage or security agreement made by Landlord covering the Project or any portion thereof or this Lease, and provided that such mortgagee or other transferee shall agree to recognize Tenant's rights hereunder and not disturb Tenant's possession of the Project so long as an Event of Default has not occurred and is continuing, Tenant shall attorn to the mortgagee or other transferee and recognize such mortgagee or other transferee as Landlord under this Lease. 15.15 NO JOINT VENTURE. Landlord and Tenant, by entering into this Lease or consummating the transactions contemplated hereby, shall not be considered partners or joint venturers. 15.16 QUIET ENJOYMENT. Provided Tenant pays the Rent herein recited and performs all of Tenant's other covenants and agreements herein contained, Landlord covenants that Tenant shall peacefully have, hold and enjoy the Project, subject to all the other provisions herein contained. 15.17 EXPANSION OF PROJECT. Tenant acknowledges and agrees that the Project may, from time to time and with Landlord's approval, be modified, including expansion to include additional land, buildings and improvements. Upon any such expansion, Base Rent payable hereunder and other affected obligations shall be equitably adjusted. The term "Project," as used in this Lease, refers to the Project and any such modification thereof. 15.18 COUNTERPARTS. This Lease may be executed in any number of counterparts, each of which shall be an original and all of which together shall constitute and be construed as one and the same instrument. 51 15.19 BROKERS. In connection with this Lease, Landlord and Tenant each warrant and represent that they know of no person who is or might be entitled to a commission, finder's fee or other like payment in connection herewith, and each party hereto does hereby indemnify and agree to hold the other harmless from and against any and all loss, liability and expenses that such other party may incur should such warranty and representation prove incorrect. 15.20 TENANT'S RIGHT TO CURE. If Landlord breaches any covenant to be performed by it under this Lease, Tenant, after notice to and demand upon Landlord, without waiving or releasing any obligation hereunder, and in addition to all other remedies available to Tenant, may (but shall be under no obligation at any time thereafter to) make such payment or perform such act for the account and at the expense of Landlord. All sums so paid by Tenant and all costs and expenses (including, without limitation, reasonable attorneys' fees) so incurred, together with interest thereon at the Default Rate from the date on which such sums or expenses are paid or incurred by Tenant, shall be paid by Landlord to Tenant on demand. The rights of Tenant hereunder to cure and to secure payment from Landlord in accordance with this Section 15.20 shall survive the termination of this Lease with respect to the Project. 15.21 BREACH BY LANDLORD. It shall be a breach of this Lease if Landlord fails to observe or perform any term, covenant or condition of this Lease on its part to be performed and such failure continues for a period of 30 days after notice thereof from Tenant, unless such failure cannot with due diligence be cured within a period of 30 days, in which case such failure shall not be deemed to continue if Landlord, within such 30-day period, proceeds promptly and with due diligence to cure the failure and diligently completes the curing thereof. The time within which Landlord shall be obligated to cure any such failure also shall be subject to extension of time due to the occurrence of any delays beyond the reasonable control of Landlord. If Landlord does not cure any such failure within the applicable time period as aforesaid, Tenant may declare the existence of a "Landlord Default" by a second notice to Landlord. Thereafter, Tenant may forthwith cure the same and, subject to the provisions of the following paragraph, invoice Landlord for costs and expenses (including reasonable attorneys' fees and court costs) incurred by Tenant in curing the same, together with interest thereon from the date Landlord receives Tenant's invoice, at the Default Rate. 15.22 LANDLORD TO GRANT EASEMENTS, ETC. Landlord will, from time to time, so long as no Event of Default has occurred and is continuing, at the request of Tenant and at Tenant's cost and expense (but subject to the approval of Landlord, which approval shall not be unreasonably withheld or delayed), (a) grant easements and other rights in the nature of easements with respect to the Project to third parties, (b) release existing easements or other rights in the nature of easements which are for the benefit of the Project, (c) dedicate or transfer unimproved portions of the Project for road, highway or other public purposes, (d) execute petitions to have the Project annexed to any municipal corporation or 52 utility district, (e) execute amendments to any covenants and restrictions affecting the Project, and (f) execute and deliver to any person any instrument appropriate to confirm or effect such grants, releases, dedications, transfers, petitions and amendments (to the extent of its interests in the Project), but only upon delivery to Landlord of an officer's certificate stating that such grant, release, dedication, transfer, petition or amendment does not interfere with the proper conduct of the business of Tenant on the Project and does not materially reduce the value of the Project. 15.23 GOVERNING LAW; SUBMISSION TO JURISDICTION. This Lease is or will be made and delivered in the State and shall be governed by and construed and interpreted in accordance with the laws of the United States of America and the State, without regard to principles of conflict of laws. All judicial actions, suits or proceedings brought by or against Landlord or Tenant with respect to its rights, obligations, liabilities or any other matter under or arising out of or in connection with this Lease or any transaction contemplated hereby or for recognition or enforcement of any judgment rendered in any such proceedings shall be brought in any state or federal court in the State. By execution and delivery of this Lease, Landlord and Tenant accept, generally and unconditionally, the nonexclusive jurisdiction of the aforesaid courts and irrevocably agree to be bound by any final judgment rendered thereby in connection with this Lease or any transaction contemplated hereby from which no appeal has been taken or is available. Tenant and Landlord each hereby irrevocably waive any objections, including without limitation any objection to the laying of venue or based on the grounds of forum non conveniens, which either may now or hereafter have to the bringing of any such action or proceeding in any such jurisdiction. Tenant and Landlord acknowledge that final judgment against it in any action, suit or proceeding referred to in this Section shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the same. 15.24 REIT COMPLIANCE. Tenant acknowledges that Landlord is or intends to qualify as a real estate investment trust under the Tax Code. Tenant agrees that it will not knowingly or intentionally take or omit any action, or permit any status to exist at the Project, which Tenant knows would or could result in Landlord being disqualified from treatment as a real estate investment trust under the Tax Code as the provisions exist on the date hereof. 15.25 FINANCINGS. Notwithstanding any other provisions of this agreement, to the extent that any trustee, rating agency or purchaser in connection with a contemplated structured finance or securitization requires amendment to the Lease for purposes of such structured finance or securitization, Tenant will not unreasonably withhold approval of such modification or amendment and any out-of-pocket expenses incurred by Tenant in connection therewith shall be paid by Landlord upon Tenant's request. 15.26 LANDLORD'S RIGHT TO INSPECT. Tenant shall permit Landlord and its authorized representatives as frequently as reasonably requested by Landlord to inspect the Project and Tenant's accounts and records pertaining thereto and make copies thereof, during 53 usual business hours upon reasonable advance notice, subject only to any business confidentiality requirements reasonably requested by Tenant. 15.27 "AS IS" LEASE. Notwithstanding anything to the contrary herein contained, Tenant expressly understands, acknowledges and agrees that the lease of the Project shall be made by Landlord to Tenant on an "as is, where is" basis, and "with all faults," and Tenant acknowledges that Tenant has agreed to lease the Project in its present condition and that Tenant is relying solely on its own examination and inspections of the Project and not on any statements or representations made by Landlord or any agents or representatives of Landlord. Additionally, Tenant hereby acknowledges that, Landlord makes no warranty or representation, express or implied, or arising by operation of law, including, but in no way limited to, any warranty of condition, habitability, merchantability, or fitness for a particular purpose of the Project or any portion thereof. Landlord hereby specifically disclaims any warranty, guaranty or representation, oral or written, past, present or future, of, as to, or concerning: (a) the nature and condition of the Project or any part thereof, including but not by way of limitation, as to its water, soil or geology, or the suitability thereof, for any and all activities and uses which Tenant may elect to conduct thereon, or any improvements Tenant may elect to construct thereon, or any income to be derived therefrom or expenses to be incurred with respect thereto, or any obligations or any other matter or thing relating to or affecting the same; (b) the absence of any hazardous substances on, in or under the Land or Improvements or on, in or under any land adjacent to or abutting the Land; (c) the manner of construction or condition or state of repair or lack of repair of the Improvements; (d) the nature or extent of any easement, restrictive covenant, right-of-way, lease, possession, lien, encumbrance, license, reservation, condition or other similar matter pertaining to the Project or any portion thereof; and (e) the compliance of the Project or the operation of the Project or portion thereof with any Legal Requirements. 15.28 THIRD PARTY BENEFICIARY. The provisions of this Lease are solely for the benefit of, and may be enforced solely by, the parties hereto and their respective successors and assign and none of the provisions of this Lease are intended to, nor shall they be construed so as to create any rights in any third parties not party to this Lease. 15.29 NO MERGER OF TITLE. There shall be no merger of this Lease or of the leasehold estate created hereby by reason of the fact that the same person or entity may acquire, own or hold, directly or indirectly: (a) this Lease or the leasehold estate created hereby or any interest in this Lease or such leasehold estate and (b) the fee estate in the Project. 54 IN WITNESS WHEREOF, Tenant and Landlord have executed this instrument as of the date set forth above. "LANDLORD" PMC COMMERCIAL TRUST a Texas real estate investment trust By ----------------------------------- Its "TENANT" AMERIHOST INNS, INC. a Delaware corporation By ----------------------------------- Its 55 EXHIBIT A Legal Description of Land EXHIBIT B MEMORANDUM OF LEASE THIS MEMORANDUM OF LEASE, made and entered into this ____ day of _______, 1998, by and between PMC COMMERCIAL TRUST, a ___________ _________ having an office at 17290 Preston Road, Third Floor, Dallas, Texas 75252 ("Landlord"), and AMERIHOST INNS, INC., a Delaware corporation, having an office at 2400 East Devon Avenue, Des Plaines, Illinois 60018 ("Tenant"). W I T N E S S E T H : 1. Landlord, in consideration of the rents reserved and agreed to be paid by Tenant, and of the covenants, agreements, conditions and understandings to be performed and observed by Tenant all as more fully set out in a lease (the "Lease"), executed by Landlord and Tenant, and dated the ____ day of __________, 1998, has let, leased and demised to Tenant certain land described in Exhibit "A" attached hereto (the "Land") together with the improvements thereon (collectively, the "Premises") in the building located thereon. 2. The term of the Lease shall commence on the date hereof and terminate on __________. 3. The Lease grants to Tenant a right of first refusal with respect to a sale or other conveyance by Landlord of any interest in the Premises or any portion thereof or of Landlord's interest in the Lease, as more particularly set forth in the Lease. 4. This Memorandum of Lease is subject to all of the terms, conditions and understandings set forth in the Lease between the Landlord and Tenant, which agreement is incorporated herein by reference and made a part hereof, as though copied verbatim herein. In the event of a conflict between the terms and conditions of this Memorandum of Lease and the terms and conditions of the Lease, the terms and conditions of the Lease shall prevail. IN WITNESS WHEREOF, the parties hereto caused this Memorandum to be duly executed as of the day and year above written. LANDLORD: PMC COMMERCIAL TRUST By: ------------------------------ Name: Title: TENANT: AMERIHOST INNS, INC. By: ------------------------------ Name: Title: [add acknowledgments] EX-21 3 Exhibit 21.1 AMERIHOST PROPERTIES, INC. LISTING OF SUBSIDIARIES
State of Incorporation Ownership Entity or Organization Percentage - ---------------------------------- ------------------- ------------ Amerihost Development, Inc. Illinois 100.00% Amerihost International, Inc. Delaware 100.00% Amerihost Lodging Group, Inc. Delaware 100.00% Amerihost Management, Inc. Illinois 100.00% Amerihost Staffing, Inc. Illinois 100.00% AP Equities of Arkansas, Inc. Arkansas 100.00% AP Equities of Florida, Inc. Florida 100.00% AP Equities of Indiana, Inc. Indiana 100.00% AP Equities of Ohio, Inc. Ohio 100.00% AP Hotels of Georgia, Inc. Georgia 100.00% AP Hotels of Illinois, Inc. Illinois 100.00% AP Hotels of Michigan, Inc. Delaware 100.00% AP Hotels of Mississippi, Inc. Mississippi 100.00% AP Hotels of Ohio, Inc. Delaware 100.00% AP Hotels of Pennsylvania, Inc. Pennsylvania 100.00% AP Hotels of Texas, Inc. Delaware 100.00% AP Hotels of Vermont, Inc. Vermont 100.00% AP Hotels of Vermont, Inc. Delaware 100.00% AP Hotels of West Virginia, Inc. West Virginia 100.00% AP Lodging of Ohio, Inc. Ohio 100.00% AP Properties of Ohio, Inc. Ohio 100.00% API of Indiana, Inc. Indiana 100.00% API of Wisconsin, Inc. Wisconsin 100.00% Hammond Investors, Inc. Indiana 100.00% Niles, Illinois Hotel Corporation Illinois 100.00% Schiller Park Investors, Inc. Illinois 100.00% Shorewood Hotel Investments, Inc. Illinois 100.00% Shorewood Investors, Inc. Illinois 100.00% AP Hotels of West Virginia, Inc. West Virginia 100.00% AmeriHost Inns of Illinois, Inc. Illinois 100.00% AmeriHost Inns of Ohio, Inc. Ohio 100.00% AP Hotels of Wisconsin, Inc. Wisconsin 100.00% AP Hotels of Iowa, Inc. Iowa 100.00% AP Hotels of Kentucky, Inc. Kentucky 100.00% API/Crawfordsville, Inc. Indiana 100.00% API/Cloverdale, Inc. Indiana 100.00% API/Marysville, Inc. Ohio 100.00% API/Plainfield, Inc. Indiana 100.00% AP Hotels of California, Inc. California 100.00% AmeriHost Inns of Michigan, Inc. Michigan 100.00% AP Hotels of Missouri, Inc. Missouri 100.00% AP Properties of Mississippi, Inc. Mississippi 100.00% AP Hotels of Tennessee, Inc. Tennessee 100.00% AP Hotels of Oklahoma, Inc. Oklahoma 100.00% AP Hotels/Altoona, PA, Inc. Pennsylvania 100.00% API/Athens, OH, Inc. Ohio 100.00% API/Hammond, IN, Inc. Indiana 100.00% API/Lancaster, OH, Inc. Ohio 100.00% API/Logan, OH, Inc. Ohio 100.00% API/Macomb, IL, Inc. Illinois 100.00% API/Metropolis, IL, Inc. Illinois 100.00% AP Hotels/Parkersburg, WV, Inc. West Virginia 100.00% API/Sullivan, IN, Inc. Indiana 100.00% API/Sycamore, IL, Inc. Illinois 100.00% API/Washington C.H., OH, Inc. Ohio 100.00% AmeriHost Inns of America, Inc. Delaware 100.00% AmeriHost Inns, Inc. Delaware 100.00% AmeriHost Inn Franchising, Inc. Delaware 100.00% API/Columbia City, IN, Inc. Indiana 100.00% Sullivan Motel Associates Limited Partnership. Indiana 56.00% White River Junction, VT 393 Limited Partnership Vermont 83.30% Metropolis, IL 1292 Limited Partnership Illinois 54.90% Bowling Green, Ohio 590 Limited Partnership Ohio 64.16% Findlay, Ohio 391 Limited Partnership Ohio 56.67% Dayton, Ohio 1291 Limited Partnership Ohio 61.50% Altoona, PA 792 Limited Partnership Pennsylvania 62.78% New Philadelphia, Ohio 1092 Limited Partnership Ohio 50.35% Kenton, Ohio 1095 Limited Partnership Ohio 52.50%
EX-23.1 4 Exhibit 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Amerihost Properties, Inc. Des Plaines, Illinois We hereby consent to the incorporation by reference in the Company's previously filed Registration Statements on Form S-3 (file nos. 33-72742 and 33-32333) and on Form S-8 (file no. 33-32331) of our report dated March 22, 1999 relating to the consolidated financial statements of Amerihost Properties, Inc. appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. BDO Seidman, LLP Chicago, Illinois March 22, 1999 EX-27 5
5 12-MOS 12-MOS 12-MOS DEC-31-1998 DEC-31-1997 DEC-31-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 4,493,834 2,349,503 3,029,039 0 0 0 3,749,135 6,813,330 7,355,048 0 0 0 0 0 0 10,406,620 11,715,346 10,637,852 106,557,115 79,661,323 53,317,721 15,219,135 9,345,991 7,481,889 115,280,788 92,668,098 66,901,156 17,330,276 13,923,027 11,004,320 0 0 0 0 0 0 0 0 0 30,448 31,065 30,185 18,285,360 21,561,794 20,881,444 115,280,788 92,668,098 66,901,156 68,618,189 62,665,516 68,342,348 68,618,189 62,665,516 68,342,348 54,286,316 52,284,877 54,359,996 54,286,316 52,284,877 54,359,996 11,247,438 8,401,080 7,528,888 0 0 0 6,113,369 4,053,933 2,767,828 (1,947,445) (1,703,443) 5,752,654 (780,000) (737,000) 2,358,000 (1,167,445) (966,443) 3,394,654 0 0 0 (332,738) 0 0 (1,295,891) 0 0 (2,796,074) (966,443) 3,394,654 (0.45) (0.15) 0.57 (0.45) (0.19) 0.49 Restated
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